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A Publication of Michael G. Kessler & Associates, Ltd.
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Behind the Numbers® Edition
Volume 5

Question Mark Logo Number 2

Royalties: 

Getting Your Fair Share!

Watchdog or Bloodhound

You Choose

The late Morris Levy, music industry entrepreneur and raconteur, was infamous for his uncaring attitude concerning royalties. Rumored once to have agreed to double a particular artistís royalty rate, he reasoned that it made no difference to him since he didnít pay royalties anyway. One would expect such an arrogant individual to be shunned. On the contrary, Levy was a well-known and well-liked music industry figure.

Unfortunately, his words were indicative of the record business, which still holds the distinction of not paying musicians their fair share of royalties. However, this problem is not restricted purely to the music industry. This attitude is regrettably commonplace regarding royalty theft throughout the world. It is not unusual to find this opinion widespread among those who control the destiny of royalty agreements. These individuals attempt to find ways to justify royalty theft. However, the truth is that royalty theft is a crime and should be treated as such.

It is often said that imitation is the greatest form of flattery. This is not always the case. When imitation compromises the creation of another, there is cause to worry. Theories vary when it comes to Intellectual Property and the rights of the copyright owners, both in the real world and on the Internet. Some individuals believe that creativity is enhanced if others are allowed to build off of an original work of another, subsequently creating a work that will benefit society as a whole. Others feel that the holder of a copyright or parent should maintain total control.

Times are rapidly changing, access to intellectual property is easier than ever via the Internet and therefore has greatly increased the risk of royalty theft. Courts are currently bombarded with cases involving the unfair payment of royalties to royalty holders. As evidenced by court papers, these cases are not limited to any one industry or any particular group of people.

In March of last year, the estates of Buddy Holly and Duane Allman sued their respective record companies for fraudulently withholding royalties starting in the sixties. A class action suit is pending in New York against Sony for royalty fraud concerning foreign earnings and reporting. Even giant media moguls are faced with suits claiming royalty theft, such as the 1996 suit brought by a group of freelance writers against the New York Times for copyright infringement after the Times sold their articles to the electronic database NEXIS without permission or payment. In this case, the courts initially found for the New York Times, ruling that the electronic re-use in question was not a copyright violation, but an electronic revision of a collective work. However, in 1999 this ruling was over-turned by the Second Circuit Court of Appeals finding that the Times and other publishers were not protected by the privilege against copyright infringement afforded to the publisher of collective works. The Times has said it may appeal, but a final decision has not yet been made.

Royalty theft, however, is not purely a crime perpetrated upon the creative individual. Certainly the song writers, authors, and poets of our time find royalty theft to be an unpleasant part 

Continued Page 2

Imagine the situation. Youíre the owner of a large company. Business is flourishing. Times are good. Suddenly, numbers donít seem to be adding up right. Expenses are unusually high or revenues too low. You suspect employee fraud. You could hire a CPA to look over your books, but wonít that just confirm something you already know? You need Sherlock Holmes . . . with an accounting degree. You need a forensic accountant!

Forensic accountant? Whatís that? Donít feel too out of the loop. Although it is a finely tuned, advanced field, forensic accounting is still a relatively new development. Defined in The Accountantís Handbook of Fraud & Commercial Crime as ďthe application of financial skills and an investigative mentality to unresolved issues, conducted within the context of the rules of evidence,Ē forensic accounting is, more simply, an accountant who possesses the investigative knowledge and experience. Michael G. Kessler, a grandfather of forensic accounting trade-marked the phrase, ďaccountants look at the numbers, forensic accountants look behind the numbers.Ē

Accountants are watchdogs. They keep, audit, and inspect the financial records of individuals or business concerns, and prepare financial and tax reports. They also are hired to complete royalty audits to make sure their clients are not being cheated out of royalties theyíve been promised. The best CPAs are flawlessly accurate mathematicians. Thereís no arguing they know their numbers well. But unfortunately sometimes they lack the investigative skills needed to dig out a deeply buried problem. They also lack the experience to come up with a solution or offer litigation support.

Forensic accountants, like those at Kessler International, are bloodhounds. They donít merely accept financial records at face value. Instead, they search beyond the numbers, thinking in terms of how and why a particular fraud may have been committed. They donít just use their eyes when looking for problems, they sniff them out. Kessler Internationalís forensic accountants offer litigation support as well, and provide expert witness testimony. They are extremely comfortable in the courtroom, presenting their findings clearly and professionally. And when it comes to royalty compliance, Kessler Internationalís forensic accountants will find an existing problem, and help you take the steps toward getting the royalties you deserve. 

Most CPAs have very limited experience in fraud detection, and even less in presenting a defense for an individual accused of fraud, so be careful when looking for litigation support. Many ďallegedĒ forensic accountants are actually only extensions of conventional accounting firms. In addition, many of the associations that are issuing fraud credentials today are for-profit organizations that offer certifications for yearly dues. Unfortunately, just because an individual has their certification, it doesnít necessarily mean that they are competent. Experience is the key. Only true forensic accountants are accustomed to the specialized work, so make sure you get the real thing. 


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