ROYALTY COMPLIANCE STILL AN UPHILL BATTLE FOR MANY LICENSORS

NEW YORK, NY… June 7, 2004...

These days, as high-profile accounting scandals and corporate fraud seem to become everyday occurrences, the financial departments of many companies are facing intense pressure to get their books in tip-top shape. One particular issue of concern remains the accurate reporting and recording of royalties, long considered a trouble spot for both licensors of products and intellectual property, and the licensees that agree to pay for the use of these commodities. Despite some improvements in compliance methods and increased scrutiny on corporate bookkeeping, many licensors are finding out that keeping their royalty payments in check isn't getting any easier.

This may come as a surprise to some. Considering the high profitability of royalty revenues, many would expect the execution of such matters to be a top priority. Unfortunately, due to the less-than-perfect nature of royalty reporting (or in some cases, because of outright fraud), many licensors are losing out on untold earnings.

Obviously, fraud plays a small but significant part on the royalty compliance stage. Most common is the intentional underreporting of sales by licensees, with billions of dollars going completely unreported each year. For some licensees, this may save them a few hundred dollars, and for others, it may amount into the millions. Either way, it is a serious crime that often goes unpunished, especially when it comes to the use of intellectual property.

More common, however, is the inadvertent underreporting or miscalculation of royalties by parties on both sides of license agreements. According to a recent survey conducted by Kessler International, a worldwide forensic accounting firm, more than 45 percent of royalty calculations are inaccurate, and more than likely, these miscalculations will not benefit the licensor. These oversights are often the result of careless bookkeeping or misinterpretations of contracts, and though unintentional, such discrepancies can make a crucial impact on a licensor's bottom line, yet often slip under the radar of compliance officers and accountants.

The question is... How do mistakes and accounting errors continue to proliferate, and what can be done to keep royalty payments on the level? The answer seems simple enough, but many companies have yet to take the initiative.

"A third-party audit can make all the difference," says Michael G. Kessler, President and CEO of Kessler International. "Many licensors don't realize how much money they may be losing, and by neglecting to establish prudent compliance practices, they're essentially throwing money down the drain."

The problem seems to be that many companies are hesitant to conduct audits because they don't think hiring an auditor is worth the expenditure, and because they don't want to offend licensees.

"In most cases," says Kessler, "the amount of money that is recovered through a compliance audit offsets the cost of an auditor by a significant margin. Plus, by conducting regular audits, you ensure that future payments will be fair and accurate. It just makes good business sense."

As for hurting licensees' feelings?

"If a licensee is insulted due to a royalty audit, that's probably because they have something to hide," Kessler says. "Royalty audits are a wise business practice and shouldn't be construed as an accusation."

In fact, most license agreements now include a section that gives the licensor the right to conduct audits, making such occurrences less of a surprise to licensees. Many contracts also contain stipulations that will make licensees responsible for audit costs if a certain value of discrepancies is exceeded.

Kessler recommends routine audits to all licensors, but especially if something seems amiss with royalty payments.

"Don't let yourself be a victim of negligence. A few preventative measures can go a very long way."

Kessler International, headquartered in New York City with offices worldwide, is the recognized global leader in royalty compliance auditing. Specializing in Forensic Accounting, Brand Protection and Computer Forensics, Kessler is dedicated to protecting the interests of Fortune 500 and startup companies alike.

For more information about Kessler International, contact Michael Kessler at 1-800-932-2221 or visit the Kessler International website at www.investigation.com.