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5th February 20215 reasons why you should undertake a royalty audit

Head of Music Royalty Audits Robert Fowler discusses the complexities of royalty accounting and why a royalty audit could unlock additional revenue.

Anyone that has worked in royalties at a record label knows royalty accounting isn’t simple. There’s a myriad of activities and entities involved in the process and often things just go wrong.

When an artist sees their 6-month summary statement, they won’t be aware of the volumes that the labels are dealing with and the number of staff and departments involved in pulling together the mass of information required for the royalty accountant to do their job. On top of this, the financial provisions in recording agreements can be highly complex.

Whilst we’ve heard from hundreds of artists over the years that they don’t ‘trust’ their label, assuming that their sole intention is to account lower royalties than contractually due, the reality is that labels have a hugely difficult task to get the accounting right. It is this that underpins much of the vast amount of under-reporting we have uncovered over the years rather than wilful suppression of royalties.

Think about it for a minute. From legal to finance, all these functions and processes can have a knock-on effect to the final royalty accounting and are performed by different staff, some at different sites and some in different countries. Inward reporting from the now numerous different digital sources can often be reported monthly and it’s a huge task for a label to process this data. All of this influences your royalties:

Legal

  • Artist agreement
  • Producer/mixers agreements
  • Artist approvals (Synch, pricing compilations, etc.)
  • Side letters
Finance

  • Recoupable and non-recoupable costs (TV, video, marketing, tour support)
  • Other income with a royalty liability (Synch, VPL, etc.)
Inter-company (Overseas)

  • Reporting of exploitation use to domestic label
  • TV costs recharges
  • Territory pricing requests, individual territory approvals and releases
Exploitation/sales

  • Incoming third-party accounting (compilations, etc.)
  • Digital exploitation processing team
  • Physical sales exploitation and processing/reporting
  • Synch sales team
Royalty accountant

  • Royalty system maintenance (setting up Artist, Producer, Mixer, A&R agreements with applicable royalty rates, escalations, option periods, etc.)
  • Setting up new product & tracks and assigning to artists, producers and options periods
  • Ensuring that all of the other above items are correct and captured within the accounting

Why is a royalty audit important?

  1. Reassurance that you are being paid correctly – There’s a lot that can go ‘wrong’ and more often than not it’s not deliberate. There can be significant amounts of royalties and costs flowing through a royalty account and you should get comfort this this is correct and that you are being paid correctly.
  2. It’s now standard business practice for most labels – Over recent years the UK majors have come a long way in their attitude towards royalty audits with most now having a dedicated royalty audit department working with the royalty auditors and trying to resolve issues before they unnecessarily become key features in an audit report. Generally, long gone is the attitude that a royalty audit is bad for a relationship and only something that happens following a fall-out.
  3. Is exploitation accounted in accordance with the agreement – (royalty rates, free goods, escalations, basis of receipts, price reductions, artist approvals). In addition, any costs deducted are in accordance with the contractual stipulations (recording, video, TV advertising, marketing, mechanicals, manufacture)
  4. Is there any exploitation that label hasn’t received income for? A royalty audit will be able to mine the data and conduct exploitation research to ensure that this isn’t the case
  5. Royalty statements can be complex– Generally, the labels now supply royalty statements and sales exploitation (to audit) in a data format. However, it’s vital to be able to understand the data to use it to maximum effect. Data mining for completeness of reporting and potential issues forms a big part of any royalty audit. You should be confident that your royalty auditor can work with a high volume of data while also understanding the financial and legal side of the music business inside out.

At HW Fisher, we have industry experience spanning decades and we understand the changes in the music industry over time. It’s this knowledge and experience that often results in recoveries of additional royalties to you via a royalty audit.

If you would like to would like to understand more about undertaking a recording or publishing royalty audit or to discuss your own circumstances, please get in touch.

First published on Synchtank, January 29 2021.

Key contacts

Robert Fowler
Head of Music Audits - Forensic

020 7874 7967
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