We have seen, over the years, a general decline in respect both within and outside the Licensing Industry – we want to be different and increasingly respectful in working with both Licensor Clients and Licensees. Licensing done right is a cooperative effort between Licensors (for whom we are engaged) and Licensees – we can, therefore, be an integral part in helping make Superior Licensors by making Better Licensees because being Better, at any level, is always a never finished/never-ending accomplishment/goal!
Audits are seldom contentious UNLESS a Licensor waits to audit (or only audits) when suspicions arise or major concerns or problems occur. ALL Licensees need to be periodically audited. And since a good audit program will generate net revenue there is NO reason not to audit! Licensees already expect to report on a consistent (monthly or quarterly) basis, and they should also expect to be audited on a consistent basis.
At some point, most Licensors come to the realization that a rotational program for auditing all Licensees is necessary for a successful licensing business. Licensors simply do not have a full and accurate “picture” without the reviews by and input from Auditors! Licensees prepare the “invoice” (the royalty report) which they submit and pay. Without an audit, this leaves too many unanswered questions.
A primary objective of our audits is to make sure Licensees come out of an audit with a greater understanding of what they need to do in the future and usually (based on our experience and input) an easier way to do their work – we are not satisfied with simply identifying and calculating past errors, we strive to improve future reporting.
It does no good to consider auditing Licensees if the costs exceed the expected returns – this is where experience is invaluable! Theoretically, Licensors could complete “full-blown” audits of their Licensees (usually costing between $10,000-$25,000/audit – ouch!), but this is seldom practical financially. Yet an equally poor approach is to not audit because “full” audits cannot be justified.
“Good” audits are exposure directional, meaning keeping an eye on costs so audits do, in fact, result in a net profit to the Licensor. There is no reason to forgo the good two to four-day audit simply because it cannot accomplish what a two to three-week audit can! If large errors are noted in the primary testing the audit can be expanded, but if no significant errors are initially noted the benefits seldom justify this additional cost.
Technology has greatly increased the quality and scope of Licensee audits. At the same time, it is now possible to audit much smaller Licensees, where under-reporting is (percentage-wise) more common.
As such, our audits are now performed off-site. Licensees electronically send much more information than they previously were able to provide (even when audited on-site). Off-Site audits are about 40% of the cost of traditional on-site audits, thus allowing for cost-effective audits of small Licensees. Completing the work off-site also allows the audit to proceed, and be completed, at its own pace – rather than being “squeezed” into a 3 or 4 day period (often not enough time for the Licensee to provide the necessary testing data or to complete the testing); sometimes, due to errors made, a Licensee may even have to correct and provide the data more than once to ensure the final numbers are correct. And since an audit provides an excellent opportunity to correct their reporting system, future reporting is also considered and should be improved as well.
As mentioned above, only the very largest Licensors can reasonably afford “in-house” Auditors. And even large Licensors find outsourcing beneficial to better maintain continuity, keep costs lower and have a higher level of expertise than they can normally develop and retain in-house.
Licensors beginning to audit their Licensees are often surprised that Licensees are not upset by audits as most Licensees expect to be audited. Licensees feel they are properly reporting (even though, more often than not, we note reporting errors) and want to make sure other Licensees are as well. For this reason, audits are very seldom contentious if the Auditors understand and appreciate the Licensor/Licensee relationship and the importance of treating Licensees professionally.
Licensees generally are very appreciative of our audits because we often give them “tips” to make their royalty report preparation much easier and better. Most Licensees do not mind paying royalties – they just don&rsguo;t want to owe at the time of an audit. So, if we can show them how to prepare reports more accurately and more efficiently they welcome and appreciate the help (with both the Licensee and Licensor benefiting!).