Thursday, December 14, 2006

Audit Clauses ARE for the creative.

In their most simple form, audit clauses allow one or both parties to audit each other's bookkeeping.

In very brief and straightforward clauses, the party requesting the audit is authorized to: 1) request an audit, 2) with adequate notice, 3) at reasonable business hours, and, 4) hire a competent accounting professional to conduct the audit. The requesting party is usually limited in its investigation by: 1) number of times an audit can be requested in any given period of time, 2) scope of the business records to be audited, 3) previous evidence of inappropriate use of audit results, if any, and, 4) the requirement to bear the cost of the audit process.

In the broad spectrum of Intellectual Property which includes all manner of publication (film, music, multimedia, software, games, licensing, written works, etc.), the stakes are higher and the clauses more complex. Power is concentrated in the hands of the distribution company or industry insiders. This requires that artists begin the difficult task of adding a dual competency in business by gaining at least a nominal understanding of various contract clauses and the accounting procedures contemplated in the language.

Here's an interesting article called Model Audit Clause. The writer is a prominent entertainment attorney in Los Angeles. I recommend spending some time in the trial notes portion of this attorney's site. It's eye opening.

This is an example of an ideal audit clause that an artist would like to see in a contract. Note, however, that the artist in order to take full advantages of the rights he or she establishes, must be diligent in tracking expenses on both sides of the equation, that of the other party and their own. And, the artist must track what the other party is doing during the process and raise an objection at that time.

It's pretty hard to know if someone's ripping you off, if you can't keep your own books straight. There is a lot of denial out there in the indie community about: 1) the need to keep good records, 2) the need to follow formalities, and, 3) the realities of dealing with professionals, including the poor sod trying to do your books.