Spring 2012 issue of Horizons

Depending on size and resources available, organizations can mitigate the aforementioned risks by utilizing their internal audit, compliance departments (if applicable), or an independent party to design appropriate monitoring controls and perform licensing audits.

terms and conditions, which may include the purpose of use, a defined territory and/or a defined time period.

In exchange for this usage, the licensor receives financial remuneration - normally in the form of a guaranteed fee and/or royalty. Licensing agreements are found in virtually every industry, including, but not limited to: • Restaurants • Retail • Mining • Publishing • Manufacturing • Agriculture Brand image, intellectual property, raw materials, and expert services or products are all examples of licensed property. Licensing agreements are intended to benefit all parties involved. These agreements allow the licensor to expand their brand, product or service with minimal capital investment. They also allow the licensee to attain an instant competitive advantage within their respective industry, generally for an agreed-upon fee. The general purpose behind licensing agreements is the perceived reduction in risk to the involved parties. In many cases, particularly from a capital investment perspective, that statement is true. However, the parties involved face numerous financial, operational, and reputational risks resulting from licensing agreements. Licensor Risk To fully maximize the financial benefits of a licensing agreement, the Licensor must focus on two main risk areas: • Licensee is accurately reporting sales/material usage/services provided and remitting the appropriate payments to the Licensor. • The brand image and/or resources are not being compromised.

Licensee Reporting and Remitted Payments

Before performing substantive procedures, the auditor must first understand the foundation for how the licensing fees are calculated. Completing a detailed license contract review will assist the auditors in control and performance indicator identification. License contract terms can vary greatly depending on the industry and are highly customizable. Licensing fees can be based on, but are not limited to, the following factors: • Percentage of licensee gross or net sales • Tiered licensee sales escalators in which sales thresholds attained result in higher or lower licensing fees • Percentage of product or raw material usage

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