This week, several notices of the intent to audit the records of several webcasters and other digital music services were published in the Federal Register, indicating that SoundExchange was planning on having the royalty payment records of these services reviewed.  Notices were sent to services including Live365, iHeartMedia and CBS).  Those notices have prompted several calls asking what this is all about.  We have written before about these audits (see our article here).  It is a somewhat routine process, where each year SoundExchange picks several webcasters whose records it will have reviewed.  Under the rules adopted by the Copyright Royalty Board, SoundExchange can elect to audit a webcaster (or other digital music service – and some of the notices this week were for services that were not webcasters – one to a background music provider or what is referred to as a “business establishment service”, here).  SoundExchange can, and usually does, elect to review three years of records.  They can only review any service once for the same time period, so effectively a service can be audited only once every three years.

Under the rules, an independent CPA is to do the audit.  Once the audit is complete, it must be provided to the music service for comment.  Then, it is up to SoundExchange and the service to work out what to do if there are discrepancies identified by the audit with which the service does not agree.  The rules do not provide for any independent adjudicator to referee what happens if there is a disagreement.  SoundExchange pays for the audit, unless the audit determines that the service underpaid by 10% or more, in which case the costs can be transferred to the service.

So the fact that these audit notices were just published in the Federal Register is in and of itself a somewhat routine matter, as someone gets audited every year (just as ASCAP and BMI can do audits, though their audits are not given as much publicity as they are not published in the Federal Register).  How SoundExchange makes the determination of who to audit is something known only to them.  And, as the results of the audits are not public, there is no way to compare the outcomes of the process.  But, as with anything of this nature, each audit can take on a life of its own, as there can be different issues raised by the auditor in the case of different services, or there can no issues at all.  I heard that one audit several years ago even concluded that the service had overpaid – though I would not expect that would be the normal outcome.  But the audit process is never a pleasant one, as it by necessity distracts at least some people at the company being audited from their normal day-to-day business.  But the publication of these notices reminds services to be careful with their royalty record-keeping, as those records could be subject to review should your company be selected in the next set of audits.