Written by Veronika Fritz, Partner, Vonya Global
Sales of licensed products has grown for the second consecutive year according to the International Licensing Industry Merchandisers’ Association’s (LIMA) 2013 Licensing Industry Survey. LIMA President Charles Riotto stated: “Our 2013 Licensing Industry Survey shows there is a lot to be optimistic about for retailers and companies of all sizes that are leveraging the power of licensing to drive product sales.” That is great news for the economy and great news for the Licensor.
In a previous article we discussed the need for a “Right to Audit” clause in the licensing contracts. We believe that legal protection of Intellectual Property is essential. Licensing agreements must establish the standard for Intellectual Property usage and explicitly dictate license/royalty fee structure and schedule. Monitoring, in the form of an audit, ensures the terms of the agreement are being met and maximizes your return on investment.
Licensing, Franchise and Intellectual Property Audit:
How does an audit create ROI? All too often licensing fees are incorrectly reported. Whether by error or intentional misrepresentation, incorrect reporting of license fees is very common. There are a variety of reasons why this happens, but none are apparent until you get the visibility gained through the audit. The following are points covered or considered during the audit to ensure that the license fees are not under reported:
- Licensing agreements can be complex, test to see that they are fully understood by all parties
- Evaluate whether the people reporting the licensing fees familiar with, or have access to the agreements
- Check exactly how Intellectual Property is used in diverse applications, products, or services can be challenging
- Review the process of reporting licensing fees which can be a complex, tedious and error-prone
- For organizations that are decentralized, check the accuracy of the reports for Intellectual Property usage received from globally dispersed locations, autonomous divisions, and varied systems
- Review the transition of employee turnover in the reporting roles
- Analyze the implications of organizational changes, such as mergers, acquisitions, divestitures, re-organization of legal or reporting structures
- Check whether Intellectual Property was transferred to non-contracted (divestitures, subcontractors) parties who are unaware of the reporting responsibility
- Check the accuracy of the reporting formulas resident in the tools used to calculate licensing fees (formulas are prone to errors)
- Review of internal controls to ensure correct supporting documentation used as the basis for the calculation of the royalties
- Check for intentional underreporting
These are just a few examples of areas where the audit verifies the accuracy of the license / royalty fees. The list grows with each licensing contract based on risk and complexity. The audit provides you an understanding of how a company uses your Intellectual Property and assess if the fees reported are complete and accurate. Acting on the Right to Audit clause by conducting the audit is the only way to ensure all licensing fees have been received. Monitoring the usage of Intellectual Property maximizes ROI.
This blog post was written by Veronika Fritz. Veronika is a Managing Partner with Vonya Global, a premier provider of internal audit consulting services. Veronika is a CPA with over 18 years of audit and management experience. Her experience covers all areas of business including compliance, financial, operational and IT. She has led the planning, development and successful execution of financial audits, Sarbanes-Oxley Engagements, pre- and post-implementation ERP system reviews, and business process evaluations. Veronika has expert knowledge in evaluating the design, integrity, effectiveness and reliability of internal controls for financial reporting processes and Enterprise Resource Planning software. She has been a trusted advisor to companies spanning various industries. If you would like more information about Vonya Global or if you have a questions for Veronika, you may contact her through this blog, the company website, twitter, or her LinkedIn Profile.