From cheating managers and promotors to IRS issues and straight up financial mismanagement, there are many reasons the list of music legends who have lost it all is a long one.  David Acosta, CPA is an expert in helping music artists navigate and protect themselves from the financial downside of the music industry. Here’s what he has to say regarding royalty fraud.

How does royalty fraud happen?

There are many variables when it comes to royalty distribution and the calculation of rates. It is an extremely complex and controversial process.  Not only do rates vary by type (CDs, digital, streaming, television and film, video games) but the calculation of royalties is different for songwriters, publishers and the recording artist. As Courtney Love pointed out in her letter to music artists, “Record companies also reduce royalties by “forgetting” to report sales figures, miscalculating royalties and by preventing artists from auditing record company books.”

How is royalty fraud detected?

It starts with the contract. Negotiate terms that lend themselves to accounting controls such as demanding payments and summaries at regular intervals with detailed backed up. Review the summaries immediately and carefully to ensure contract compliance.

How are royalties distributed?

Royalties are typically paid either monthly, quarterly, or annually.  Royalties are paid after all the deductions are calculated.  Some artists never see any royalties because of recoupment.

How do you calculate lost revenue? 

Most analyses use a combination of historical or past performance. In some instances, we have to project what income the artist could have made but for the actions of the record label.

How do you recover lost revenue? 

As accountants, we start by conducting an audit. If the numbers differ from the record label’s numbers, we make a demand for any money owed.  Unfortunately, this is when lawsuits arise.  If we have a solid case, it is likely to settle for an amount usually less than 100 percent of what is owed.

Who manages royalty compliance? 

Lawyers are usually involved during contract negotiations, but in terms of compliance, it is usually the business manager who keeps track of royalties owed.  Unfortunately, many business managers aren’t savvy when it comes to keeping up with complicated royalty formulas.  It’s best to have a CPA on the team. That’s why they call it royalty accounting.

David Acosta, CPA has more than 25 years of accounting experience and serves on the Board of Directors of the Texas State Society of Certified Public Accountants and the Board of Governors of the Texas Chapter of the National Academy of Recording Arts and Sciences (Grammy Awards©). http://www.CooperCPAGroup.com

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