Q. What kinds of mistakes are there while auditing?
A. There are two or three categories of underpayments—claims which we call them. One category is where it’s a mathematical, clerical error. It’s a simple human error when whoever was inputting the information into the sales system or the royalties system input the wrong amount, and instead of indicating that there was 1 million units, they accidentally put that there were 100 thousand units sold. And so the payment that gets made to the client is only 10 percent of what it was supposed to be based on, 100 thousand instead of 1 million. That’s an accident—human error. That’s one category of underpayments. In that category you would also include mathematical errors where, for some reason, you add up all of the revenue on a royalty statement or profit participation statement and you deduct the allowable deductions, and the formula in Excel is wrong. Those are just accidents.
Some kinds of errors are errors where there is a provision in the agreement that the licensee, the payer, forgot to pay attention to. A provision, for example, that says they’re only supposed to take a 20 percent distribution fee on domestic revenue, and they didn’t see that, and so they took a 25 percent distribution fee. But it’s also sort of a accident.
Sometimes there’s language in the agreement that the paying company interprets in a different way than what was intended, so there can be a dispute about what the provision actually means.
But all those cases are not like fraud—they’re not like cheating. There are some times when you find claims that are resulting from a payer cheating and acting fraudulently, knowing that it has an obligation to report a certain way and unilaterally deciding that it’s not going to report a share of that revenue—an illegal act. You don’t find that a lot, and that’s not typical. Typically, it’s either accidents, mistakes, oversights or difference in interpretation of provisions due to ambiguous language.