Audit Rights
Contractual permission for profit participants to examine studio financial records to verify accurate royalty calculations.
Definition
Audit rights allow talent with profit participation to hire auditors examining studio accounting. These reviews verify that revenue is properly reported and expenses are legitimately charged against their participation.
Audits frequently reveal discrepancies—sometimes significant. Studios may settle for additional payments when audits surface questionable accounting practices, even without admitting wrongdoing.
Why It Matters
Without audit rights, participants must trust studio reporting. Given notorious accounting practices, verification capability is essential for anyone with backend participation.
Audit rights should be negotiated into any profit participation deal. The cost of audits (often six figures) is worthwhile given how frequently they discover additional amounts owed.
Examples in Practice
An audit of a major franchise reveals $12 million in improperly charged costs against a producer's participation. The studio settles for $8 million rather than litigate.
A profit participant's audit discovers the studio charged marketing costs from one film against another's books, inflating expenses. The error is corrected, releasing $3 million in held backend.