The Magnitude and Meaning of Royalty Misreporting

• Author: Russell L. Parr
• Profession: President of Intellectual Property Research Associates
• Pages: 305-312

CHAPTER 19

THE MAGNITUDE AND MEANING

OF ROYALTY MISREPORTING

Debora R. Stewart, David J. Lambdin, and Megan E. Farrell

InvotexIP, LLC

As shown in the pie-chart, approximately 86% of licensees both underreport and underpay

royalties to their licensors. In this chapter, the authors provide results of their study in which

they examine the magnitude of royalty misreporting and its underlying causes and present

problem-solving strategies to put into practice.

20%

Underreport

by over 100%

14%

Properly

Report

Underreported Royalties As % of Reported

32%

Underreport

by 1-5%

8%

Underreport

by 6-10%

12%

Underreport

by 11-24%

7% Underreport

by 25-49%

7% Underreport

by 50-99%

Source: InvotexIP Audit Statistics 1997–2016.

INTRODUCTION

Licensors are not reaping the full benets of their license agreements and have cause to

be concerned. Enormous resources are expended in drafting and negotiating license agree-

ments, not to mention the time, effort, and money spent generating or acquiring the intel-

lectual property (IP). While some organizations are primarily interested in promoting soci-

ety’s common good, they are also concerned with recouping investments through royalty

payments to the organization. As such, management is tasked with the responsibility of

ensuring that assets are protected and used to their fullest earning potential.

Many scal problems arise when no one takes responsibility for protecting assets.

We read about it in the newsdaily. Cash is embezzled. Fraud is perpetrated. Machinery and

other consumables mysteriously “walk out the door.” These asset misappropriations are

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