THE PUBLISHING AUDIT 

IVAN HOFFMAN, B.A., J.D. 


If the author has sold a reasonable number of books, it often pays to examine the records of the publishing company in order to verify the statements the author has been receiving. If the author is negotiating a new deal with the same publisher, it may also pay to examine the account on the old deal or deals not only to perhaps increase the author's bargaining position relative to the new deal but to check out discrepancies in the event there are cross-collateralization issues. (see "Cross Collateralization In Book Publishing Contracts.")

For authors who feel that to do such an examination during the relationship would somehow create ill feelings on the part of the publisher, I suggest that these concerns are perhaps misplaced. This is a normal aspect of the business relationship, one for which the publisher in its contract has already provided.

There should not be any implication in the request for an audit that you suspect any foul deeds on the publisher's part. The relationship between the author and her or his editor is not in question for the accounting is done by individuals with no relationship to the author, personnel with many accounts to keep. The likelihood that simple contract misinterpretations and accounting errors have crept into the statements is a far more common occurrence than an outright attempt to cheat the author.

Before I get into some of the contractual provisions in which there may be some money miscalculated and therefor owed to the author, the author must examine her or his contract not only to make certain that there is the right to audit but also to make certain that the audit is being conducted according to the contract provisions.

THE PRIVATE PERIOD OF LIMITATIONS

An author, whether of computer books or books for the non-computer market, may find herself or himself faced with a clause in the contract with the publisher that the law refers to as a "private" period of limitations. It is a clause whose intent is to shorten the open period of time that an author may have to object to apparent irregularities on royalty statements.

It may vary somewhat from contract to contract but in essence looks something like:

All statements rendered hereunder shall be deemed final and binding upon Author unless Author shall notify Publisher in writing within six (6) months after such statements are rendered stating the specific objections to the statements and as to all aspects of all statements to which no such specific objections are made, those aspects shall be deemed final and binding.
Or
Author shall be deemed to have consented to all statements and the same shall be binding upon Author unless Author shall have notified Publisher, in writing, of Author's specific objections thereto within one (1) year from the date thereof and unless Author commences suit on such statement within one (1) year from the date Publisher denies the validity of such objections.

What Are The Issues These Type Clauses Present?

Initially, of course, we should understand the ostensible justification for their inclusion in the contract. From the publisher's point of view, they serve to bring a finality to the accounting process much sooner than the law requires. Absent these clauses, the law of the state under which the contract is to be interpreted governs how long a party has to bring a litigation for the claimed breach of a written contract. But since each statement that is assertedly incorrect creates its own statute of limitations, in theory then the publisher has a very long tail period from each statement.

And in the most outrageous of cases, there may be different statutory limits placed on the right to sue for fraud. This fraud may not become apparent for a long time since fraud, to be proven, often requires a showing of a pattern of behavior and that may not come to the surface for many years worth of statement.

Additionally, it is possible that upon an examination of a particular royalty statement that may be the subject of a claim during the statutory period, information is discovered that exposes previously unexposed accounting errors in statements that may have had their statute run i.e., statements that go back to times before the applicable statute of limitations. In such an event, the publisher in truth may have to retain statements for many years beyond the statutory period. Few publishers have garages large enough to hold many years worth of records.

So these shorter periods of limitation on the author's rights are designed to create some final accounting between the parties, at least as to the older statements. And the author must conduct the examination within the parameters of this contract provision or run the risk that statements that go back further than the clauses' coverage may be barred. (Obviously in the original negotiation of the agreement, this issue should have been faced.)

POTENTIAL SOURCES OF ERROR

There are potentially a great number of areas of unreported or misreported sums that may be due the author. Let me cover just a few.

Where Are The Books?

The publisher reports actual returns which are reductions of the royalties due. [NOTE: I will not cover in this article the issue about "reserves against returns." For information about that and how it plays into the auditing process, read "Many Unhappy Returns"]

For the purpose of this article, let me limit my discussion to the question of "where are the books?" In other words, if the books have been returned by the stores or by wholesalers and distributors, where are they? If they have been returned in damaged condition, where are the covers (usually only in the case of paper back books) or return memoranda or authorizations or reports from outside firms that accept returns for smaller publishers? In short, the books debited the author for returns must be documented. If they are not so documented as returns, then they should be in the publisher's inventory and should show up as such. And if they are neither the subject of the returns evidence nor the inventory run, then they must be the subject of other sales (in other words they came back and then were reshipped) and as such, must be credited the author as sales. The actual books have to exist in some fashion or evidence of their disappearance must be provided.

In order to know the full extent of this issue, it may be necessary to examine production reports to see how many units were produced and compare that with how many were reported as sold. The difference may tell a story. There may be explanations for the difference such as damages, promotional copies etc. but those difference should be explained.

Comparing The Contract With The Statements

There are two issues among many that I wish to cover here. The first is to make certain that the amounts reported to the author are the same amounts as are set forth in the contract itself. This means that the author must compare the amounts for each category of sales-book clubs, foreign, normal trade channels etc.-as are reported on the statement with the appropriate contractual provisions in the agreement.

The second is to examine the licensing deals that have been made by the publisher for the author's book to make certain that the amount paid by the licensee matches the amount contracted for. This may inure to the benefit of the publisher as well since the publisher may not always correlate the two. For example, if the publisher has entered into a foreign licensing deal for the book and the contract calls for say a $1,000.00 advance, the licensee may have actually paid less than that amount but the publisher may not have caught the presumed error. Thus the publisher may have reported to the author the author's share (usually 50%) of the amount received instead of the amount the licensee should have actually paid. Thus both the publisher and the author may be out some money each in this example. There may be legitimate explanations for the variance paid by the licensee but until it is checked out, neither the publisher nor the author may even know that the variance existed.

CONCLUSION

The issues I have raised in this article are but a few of the many such items that may arise in any examination and I have not intended this article to be exhaustive of all of those issues nor even of the issues I have discussed.

What is important here is that the author, and indeed the publisher, may benefit from a careful and periodic review of their contractual relationship.

© 1997 Ivan Hoffman

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This article is not intended as a substitute for legal advice. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws.

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.


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