Finally, the day you’ve been waiting for.
You are now a published author.
It’s time to sit back and watch the royalties roll in.
While this may be the happy outcome for some authors, I have yet to meet an author who can easily determine whether the payments on his or her royalty statements are accurate. And while I have rarely seen an author who actually suspects fraud, I have often witnessed authors who just “don’t know.” The imbalance in power between author and publisher often begins with the complexities of the publishing agreement. Unless an attorney is involved in that process, authors tend to accept the terms set forth in the publishing agreement as standard, without questioning specific terms.
Ideally, royalty calculations should be relatively straightforward. That is, the royalties paid should reflect the royalty rate agreed on in a publishing contract for the per-unit sale, multiplied by the number of books sold by the publisher. But nothing is ever simple in the publishing industry these days. These days, it is necessary to factor in such variables as escalation clauses, different rates for different sales categories or channels, whether there is co-authorship, electronic materials, abridgements, agreed-upon deductions, returns for reserves, and specific definitions of earnings. The calculation of royalties has therefore become much more complicated. Adding to the complexity is the fact that many publishing houses’ legacy reporting systems are not equipped to handle complicated royalty calculations, leaving more of the work subject to human error.
A detailed analysis of a royalty statement, even one performed by an accounting professional, may not help an author determine whether the statement is accurate, since traditional royalty statements rarely include all the information needed. Some of the information missing may be:
- Inventory information related to the printing and ultimate sale or disposal of books.
- Information related to the sale and distribution of electronic content.
- Underlying sales and return records.
- The publisher’s list of all ISBNs associated with an author and clear indication of which of these bear royalties.
- Subsidiary-rights agreements and records of monies received for these contracts.
- Information related to the allocation of components (e.g., a DVD with a book or a study guide with a textbook) included in packaged or bundled sales.
Authors may find themselves in a situation in which the publisher is not providing timely or satisfactory answers to the author’s relevant questions. This can often result in a disconnect between what is reported on the royalty statements and the author’s understanding of how the book is selling. Authors may notice unexplained trends on their royalty statements and discrepancies with respect to units, where books are being sold (domestic or foreign), or types of sales. There may be unexplained deductions on the royalty statements, or royalty payments may begin to shrink with each reporting period without explanation.
What Can Authors Do?
They can continue to accept royalty statements that they don’t understand (and possibly lose money) or they can engage a third party to perform a royalty audit.
A royalty audit is the review of a publisher’s underlying books, records, and systems used to calculate the royalties owed to an author. Royalty audits are performed by specialized auditors, often accountants, who have experience in this type of review. The overall purpose of a royalty audit is to ensure that an author’s royalties have been calculated and paid in accordance with the terms of the publishing agreement. After examining the publisher’s records, the auditor will write a report of her findings — including, if applicable, a calculation of unpaid amounts due to the author. In my experience, royalty underreporting ranges from 10 to 20 percent of an author’s reported earnings.
Authors should select an auditor they trust, with a skill set appropriate to the circumstances. A CPA designation is a good indication of an auditor’s level of skill and training. If the author suspects that there are large amounts of unreported sales, a CPA with a focus on forensic accounting may be needed. If an author believes that the relationship with the publisher may become contentious and/or lead to litigation, an accountant with a background in litigation support and providing expert testimony may then be the best choice. The auditor should always be objective and independent. Selecting such an auditor will ensure that the results of the audit “hold up” and are more likely to be accepted by the publisher.
Many auditors provide their services on a contingent-fee basis; this means that the auditor’s fee will be based on a percentage of the unpaid royalties found as a result of the audit and that no payment will be due until the payment is actually made by the publisher to the author. In situations where an audit is not expected to result in large findings of unpaid royalties, but may be sought for strategic or other business reasons, auditors may choose to work on an hourly rate or a fixed fee. An auditor’s pre-audit discussions with an author and a basic review of royalty statements and publishing agreements are usually free of charge.
Authors may be hesitant to assert their audit rights for fear of upsetting their relationship with their publisher — but remember, your publishing agreement is the codification of a business relationship, not a friendship. Publishers are regularly faced with audit requests as part of the normal course of business, and authors are legally entitled to a review of the records that support their royalty payments. Authors should not fear retaliation, only inadequate information. Authors can be sure of the accuracy of their payments only after they ask the questions they have the legal right to ask, and receive accurate information.
By Juli Saitz. Reprinted from the Fall 2017/Winter 2018 Authors Guild Bulletin. Ms. Saitz leads the royalty compliance practice at Ankura Con-sulting Group. She can be reached at juli.saitz (AT) ankura consulting (DOT) com.