Friday, September 05, 2008

In Search and Fear of Human Error

Ah, sleep.  I miss you so.  Not that I’m not getting some sleep and certainly more than my wife, who gets up twice or three times a night to nurse our eight-week-old son, but I’m definitely taking a hit.  You try reading hundreds of pages a week when all you want is a nap!

Last week, I said good-bye to the last of the summer interns:  Jeremy Gong, Elizabeth Marks, and Madeline Davis.  Jeremy worked on royalty statement reviews and actually found some money for clients.  Way to go, Jeremy!  Elizabeth and Madeline worked on reading and writing reader’s reports and following-up submissions.  Madeline also worked on the website and Microsoft Access database.  My thanks to all of them for their hard work.  It really made my life easier.

You might wonder how a summer intern finds money for clients.  Well, in the cases in question, it was simple.  The publisher’s standard boilerplate says the rate on Canadian sales is 6%.  My negotiated rate is 8%.  But Jeremy found that the rate on the statement was 6%.  Go back and recalculate and it means a few hundred dollars to the client.

In another example, the publisher is prohibited from accounting more than 50% of copies sold at a reduced royalty based on discount.  This is because their standard discount is actually high enough to make the vast majority of sales fall under the deep-discount clause.  When you argue with them about how unfair that is, you are invited to let another firm publish the book.  Otherwise, you can settle for what they call the 50/50 clause, which limits the number of copies sold at a reduced royalty to 50% of all copies shipped in that period.  Well, if you have that clause and then discover that more than 50% of the sales were accounted for at a deep discount, then you’ve found money for the author.

I would guess that the majority of agents spend far less time on statements than their authors would like.  Contract terms and statement formats vary, making it difficult for agents to easily glance at a statement and figure out if it is correct.  Also, according to the CFO of one major house, 90% of all books never earn out.  And if the book doesn’t earn out, is there a need to dig deep into the statement?  For most agents, the answer is probably, No.  On the other hand, I had breakfast with the publisher of good-sized imprint a couple of years ago and he told me that one agency had hired a forensic accountant in-house and had found “tens of thousands of dollars” for their clients.  Presumably this accountant was conducting audits of the publishers, looking at the actual orders and discounts granted, and following them through the process to determine if the right royalties were being paid.

To hire an experienced CPA to do an audit could cost you hundreds of dollars per hour, plus expenses such as transportation and hotel, or it could cost you a percentage of what is found to be wrong.  Given that most authors aren’t independently wealthy or even making enough in their day jobs so that they can pay for the audit, the return on the investment is unlikely to be worth it, just as it may not be worth it for an agent to slave over statements for hours if the book is unearned.  If you spend $5,000 on an audit to find that the publisher owes you $3,000, it wasn’t worth it, was it?

And, yes, some contracts call for the publisher to pay for the audit if an error of 5% or 10% is found.  But that percentage may be of the total amount previously paid to the author, including advances.  So if you were paid $50,000 for the book, you are $20,000 unearned, and the error is $2,000, you are paying for the audit out of your own pocket.

And, yes, some CPAs will work on contingency.  But they get paid no matter if the book is earned out.  So if the advance was $50,000 and you are $20,000 unearned and the CPA finds you should be $10,000 unearned, and you agreed to a 1/3 contingency fee, you now owe the CPA $3,333.34 out of your pocket, because the CPA “found” you $10,000, even if there was no cash received.  Was that worth it?  Perhaps, if it means you ultimately earn out that much quicker and get real money.  But you have to sell a lot of books to earn $10,000.

I’ll be frank with you.  The amount of follow-up and auditing that should be done on any book is far greater than any agency could ever accomplish.  For the small agencies, it’s just a matter of time.  How much time can one expend looking at statements that aren’t glaringly wrong?  For the larger agencies, I’d say it’s a matter of volume.  A trained bookkeeper or in-house accountant can probably look at a lot of statements in one day, but for the agency to be paying for such a full-time, in-house person means having to have literally millions coming in every year, which means the number of statements is likely greater than anything short of a team of bookkeepers or accountants could both process and review.

In the end, though, the biggest issue for any agency is simply a lack of information.  If the publisher doesn’t tell me about a book-club deal, how can I track whether or not the money ever came in to the publisher and showed up on a statement?  If the publisher refuses to disclose the terms of the deals it does (common with writer-for-hire deals) or send me the contracts with the book-clubs and foreign publishers, how do I know that the terms they are reporting are correct?  Thus, agencies and authors are forced to trust publishers to get it right.  But those publishers are run by human beings and human beings make errors.

No matter how slick your statement looks, it may be wrong or it may simply be an Excel spreadsheet dressed up to print nicely.  The data may even be entered by hand, rather than pulled directly from the order systems.  You ever see a 6 when the number was an 8?  How about typing a 3 when you meant a 9?  How is your eyesight when you are reading computerized reports?  Accidents happen and short of going in and looking at the original reports and orders yourself, there’s likely no way to ensure that errors aren’t taking place.

Some agents simply request a reconciliation to print on every statement.  This forces the publisher to go back and look at the numbers again, perhaps in a different fashion, and perhaps helps find errors.  But now Random House has built this feature into its statement.  So if an error has occurred, chances are it’s also in the rec to print.  So you’d better ask questions about that rec to print if it doesn’t look right to you.

In the end, no one can be more invested in making sure your statements are right than you, the author.  After all, the author gets the majority of the income from that statement.  And I’ve never seen a representation agreement for an agent that states the agency will review and audit the publishers’ statements.  They are all focused on placing the authors’ works.  So unless your agent has actually told you they have a bookkeeper or accountant on staff whose job it is to carefully review and even audit statements, it’s really your job to take a long, hard look at every statement.

Can anything be done to improve the situation?  Yes.  Publishers could adopt a uniform royalty statement format so that each publisher is including the same information in the same format on every statement.  Publishers could also deliver those statements in electronic form that could be easily imported into software that would make is easier for agents and authors to find errors.  Lastly, publishers need to increase transparency.  If an author is a profit participant in a licensing deal with a book-club, then the author should have the right of consultation at least—approval, preferably—over the terms of the deal and should have the right to review the contract before it is signed and to have a copy of the signed contract.  One publisher I know did a sub-license for the paperback rights to a title.  I applaud that this publisher did send me a copy of the contract upon request and sends copies of the statements provided by the reprint publisher.  What I don't applaud is that this publisher didn't know that the paperback publisher was going to sell the majority of copies at a deep discount, thereby vastly reducing the royalties earned.  The original publisher should have reviewed and negotiated the reprint agreement more aggressively.  And had I been shown the agreement ahead of time, I would have pointed out this dangerous flaw in the language.  But I wasn't, and now the publisher, my client, and my firm are paying the price in lost income.




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