Crash Course Part III: “Desk-Forensic Audit” vs. Normal Audit
Short of an audit, a “desk-forensic audit” is the most meaningful and practical way to identify unpaid amounts. It consists of 3 general components:
Reviewing the Client’s Agreements: We review the client’s agreement(s) with the 3rd party and determine if contractual installments, advances, profits, or other payments that were due were appropriately made to the Clients. We also assess whether basic royalty statements are being rendered and paid.
Identifying Unpaid Contractual Advances, Installments, Deferments, Statements, and Basic Errors: We analyze the amounts reported on the face of the Client’s statements to identify errors and additional amounts owed.
Help Liaise with 3rd Parties and Resolve: Upon determining that the 3rd party owes money and/or statements, we can provide a draft letter and relevant documentation to go to the licensee.
These “desk-forensic audits” are “mini audits” of the client’s royalty or participation statements. The benefit is that the client does not need to commit to a full royalty audit or participation audit, which can be quite an investment. Additionally, it is a good opportunity to identify errors and/or omissions. “Desk-forensic audits” provide more in-depth analysis compared to a simple complimentary initial review that auditors conduct before taking on an engagement. Hurewitz and Company uses “desk audits” to identify if basic provisions (such as distribution fees, recoupment of advances, fees and allowable costs, and breakeven calculations) are being adhered to correctly. We also use “desk-forensic audits” to determine whether a complete, full audit is warranted.
For one of our clients, Hurewitz And Company conducted 3 “desk-forensic audits” of different projects. Fees ranged from approximately $5k to $10k for each project. Just these “mini audits” alone disclosed incorrect distribution fees that had been charged, resulting in hundreds of thousands of dollars in amounts that we helped get paid to the client.
Although a “desk-forensic audit” is a useful tool, it is not as effective when compared with a normal, complete audit. During a full audit, auditors perform fieldwork that gives them access to much more information, allowing them to fully analyze the books and records of the company.
In short, you should NOT be afraid to audit, and you SHOULD hire a professional and experienced auditing firm that understands the practice. An experienced firm will not only be able to manage and maintain your business relationships, but also indicate the level of auditing that is appropriate for your project.