Unlike compliance services, such as tax preparation or financial statement audits that represent more of a commodity service offering, profit participation audits represent a forensic consulting engagement. In most cases this requires extensive, specialized experience and can only be performed once. Therefore, as we learned from Indiana Jones and the Temple of Doom: “choose wisely” when picking your profit participation auditor.
We recall several instances that highlight our concern with the auditor selection process. We have seen participants chose a less experienced auditor who:
- Could not complete the audit due to dissolution of the audit firm or abandonment of the project
- Did not identify any issues
- Highlighted a significant issue which turned out, after incurring additional litigation fees, to be immaterial or factually incorrect.
So to help participants, we compiled a “cheat sheet” to use when looking for an audit firm.
In choosing a (profit participation) audit firm, it is important to consider the following factors:
- Experience: Generally, the more experience the audit firm can demonstrate – particularly current experience at the studios – the more value is derived from the audit. This is the most important factor, since such experience would help the audit firm provide you with a reliable recommendation as to whether or not an audit is worthwhile. If an audit is needed, the auditor is able to determine what areas of risk need focus. In addition, the audit firm may provide you with insight regarding the studio’s culture, which is helpful while you navigate through the audit and settlement processes. (Note that the audit firm would not be able to share specific potential issues due to non-disclosure restrictions)
- Return on Investment: The relative costs and ultimate value are typically considered by clients. The audit firm you choose should have the necessary experience and technical savvy to identify those issues that result in the most settlement value and do so with efficiency and cost-saving strategies. While there are no guarantees, the key would be the underlying experience at the studio and the general technical knowledge.
- Reputation: Our entertainment industry, especially in relation to profit participation audits, is a small community. You should consider asking for a recommendation from colleagues or friends in the industry who can provide a solid recommendation based on their past experience.
- Pre-approved Audit Firms: The studios often pre-approve audit firms within your agreement (Refer to the audit paragraph of the contract for a list of such firms.) Should you choose an audit firm that is not pre-approved, be sure that your selection is acceptable to the studio.
- Viability of the Audit Firm: In most cases, an audit can take a substantial amount of time to complete and settle. It is important that the audit firm you select is viable and will be able to perform the review, complete the audit report and be available to assist with the settlement discussions (or litigation, if necessary).
- Customizable Approach by the Audit Firm: Regardless of whether the audit relates to a motion picture or television series, the structure of the underlying participation deal – or the applicable studio or distribution company – the audit procedures and related audit fees should be properly tailored (limited or extensive review) and focused on cost/benefit analysis and risk analysis. When choosing an audit firm, ensure that the proposed scope has been developed to address your needs and the key areas of risk applicable to your deal.
- Client Service: It is important to pick an audit firm that is responsive and available throughout the audit process. From the initial statement review and recommendation stages through review of the final settlement agreement and amount, the audit firm you select should be available and provide you with support as needed.
- Price: While the price factor is important, consider the following:
Does the audit firm represent other participants with which the fee can be shared? If yes, the overall cost of the audit may be shared, which can be cost efficient to you.
Are the proposals you receive comparable? If an audit firm charges less, will they put in the same number of hours and effort? Through what point of engagement will the fee cover? (e.g., through issuance of final report, assistance in settlement discussions, etc.)
Have you considered the ultimate return on investment based on the experience of the audit firm? It is possible that while your audit fee may be lower, the ultimate settlement could also be significantly lower.
- Timeliness of Audit: With contractual tolling restrictions, length of the queue and the limited studio resources available to support profit participation audits, there are certain limitations beyond the audit firm’s control to be able to anticipate the date by which an audit can start. If you have reasons to have a “rush” start, this should be discussed with the studio to see if they could accommodate, regardless of your audit firm selection.
If you have any questions on the selection process, please do not hesitate to contact us at 310.873.1600.
About Ilan Haimoff (Partner, GHJ)
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.
About Michael Sippel (Pricipal, GHJ)
Michael is a senior manager within our Participations Audit Practice and specializes in contract compliance and forensics. Prior to joining the firm, he was a staff accountant at Hagen Streiff Newton & Oshiro, working within their Insurance and Forensic Litigation accounting practice. He earned his bachelor’s degree from the University of California, Berkeley in Business and Economics.
Originally published on 2/3/2017