The audit clause is one of the clauses that always needs to be present in a video game publishing agreement. It is the developer’s only way to verify whether the royalties they receive are correctly calculated. While it is possible that an audit clause is lacking in a first draft, it is crucial to ensure that one is in place before signing.
What is an audit clause?
The audit clause is a clause in a video game publishing agreement which gives the developer the right to check whether the publisher’s calculation of royalties is correct. In most cases this is done by having an independent accountant check the financial data of the publisher.
Why the audit clause matters
In most video game publishing agreements, the publisher will provide the developer with periodic royalty reports. These reports contain the calculation of the royalties which the developer will receive as compensation for both (1) developing the game; and (2) providing the publisher with an exclusive license to publish and market the game.
The amount of royalties which the developer will receive often depends on the revenue which is generated by selling and commercially exploiting the game. This revenue will be reduced with certain amounts which have been agreed in advance before applying the agreed upon royalty percentage. An example of a common deduction is the costs for marketing the game.
Some developers believe that it is sufficient to access information about the sales on the platform, such as the Sales Report via Steamworks. However, to verify the royalty statement, a developer also requires access to proof of the amounts deducted from the revenue. This information is not public and therefore a developer requires the cooperation of the publisher to verify the royalty reports.
The audit clause actually provides the developer with a right to verify the calculation of the royalties. While audit clauses are not enforced often, they provide a safeguard in cases of doubt.
Example of an audit clause in a video game publishing contract
Below is an example of the audit clause from the publishing agreement Raw Fury has publicly shared:
“Publisher agrees that Developer at its own cost may once during any calendar year, audit its books and records for the purpose of determining the accuracy of Publisher’s Royalty Statements to Developer. If Developer wishes to perform any such audit, Developer shall notify Publisher in writing at least thirty (30) days prior to the planned audit. All audits shall be made during regular business hours, and shall be conducted on Developer’s behalf by a certified independent public accountant. Each examination shall be made at Developer’s own expense at Publisher’s regular place of business where the books and records will be made available to Developer’s accountant. In the event that Developer establishes as a result of an audit conducted by Developer, that there is a discrepancy in the Developer Share payments due to Developer of five percent (5%) or $10,000, whichever is greater, for the period covered by the audit, then Publisher shall pay to Developer, upon settlement of the audit, Developer’s reasonable third-party legal and auditor’s fees and disbursements actually incurred in connection with such audit and interest at the rate of five percent (5%) per annum on the underpaid amount.”
How to review and negotiate the audit clause
Limit audits to a reasonable frequency
It is important to agree on a frequency which ensures that a developer is given sufficient opportunity to assess the accuracy of the reports. At the same time, publisher should not be overburdened with excessive audit requests.
In this context, it is also important to check whether the contract includes an objection period for royalty statements. If that is the case, this should be taken into account when reviewing the audit clause.
Require audits by an independent professional
It can be important to determine whether a developer can perform the audit themselves or whether this can only be done by a ‘third party’, such as an accountant. Often a developer does not have the (financial) knowledge to be able to perform an audit.
Shift audit costs if significant underpayments are found
By default developers pay for the audit. However, many contracts contain a reimbursement clause for when it is discovered that the developer has been underpaid. These reimbursement clauses often contain that the (reasonable or actual) costs of the audit will be paid if there is a significant underpayment. What is considered a significant underpayment is often an underpayment of at least 5% – 10%.
Before you sign: summary and next steps
Audit clauses is your safety net to verify royalties. By negotiating fair frequency, costs, and procedures, developers can ensure transparency and protect their rightful share of revenue.