In our last post, we outlined the differences between the three main types of audits (royalty, profit participation, and contract) and examined their uses and benefits. Now we turn to the consequences of not performing sufficient audits.
Essentially, audits uncover any inefficient or outdated business processes so they can be adjusted to boost revenue associated with licenses and royalties.
Here are some reasons you should perform audits on a regular basis:
- Confusion often occurs when new product numbers are
assigned. Sometimes, licensees continue to sell inventory under the old
- Newly licensed products are not always communicated to the
accounting department in a timely manner by sales/engineering.
- There may be “gray areas” regarding the amount of
deductible expenses allowed under the licensee agreement that should be
- There may be weaknesses in the royalty-related section of
your accounting processes.
- Audits expose employee theft issues and other holes in your
- There may be issues around exchange rates, which can be
miscalculated or misstated.
The truth is, revenue loss associated with licensing/royalties most often occurs because of error rather than fraud. Of course, an audit will reveal either type of issue, allowing you to fix broken processes and/or terminate agreements that are not being adhered to. An audit also sends a strong message to licensees that under-reporting of royalties will not be tolerated.
Of course, fraud still accounts for a significant amount of loss, including employee theft, gray-market sales and understatement of sales.
The risks associated with not performing IP audits are serious. Not only is your company leaving money on the table, but your corporate reputation is on the line. In many cases, the cost of diluting your IP’s value is even greater than the missed revenue.
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.