09 Apr Why you Should Enforce an Audit Clause
Why put an audit clause in your contracts if you are not going to use it?
Even if you think you properly defined Net Sales and have created a perfect Royalty Reporting template, you are still in danger of royalties being under reported thereby resulting in lower payments. Let’s be honest, a licensee can create deduction back-up or be smart enough to always be within limits of what is allowable. They also could be unintentionally misinterpreting the Agreement and its requirements. No matter the reason, you will only be sure if you conduct an Audit. Yes it costs money to have an audit program but all it takes is to identify one licensee that is out of compliance and it will pay for itself several times over.
We have clients that were reluctant to invest in an audit program due to the upfront time and costs involved. We worked with them to identify the right licensees to audit and we provided the outside auditors with all the background information they required. This helped to reduce the cost and to reduce the amount of time they had to invest. The result was that the amount recovered was significantly more than the cost of the audit.
Another benefit of an audit is that once licensees are aware that you have an active audit program they will be better about self-policing. The licensees that went through the audit became compliant not only in how they reported but in the timeliness of their payments. This helps your bottom line by getting payments in your account sooner and improving cash flow.
Audits can also help you identify licensees that you may not wish to do business with. It could be due to the way they conduct business or perhaps they are using your property in a way you do not want or that could damage your reputation. Your licensees represent you and your product/property. It is important that you know they are being used correctly and in the manner intended.
The Audit is a powerful tool for the Licensor, it is important that you take advantage of it.
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