Amid the daily hustle and bustle of a busy TTO, tracking and checking the accuracy of royalty payments is one activity that frequently is shunted aside or, at best, performed on an ad hoc basis. That’s a mistake, says Sidney P. Rattner, CPA, a partner in the Schaumburg, IL, office of the certified public accounting firm McGladrey & Pullen, LLP. Decades of auditing royalty streams associated with license agreements have taught Rattner that 70% to 80% of audits produce “not only a report for our client, but also a check.”

Michael F. Moore, manager of strategic accounts and compliance in the Office for Tech Commercialization at the University of Minnesota (UMinn), agrees that audit results usually work in favor of the licensor and are, at worst, cost-neutral. “We do royalty audits, but we do them on a limited basis,” Moore says, adding that the audits typically focus on licensees with the largest royalty streams. “The difficulty for us is the cash outlay.” Some TTOs respond to the challenge of optimizing royalty audits with homegrown solutions. The Wisconsin Alumni Research Foundation (WARF) conducts royalty audits using customized checklists “derived from the specifics of the particular license and the type of technology,” explains Andrew Cohn, director of government and association relations. “We look for anomalies like wide variation in reported income for medium-size licensees, which might trigger an audit, but that has not happened for a while. For our most valuable licensees, we audit around every five to seven years.”

To help make the best use of limited resources, Rattner, who oversees his firm’s royalty audit process, has developed a checklist TTOs can use as a “diagnostic tool” to determine whether and how often to audit license agreements. The simple scoring tool helps users to assess the “risk profile” of each license and identifies factors that signal an audit may be warranted. The checklist examines factors such as the timeliness of royalty payments, supporting documentation, and complexity of the royalty calculation as well as the TTO’s level of understanding of the licensed technology, its distribution channels, and commercial uses. Responses are scored on a point system, with the total indicating the agreement’s potential exposure. A detailed article on the audit checklist, including a copy of the entire scoring system, appears in the August issue of Technology Transfer Tactics. To subscribe and access the article, CLICK HERE.

Posted August 25th, 2010 under Tech Transfer

Write a comment