Red Flags in Licensing and Royalty Audits

by | Sep 21, 2020 | Contract Compliance, PKF Texas - The Entrepreneur's Playbook®, Tax and Accounting Desk

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back once again with Carlos Gomez, an Audit Manager and one of the faces of the PKF Texas Contract Compliance Services team. Carlos, welcome back the Playbook.

Carlos: Thanks, Jen.

Jen: So, Carlos, you and I have talked off video about licensing and royalty audits. Are they the same thing?

Carlos: They’re just a term that’s synonymous with licensing. Royalties are just the funds that you receive from your contract agreement, whether it be a licensed franchise or just a vender.

Jen: So, are these very commonplace in the contract compliance services world?

Carlos: They are. Royalties is basically your revenue, as rather being a licensor; that’s where you get your money from. It’s your third party that’s collecting their share and then paying forward your share.

Jen: Is there a chance of misreporting going on during a license agreement?

Carlos: There’s a lot of misreporting.

Jen: And why would somebody misreport?

Carlos: Not intentionally. I think we may have discussed before in the past, but it’s just mishaps. Not everybody’s accounting systems are set up for specific agreements, and especially if they are a large licensee where they have multiple licensors, whether it be an intellectual property of entertainment, a movie studio; there are so many conditions of agreement. They can’t meet them all.

Jen: If a client is concerned about their relationships, what steps do they need to take to embark on one of these royalty audits?

Carlos: Well, they reach out to us for sure.

Jen: Definitely, of course.

Carlos: Some of the licensees, they can identify themselves, whether it be misreporting that the statements are not coming in time, the payments are missed. Those are some of the red flags, whether it be timeliness or misreporting in general. But there’s trend analysis that we can run, and we can help them identify some of the riskier areas.

Jen: So, would a licensor hire us, or a licensee, or both?

Carlos: Great thing that we can work with both.

Jen: Perfect. On the same engagement or separate engagements?

Carlos: Separate engagements. We obviously wouldn’t work with licensees that we’re doing audits for a licensor for, just to maintain a level of independence. But we can help both licensors if they want to audit licensees and help licensees if they are ever getting audited.

Jen: Perfect. All right, well, we’ll get you back to talk a little bit more about contract compliance services. Sound good?

Carlos: Yes ma’am.

Jen: For more information about this topic, visit This has been another thought leader production brought to you by PKF Texas – The Entrepreneur’s Playbook. Tune in next week for another chapter.

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