What are the Common Mistakes Found During an Audit?

Q. What are the common mistakes found during an audit?

A. Generally there are two or three categories of underpayments—which we call ‘claims.’ One category is where it’s a mathematical, clerical error. It’s a simple human error when whoever is inputting the information into the sales system or the royalty system, inputs the wrong amount. For instance, instead of indicating that 1 million units were sold, they accidentally enter only 100 thousand units. And so the payment that is made to the client is a percentage based only on 100 thousand units instead of 1 million. That’s an accident—a human error. That is one category of underpayments.

Another sample in the same category is found in calculation – while the person is doing work in a spreadsheet and they accidentally use a wrong formula in Excel. All the amounts entered may be correct, but with a wrong formula, we arrive at an erroneous result.

Or sometimes a provision in the agreement may be overlooked. For instance, let’s say the agreement says the payer may take 20 percent distribution fee on the revenue after the marketing costs have been deducted. The person doing the calculation may have overlooked the underscored provision, and lets the payer take 20 percent of the total revenue, which is a bigger portion, leaving a smaller share for the participant.

Those errors are accidental – unintentional.

Another situation is there might be a discrepancy in interpretation of the language used in the agreement. This could perhaps be cleared up by discussions or arbitration or potentially legal trials.

But all above cases are unintentional; they’re innocent mistakes, oversight or misunderstanding. They are not like fraud, which is intentional and willful – like cheating. There have been claims of fraudulent acts by a payer, where the agreement clearly stipulates their obligations to report a certain way but they unilaterally decide not to comply and only report a portion of the revenue. This becomes an illegal act.

The last situation above is an exception and not a typical claim you’d find in an audit. Generally, the errors you find are accidental, through erroneous inputting of information or else it’s a difference in interpretation of ambiguous language in the agreement.