Intellectual Property: Valuation, Exploitation and Infringement Damages 2013 Cumulative Supplement, 11th Edition

CHAPTER 33A

THE MAGNITUDE AND MEANING OF ROYALTY MISREPORTING (NEW)

DEBORA R. STEWART, CPA

JUDY A. BYRD, CPA

  33A.1 INTRODUCTION

  33A.2 “WHY?” VERSUS “HOW?”

  33A.3 MATH ERRORS: 5% ERROR RATE

  33A.4 ROYALTY RATE ERRORS: 4% ERROR RATE

  33A.5 TRANSFER PRICES: 4% ERROR RATE

  33A.6 UNREPORTED BENCHMARKS AND MILESTONES: 5% ERROR RATE

  33A.7 UNREPORTED SALES: 16% ERROR RATE

  33A.8 DISALLOWED DEDUCTIONS: 9% ERROR RATE

  33A.9 UNREPORTED SUBLICENSES: 17% ERROR RATE

33A.10 QUESTIONABLE LICENSE INTERPRETATION: 40% ERROR RATE

33A.11 CONCLUSION

This chapter provides results of a study by Debora Stewart and Judy Byrd. They examine both the magnitude of royalty misreporting and its underlying causes.

33A.1 INTRODUCTION

Licensors who do not know if they are reaping the full benefits of their license agreements should be concerned. Enormous resources are expended in drafting and negotiating license agreements, not to mention the time, effort, and money spent generating or acquiring the intellectual property. Few organizations are altruistic, interested only in promoting society's common good. Most are interested in 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 fiscal problems arise when no one takes responsibility for protecting assets. We read about it in the papers and hear about it in the news. Cash is embezzled. Fraud is ...