Many companies take advantage of licensing intellectual property such as software, technology, apparel and many other categories. This is because it is a great source of revenue that comes in the form of royalties paid by the individual or company the licensing agreement is with (otherwise known as the licensee). Having an extensive licensing portfolio can be very beneficial for businesses; however, it can also spell loss for those who do not keep track of the reporting processes of their licensees. This is where licensing audits come in. In order for companies to make sure their receiving their fair compensation for the license, regular audits need to be conducted.
But what exactly is a licensing audit? An audit of a company’s licenses and royalties work as any other audit would: They aim to make sure that all financial and operational information is being reported accurately and truthfully in order to ensure the licensor is not being undermined. Because companies receive royalties for these licenses, they will want to make sure that they are receiving their fair share from licensees, which, unfortunately, is not always the case.
Why would a company need a licensing audit?
Because some licensing portfolios can become quite large, it’s often hard to keep track of all licenses. Other business or issues arise and soon a company falters on keeping tabs with their licensees or no longer expresses the need for more detailed reporting. This is where problems often lie, as licensees can get away with underreporting. Companies could be losing out on major royalties and not even know about it. This is where licensing audits come in. A company that is equipped to perform a licensing audit will be able to identify all royalties that have not been paid to a licensor.
What are some other reasons to complete an audit?
While finding withheld royalties is always a plus, there are some other reasons that companies may want to complete licensing audits. One being that the completion of one audit will likely ensure that licensees are making sure that they are accurately reporting all financial and other information in the future. If licensees are caught underreporting once, they will not want to be caught again, and will therefore work to make sure that they are keeping up with detailed recording. Another would be to stop or make changes to an existing license. If a company no longer wishes to be in business with said licensee, or wants to change the terms and conditions of the agreement, then an audit would be the perfect time to do so.
While conducting a licensing audit of all licenses can seem like a time consuming endeavor, it will ultimately favor the party who is doing the auditing. When licenses are such a big part of a company’s revenue, the time taken to complete an audit is well worth it. Finding a good company that has auditing experience with a number of industries will ensure that the auditing process runs smoothly.
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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