Navigating Royalty Audit Issues
for Record Producers
by Chris Castle, Esq.
An unfortunate fact in the recording industry is that successful records result in audits by royalty participants. This is partly due to the entrenched distrust that artists have for record companies and partly to simple prudent business practices. If an artist sells hundreds of thousands or millions of units around the world, it would be the rare company that could move that many pieces of product without making a mistake. Sometimes the mistakes are just mistakes, and sometimes an audit holds up a mirror that reveals what happens under the record company hood, warts and all. And the "all" category can be very interesting.
An audit is usually conducted by an accountant to verify the books and records of the record company that backup accounting statements. From the record company's point of view, audits are a necessary evil. At major labels, the administrative cost associated with an audit is usually much more burdensome than dealing with any subsequent payments generated by the audit itself. In fact, fiscally sound record companies will reserve funds on the contingent-liability side of their financials to deal with audits that they know are in progress or are likely to occur. This reserve includes an unsegregated amount to cover artist, producer, mixer and remixer royalty payments.
To simplify their audit responsibilities,
among other reasons, some years ago record companies largely stopped engaging
producers directly, and began requiring artists to engage producers and
bear the burden of accounting and paying producer royalties as a matter
of contract. This put the producer in the awkward position of having to
audit -- perhaps even sue -- the artist with whom the producer has a creative
relationship.