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.
Many companies will want to take advantage of this opportunity and push additional licensed products and/or intellectual property to market and increase their distribution network. However, as with all growth strategies, increased opportunity often means increased risk. Companies must avoid the “rush to sell” mentality without considering those risks.
Here are a few basic considerations:
- Legal protection of IP and brand is essential
- Terms for payment of license fees/royalties are fundamental
- Setting standards for the usage of IP, products, and/or brand
However, the legal agreements protecting IP and defining payment terms is not enough. It is quite common that licensing revenue is lost because licensing fees are incorrectly reported to the Licensor. Therefore, Licensor’s should establish a control mechanism to minimize the risk of incorrect reporting, and the best control is a “Right to Audit” clause in the licensing contract. A Right to Audit clause accomplishes the following:
- Requires licensee to maintain reasonable accounting system
- Sets expectation for record retention
- Establishes the parameters (scope) of an audit, such as: accounting records, written policies and procedures, ledgers, cancelled checks, deposit slips, bank statements, journals, original estimates, insurance documents, payroll documents, timesheets, etc…
- Creates rules dictating who can participate in the audit
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.