GHJ’s Profit Participation Services Practice performs forensic consulting reviews of motion picture and television participation and other royalty statements to ensure that the profits are shared with participants in accordance with the applicable agreements.

As participants evaluate whether to pursue an audit of their profit participation, here are five things they should know:

1. Consider auditing if any of the following key risk factors are present:
   1. Delays in statement issuance
   2. Significant or unusual transactions appearing on the statement
   3. Change in management or potential distributor financial issues
   4. Apparent inconsistencies between the profit participation statement and the applicable agreement
   5. Significant international activity
   6. Older, complex or unsigned agreements
2. Know audit provisions and contractual limitations. Typically, there is an agreed-upon process and timing for when to notify of an audit.
   
3. Every distributor may have a different process and may have different timing based on their audit queue. Certain distributors may accommodate an audit quickly while others may require a wait in the queue for a couple of years. The timing for sending the audit notification would also depend on who is being audited.
4. It takes time. An audit process could take on average nine to 12 months. This is primarily due to the gathering of information and following up with questions for various divisions and departments across the distributor’s operations.
5. An audit is not the end of the process — there is the reporting and settlement stage! At the conclusion of the audit, a report is issued that summarizes the claims identified during the audit. These claims can include errors and contract noncompliance issues, contractual interpretation issues, equity issues and open items. Once the report is issued to the distributor, the settlement process is kicked off, which is typically handled by the client or its outside attorney.

To learn more about profit participation or royalty audits, please contact GHJ’s Profit Participation Services Practice. To learn more about how to support successful entertainment ventures, please contact GHJ’s Entertainment Practice.