8.5
Audits
Most license agreements give the licensor the right to audit your sales records to confirm that royalties were reported correctly. Audits are a normal part of licensing, and good record-keeping makes them straightforward.
A typical audit clause states how often the licensor can audit, how much notice they must give, how many years back they can look, and who pays. Commonly, the licensor pays for the audit unless it finds underpayment above a set threshold, in which case the licensee may have to cover the audit costs as well as the unpaid royalties, sometimes with interest. Check your contract for the exact terms.
To be audit-ready:
- Keep invoices, credit notes, and return records organized by product and period.
- Make sure your royalty reports match your accounting system.
- Document how you applied deductions, exchange rates, and royalty bases.
- Retain records for at least the period stated in the contract.
- Track free goods, samples, and closeouts, since contracts often have specific rules for them.
If you find an error yourself, raise it with the licensor promptly and correct it. Proactive honesty builds trust, which matters a great deal in long-term relationships with Japanese licensors (see 6.1). For complex audits, involve your accountant.