Thursday, May 29, 2008

Audits and Other Fun Activities

I am considering auditing my publisher for three books i have written, all of
which have blown by the respective advances. Give me some advice. I live in
Florida, my publisher is in Chicago. What is the best way to go about it?—Jeff
Snook

Short of getting on a plane and doing an audit yourself, probably the most cost-effective solution would be to find a CPA in Chicago to conduct the audit and report back to you. The costs of such an audit would be fairly high I expect. In fact, most authors never audit their publishers for this reason.

I've heard tell that Stephen King audits his publishers every year. And he should. With that many millions of copies in print, errors are certainly made. As an agent, I recommend that clients consider auditing just as regularly or certainly every three years, since most publishers' boilerplate contracts state that royalty statements are binding after three years. Yet I have never had a client audit a publisher.

One potential way to avoid the cost is to find a CPA to do an audit on a contingency basis. Just like an attorney working on contingency, the CPA only gets paid if he or she finds you money. Of course, the CPA is likely going to want to review all of your statements first. If he doesn't find anything noteworthy, he will stop there. A CPA working on contingency is unlikely to go into the publisher's royalty department if she doesn't think there's money to be made.

Also, keep in mind that your CPA can make money on a contingency deal, even though you do not. Imagine this scenario: You were paid a $50,000 advance and have earned out $20,000. You ask your CPA to look on contingency with the terms being that the CPA gets 1/3 of whatever he finds. He goes in and finds that you have actually earned out $30,000, not $20,000. So the CPA found you $10,000. But because you still haven't earned out your advance, you don't get any cash. But you now owe your CPA 1/3 of $10,000.

Most publishers will pay for the audit if you find discrepancies in the publisher's favor in excess of 5%. But 5% of what? For some publishers, it's 5% of whatever they should have paid you. So if they should have paid you $30,000 but only paid you $20,000 in royalties, well, $10,000 is clearly more than 5% of $30,000, so likely the publisher will pay for the audit. Other publishers require the error to be more than 5% or 10% of the total amount previously paid, including advances. So imagine you got an advance of $50,000 and earned royalties of $20,000, for a total of $70,000 earned. But you do an audit and find an $6,000 error. Well, $6,000/$70,000 is about 8.5%. The publisher will not pay and you will have to foot that bill. Fortunately, it is a business expense, right?

And some publishers actually try to put in their contracts that you cannot hire a CPA working on a contingency basis. Sneaky, huh? They figure if you can't do that, then you're less likely to audit. But how will they know, I've always wondered.

There are a few companies that do such audits. Search online for publisher or author audits and they should come up.

One firm that does them is Marcum & Kliegman, an accounting firm out of New York. Gail Gross, who has been doing audits for years, recently moved over to that firm. Find that firm online at http://www.mkllp.com/services/agency.asp.

Another expert in royalty reviews is Paul Rosenzweig of RRS, Inc. He is out of Walnut Creek, CA, and can be reached directly royaltyreview at sbcglobal.net.

A final thought, especially for Mr. Snook: Not all royalty records are kept where you might expect them to be. Wizards of the Coast is located in Washington State. The records are in Providence, RI, with parent company Hasbro. Simon & Schuster and Penguin both have their royalty offices in New Jersey, a long way away from any nosy New York City-based agents. Perseus keeps their records in Colorado. Your publisher may be in Chicago. Their royalty records may not be. Interesting, huh?

Z

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