Business

Concerned About Your Record Deal? Why Financial Auditors Can Be Artists' Saving Grace

Marsha Sealy
Claudia Bernaldez

Marsha Sealy

"This is your music, your business and your brand. It’s on you to invest in yourself," says audit veteran Marsha Sealy.

On Sept. 2, #TheShowMustBePaused laid out its list of demands for music companies to implement and uphold as the organization continues to push for diversity, transparency and the end of racial bias across the industry. Then last week, Kanye West picked up the gauntlet himself by denouncing label deals and calling for reform in how artist contracts are structured.

When it comes to contracts and other financial matters, one of the first steps an artist, songwriter or producer can take on the road to accountability is to engage an auditor. In the as-told-to below, audit veteran Marsha Sealy explains why it's high time for all contracts to be "fair and equitable."

We may be perceived as the devil by some, but auditors are truly a saving grace. Still we largely remain the industry's best-kept secret. However, as Kanye West publicly decries the current structure of recording contracts — following label/publisher BMG's post-#BlackoutTuesday commitment to review all of its historic contracts for inequities or anomalies — the auditor in me says, "It's time for artists — especially Black artists — to conduct their due diligence."

What artists and songwriter/producers need to understand first is the fundamental difference between an auditor and an accountant. A number of auditors are also accountants, handling and validating the bookkeeping, preparing financial documents such as profit-and-loss statements, balance sheets and overseeing the controls that govern the accounting process. Generally, however, accountants and internal auditors are employees of the organization where they work. An external auditor, however, is a third party brought in to impartially examine and render an opinion (audit report) on the accuracy and completeness of all financial aspects of the said business.

Auditors fight for both established and rising artists, songwriters and producers who may want to redline their contracts or double-check the numbers for their publishing royalties, streaming royalties, synchronization/mechanicals, downloads and radio performance revenue. We consult with clients to make sure that mistakes made going into the contract are mitigated. And we provide education to minimize the risk of financial loss recurring.

That artists typically don't have the proper representation is still a horrible story. At the very least, artists should engage a reputable attorney they trust. But while attorneys have a high level of oversight, they're generally not the ones that conduct the actual audit. Lawyers will engage an auditor to conduct due diligence behind the scenes for a client. But here's something else that artists and songwriter/producers should bear in mind as well: Standard music industry contracts typically state the artist or songwriter/producer have the right to request an audit and retain an audit firm of their choice.

Among the telltale signs that can prompt an audit request: When was the last time a statement was received? From that point, the label or publisher typically has 90 days to gather all the needed documentation for the audit. The contract should stipulate the timeframe in which the documentation must be provided for review. For rising artists who haven't yet built a sizable catalog, it may be just a matter of asking the company to provide an updated statement to make sure everything is on point. More established artists with expansive portfolios should generally have an auditor look at the documentation at least annually.

Fees to conduct an audit vary. It may be covered already by the retainer being paid to the attorney/law firm. Or customized terms are established including but not limited to a flat fee based on the number of hours estimated to complete the audit. Another option is a contingency based on a percentage of unpaid royalties recovered as a result of the audit.

The requested audit should include a thorough review of all financials and compliance measures, in addition to assessing the controls governing a particular process or the business itself. The focus is on determining whether the controls are effective and efficient or if there are gaps. While also assessing the life cycle of the business, an auditor will keep in mind key questions such as how are you getting paid versus how you should get paid? What are the perceived discrepancies or anomalies? And does a lack of compliance with the artist's contract indicate a breach? Additional factors to check out include validation of payouts from exploitation agencies and distributors, inventory of physical assets, streaming and digital sales, performance and radio revenue, deductions and splits.

Further regarding contracts, you'd be surprised at how many artists will sign without reading and realizing what they're signing. Don't sign anything until an entertainment attorney can review the document. For example, I've had clients complain that they haven't been paid when, in fact, their contract stipulates that payment will not be rendered until expenses are recouped. I've worked with some clients that have signed 360 deals without a clear understanding of who receives their revenue. That's why it's important to keep a copy of the original contract and all addendums.

This may sound elementary, but it's still necessary to underscore. It's never a good idea to hire a friend or anyone else as your legal representative unless he or she is well-versed in contracts, intellectual property and litigation. And whether choosing an entertainment attorney or an auditor, take time out for some due diligence. Find out how long the executive or firm has been in business; thoroughly check out his or her references and noted accomplishments.

Finding money that may be missing or is being allocated incorrectly is also part of the due diligence that artists need to bear in mind over the course of their careers. That's why an auditor should be among an artist's top favorite cell numbers alongside those of his lawyer, manager and publicist. It's always time to ensure that contracts already in place or being offered are actually fair and equitable. This is your music, your business and your brand. It's on you to invest in yourself. Having a seat at the table means bringing more than just your appetite.

A 20-year audit veteran, Marsha Sealy heads MCS Enterprise. The Dallas- and Miami-based firm provides consulting and audit services, specializing in music and entertainment. PriceWaterhouseCooper (PwC), Robert Half Management Resources and various world music artists are among the clients that Sealy consults.