Ten tips when checking royalty statements

In the second of his articles, Stephen Aucutt, a contracts and royalties expert who has worked in publishing for over thirty years, gives his insider tips for checking royalty statements. He can be contacted at [email protected].

A copy of the contract and any previous royalty statements are a necessity. Particularly previous statement since errors in those may not be apparent until subsequent statements are received.

Check that the amount of any advance or unearned balance of the advance deducted is correct and that advances or debit balances which apply to other books are not being deducted unless the contract is for two or more books and specifically permits joint accounting.

Check that any reserve against returns held has been calculated in accordance with the contract and that any reserve against returns held previously has been repaid at the appropriate account. Reserves should not be withheld against subsidiary rights’ income nor, normally, against electronic book royalties.

Check that the number of returns at a particular royalty rate and/or type of sale does not exceed the number of sales at that royalty and/or of that type of sale. Pay particular attention to this if the contract provides for rising royalties and royalties are being paid at an increased rate. Clawing back more in royalties as a result of returns than was paid initially is one the most common errors.

If the contract provides for rising royalties, check cumulative sales to see if any change point has been reached. All trade home sales, including those at reduced rates, should be combined to achieve change points; royalties calculated manually or using basic computerised royalty systems regularly feature errors of this type.

If you have been advised of any subsidiary rights sales, check that your share of income has been reported and at the correct rate. Your contract should provide for you to be informed of any subsidiary rights’ deals and the primary terms of those deals. Basic computerised royalty systems may be loaded with the publisher’s standard rates by default, rather than the correct contract rates.

If royalties on sales in excess of a particular discount are based on receipts, check that the average price per copy received does equate to sales at or below that discount. Worthwhile making a note of the average discount to compare with previous and subsequent accounts – any significant variations in the average discount should be queried with the publisher.

Unless you have been advised of any sales at high discounts, query any sales (particularly export sales) being made at a discount of 70% or more off the retail price. Export sales at discounts of 70% or more may indicate that export royalties are being based upon inter-company receipts, rather than on local receipts, i.e. an ‘internal’ price charged to a UK publisher’s overseas company, rather than the overseas company’s receipts from distributors/retailers.

Large number of sales + different royalty scales based on discounts + rising royalty rates = significant potential for errors. Even the best computerised royalty systems can struggle with the complexities of accounting for royalties across three or more discount bands, particularly where a royalty rate rises to the next level at one account and then drops to the previous at the next account due to returns.

If it doesn’t make sense or doesn’t look right, query it with the publisher! Royalties calculated manually are prone to human error, as is the input of contract information to computerised royalty systems. Do not rely on the publisher to check the accuracy of their royalty statements.