What Is a Licensing Audit?

Licensing agreements can be very profitable endeavours.

What Is a Licensing Audit?

There are many factors involved in licensing agreements. While the licensing of assets, such as trademarks, copyrights and other intellectual property, have become a main source of revenue for many businesses and organizations, they also require regular reviews to ensure that the licensees are adhering to the terms of the contract and, conversely, that the licensors are receiving accurate payments. Put simply, a licensing audit is a review of the licensing agreement that will function to verify that both parties are upholding their contractual obligations.

Why a Licensing Audit is Important

Just as licensing agreements can generate a lot of money, so too can they lose businesses and organizations a lot of revenue. A licensing audit helps avoid future revenue losses, as auditors meticulously review the contractual provisions of the agreement to ensure that both parties are in compliance. Often, it is the license holder who benefits from a licensing audit; they are particularly vulnerable to revenue loss via underpayment; the licensee must then bear the expense to compensate for the (sometimes hefty) revenue lost to the holder.

Licensing audits occur in a wide variety of fields and industries, including (but not limited to) apparel, software, automotive, entertainment, sports and technology. Often, licensing audits can uncover huge losses to the licensor, which then places the burden on the licensee to recover those losses. In order to prevent losses to both parties, licensing audits can help maintain the integrity of the licensor-licensee relationship by ensuring that both parties are in compliance with the agreement provisions and due diligence procedures of the contract from the time of negotiations.  That is, audits do not necessarily have to happen after the fact; they can be used as a strategic and proactive approach to avoid future compliance issues instead.

How It Works

Auditors cross-reference the terms of the license agreements with accounts of royalties to see if there are any discrepancies. While this may sound simple, professional auditors are able to determine areas of omission that are typically overlooked by people without professional training and expertise. Auditors are also used to sift through the mountains of electronic and hard copy data involved with licensing agreements (this mountain can deter a great many people from looking into licensing agreements).

A licensing audit is not all "paperwork," however. Many firms will take a proactive approach to licensing agreements by emphasizing clear and open communication, cost-effectiveness and audit planning, as well as effective investigative solutions.

Licensing audits can also help prevent companies and organizations from being taken advantage of by counterfeiters and fraudsters, which is always a concern in any branding, royalty or licensing agreement.  Put simply, any time there is a licensing agreement, there should be a licensing audit. It can avoid major losses to revenue, and it can prevent future strife between company and business relationships. Licensing audits are primarily concerned with maintaining the dignity of the contract so that both parties are in contract compliance without any issues or concerns. They are a great way to avoid or recover losses.

Miller Kaplan Arase LLP is a certified public accounting firm specializing in accounting, business management, 401k reporting, financial tax planning, royalty and licensing audit services for individuals, healthcare, media, real estate, food and beverage industries, and tax-exempt organizations worldwide. To know about software licensing audit visit Wikipedia.org.

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