Royalty Contract Audits – Part 1

Royalty contract audits help ensure that calculated royalty expenses are accurate. They protect your company against over-payments and underpayments.

At one company a royalty contract audit revealed that the publisher was paying royalties on below cost sales, when no royalties should have been paid. At another company an audit revealed that hardcover royalty contract templates were used to create the contracts for mass market paperback books.

How do you audit royalty contracts?

First, select a random sample of contracts to audit

The general practices is to audit a random sample of royalty contracts each week or each month. If you review 2 contracts a week that’s 104 contracts a year.

To create the random sample export a list of all royalty contracts to Excel. Then inset a column and populate it with the formula =RAND(). This assigns a random number to each row. Sorting the worksheet by this column and selecting the top X contracts to review will give you a random selection of royalty contracts to audit.

You should also review the 10 contracts that generate the most royalty earnings each year. At many small publishers the top 10 contracts account for 50% or more of their royalty expense.

Second, compare the paper contract to the contract in your royalty system

The royalty system’s contract royalty rules should match the rules in the paper contract, exactly. If your paper contact has a rule that says no royalties on below cost sales your royalty software should have that rule. If the paper contract says that you pay a bonus when a book is listed in the New York Times best seller list your royalty software should have that rule. There should be no exceptions.

If your paper contract mentions two advance payments your royalty software should reflect those two advance payments and whether they have been paid. If the author is liable for certain charges; such as image fees or indexing charges, were these incurred and recorded in your royalty system?

Easy Royalties has a royalty statement summary report that summarizes all royalty rules and payments related to the contract.

Third, look at the related product records

If your contract has a rule that says royalties are based on format (i.e. paperback) does the product have the correct format assigned? If royalties are based on gross profit (revenue less cost of goods sold) does product have a record of historical unit costs and does these costs match the costs recorded in your accounting software?

Fourth, were all royalty related sales accounted for?

Print a sales report by month by customer. Are sales missing that are related to this contract?

If you sell eBooks, are there Kindle sales for each month? If you are a music publisher do you have BMI sales for each month?

Were any sales duplicated (i.e. imported twice)?

Were any rights income received this product? If so, is this rights income accounted for in the royalty statement?

Fifth, review the contract’s most recent royalty statement

Were royalties calculated correctly? Verifying the royalty statement’s calculations will tell you if the contract was created correctly in your royalty software.