Protecting Record Producer's Interest In Music-Royalty Audit Scenarios

An audit is usually conducted by an accountant to verify the books and records of the record company that back up accounting statements. From the record company's point of view, audits are a necessary evil. At major labels, the administrative cost associated with an audit is usually much more burdensome than dealing with any subsequent payments generated by the audit itself. In fact, fiscally sound record companies will reserve funds on the contingent-liability side of their financials to deal with audits that they know are in progress or are likely to occur. This reserve includes an unsegregated amount to cover artist, producer, mixer and remixer royalty payments.

To simplify their audit responsibilities, among other reasons, some years ago record companies largely stopped engaging producers directly, and began requiring artists to engage producers and bear the burden of accounting and paying producer royalties as a matter of contract. This put the producer in the awkward position of having to audit – perhaps even sue – the artist with whom the producer has a creative relationship.