By Sherri Carstens, CFE (Senior Manager, GHJ) and Ilan Haimoff (Partner, GHJ)
Let’s imagine the perfect world when it comes to a profit participation audit of a studio film or television series distribution statement:
You (Producer) wake up on a Monday and decide it is time to audit. Within days, your attorney sends an audit notice to the studio, and by the end of the week, the audit firm is set to start the audit the following Monday, after confirming with their contacts at the studio.
In reality, the time it takes from the moment you decide to audit to the moment an audit actually can start may take months or even years, depending on the studio and your underlying audit rights. Assuming there is no explicit agreement provision that requires an audit to start within a specified time or scheduled on a priority basis, the primary reason for the delay in commencing is due to the limited resources available at the studio to support all audits at the same time. While each studio has a different process, the timing of each audit may be determined based on the audit notice date.
The following are ideas and tips to consider as you contemplate sending an audit notice to a studio:
- Be ahead of the game: If there is the possibility that you may want to audit, depending on certain factors, you may want to consult with your representative as to whether to submit an audit notification as soon as you receive your first participation statement. When weighing the risk of missing a tolling deadline vs. sending an audit notice too early, it is important to also consult with the audit firm – who may be familiar with the studio processes – which should be considered as part of such decisions.
- Monitor you tolling rights: A designated representative (attorney, agent or business manager) should be monitoring your tolling rights to ensure that a decision to audit is made timely and/or none of your audit rights expire.
- Consult with an audit firm: Since each studio has a different process, you may consider consulting with an audit firm as to the best timing to notice and whether an audit would be worthwhile. Note that in some cases, an audit is not necessarily the right answer.
- Plan ahead: Assuming you have more than one picture or television series, you may consider developing a process through which you maintain your tolling and consult timely with your representatives – including the audit firm – to ensure that an informed decision is made as to whether to audit and when to send the audit notice. As an example, assume that:
- A studio has one queue for multiple audit firms with an estimated wait of three years and has a system of first-in, first-out approach to starting audits
- You need to notice within a month to be able to audit to inception
- Your picture is in its early distribution life cycle, as you expect much more revenues and expenses will be recorded in the coming three years
After confirming with the audit firm that an audit would be warranted, it may make sense to send the audit notice within the coming month.
- If unsure, you could ask for a tolling extension: Sometimes – for various factors – it may be difficult for you to make a firm decision as to whether to audit or not. Under those circumstances, you may try to negotiate a tolling extension, which would give you additional time to decide. There is no guarantee that the studio would agree. However, it may be worth trying under certain circumstances.
The profit participations team at GHJ is here to assist you if you still have questions about the audit notification process.
About Sherri Carstens (Senior Manager, GHJ)
Sherri Carstens joined GHJ in 2000 and has over 16 years of auditing experience within the entertainment industry. Her specialty includes profit participation audits on behalf of talent, investors, producers and directors at major studios. Currently she manages audits at Warner Brothers. Prior to GHJ, Sherri was the internal auditor at Panavision – auditing Panavision’s agents worldwide. Sherri earned a Bachelor of Science Degree with honors from California State University, Fresno. While in college was an active member of Beta Alpha Psi. Sherri currently resides in Santa Clarita.
Ilan leads the GHJ Entertainment and Media Practice, and his specialty includes profit participation audits on behalf of talent, investors and co-producers at both the major and mini studios. He currently oversees participation audits at various studios, including 20th Century Fox, Sony and Starz, as well as other prominent studios. He is also a co-author of GHJ 2015 whitepaper, New Media Trends: Consolidating to Meet Consumer Demands.