Audit Rights
Commercial Contract
Table of Contents:
Purpose
Auditor Requirements
Frequency
Cost
Audit Rights
Purpose
In circumstances where one of the parties possesses the contractual right to access the other party’s books and records for certain verification purposes (aka audit right), the parties should specify the scope and purpose of such audit right:
Exemplar C9-1
During the term of this Agreement and for three years thereafter, Contractor shall keep all books and records relating to the Services in accordance with generally accepted accounting standards, and Client may examine such books and records solely in connection with Contractor’s Services to Client hereunder upon reasonable notice and during normal business hours and subject to Contractor’s workplace rules, at Client’s sole cost and expense.
Exemplar C9-2
Licensee acknowledges and agrees that Licensor may, during the term of this Agreement and for a period of two (2) years following termination of this Agreement, audit Licensee for the sole purpose of examining and verifying that Licensee has complied with the terms of this Agreement in regard to the permitted use of the Licensed Data and Licensee’s obligations upon termination of the Agreement. Licensee’s representative and Licensor, or Licensor’s authorized agent, shall work together in a timely manner to inspect Licensee’s books and records and any systems that load, store, process, and/or read the Licensed Data as reasonably necessary for Licensor to verify that Licensee has complied with the terms of this Agreement.
Exemplar C9-2A
Licensee agrees that Licensor retains the right to audit Licensee during this Agreement and for 2 years after termination. This audit, if performed, will only be permitted to verify Licensee's compliance with permitted Licensed Data usage and post-termination obligations. Licensee's representative will cooperate promptly with Licensor or its authorized agent to examine relevant books, records, and any systems that interact with the Licensed Data as needed to confirm compliance with this Agreement.
Auditor Requirements
If a party is not comfortable with allowing the other party direct access to its books and records, particularly if the parties are competitors, then the parties may agree that the audit may be conducted only by a third party, and preferably, a nationally recognized CPA hired by the auditing party for such purposes:
Exemplar C9-3
Supplier shall have the right, upon giving at least thirty (30) days prior written notice to Customer, to have an independent third party (“Auditor”) appointed by Supplier examine the relevant records of Customer to determine compliance by Customer with the terms and conditions of this Agreement (“Audit”).
Exemplar C9-4
Upon Supplier’s request, Customer and its Subsidiaries will provide access to Audit Information to a nationally recognized independent certified public accountant (“Auditor”) selected by Supplier and approved by Customer (such approval not to be unreasonably delayed or withheld), for purposes of conducting an audit of Customer’s and its Subsidiaries’ compliance with the terms of this Agreement. Customer must be given at least thirty (30) days notice of any audit and the access will be limited to those portions of the Audit Information necessary to verify Customer and its Subsidiaries’ compliance with this Agreement. The Auditor will use reasonable and customary care to protect the confidentiality of Audit Information. Audits will be conducted during regular business hours at Customer’s facilities and subject to s compliance with Customer’s workplace and security rules. The Auditor may be escorted by Customer’s personnel when on Customer’s premises and will not unreasonably interfere with Customer’s normal course of business. Following conclusion of the audit, the Auditor will provide both Supplier and Customer with a report of the results of the audit.
The following exemplar recites certain requirements designed to preclude a party from using an auditor who may be incentivized to find financial irregularities in favor of the hiring/auditing party or who may have some other similar conflict of interest:
Exemplar C9-5
In the event of any dispute as to any fees due under this Agreement, Licensee, an officer of Licensee or Licensee’s certified public accountant (but (a) in no event shall Licensee hire or employ an accounting firm of accountants or any person to audit Licensor as set forth under this Paragraph who is compensated or paid for such audit on a contingency basis and (b) in the event Licensee hires or employs an independent party to perform such audit, Licensee shall provide Landlord with a copy of the engagement letter) shall have the right after reasonable notice and at reasonable times to inspect Licensor’s accounting records at Licensor’s accounting office.
In the following exemplar, the auditor is precluded from accessing information without the owner’s direct participation:
Exemplar C9-6
Licensor and/or Licensor’s authorized agent shall not access Licensee’s books and records and any systems that load, store, process, and/or read the Licensed Data without the presence and assistance of Licensee’s representative(s). If required by Licensee, Licensor’s authorized agent will sign a non-disclosure agreement prior to participating in any audit. Any such audit(s): (i) may be performed by Licensor or its agent; (ii) shall occur only during normal business hours; (iii) shall, in each instance, be preceded by at least thirty (30) business days’ advance written notice; and (iv) will be limited in frequency to not more than one in any twelve (12) month period unless Licensor determines or reasonably suspects that there has been a violation of the terms of this Agreement. Licensor will be solely responsible for its costs and expenses of such audit; provided, however, Licensee will pay the reasonable costs and expenses of such audit and any applicable charges if the audit reveals that Licensee has not complied with this Agreement.
Frequency
Because audits can be disruptive to the party being audited, the parties may agree to limit how many such audits may be conducted (e.g., once a year), unless an audit shows a material discrepancy:
Exemplar C9-7
Contractor may, at its expense, engage a third party to enter onto Company’s relevant premises to review Company's compliance with the terms of this Section. Contractor may conduct such review no more than once per calendar year, at its own expense, on at least thirty days written notice and in a manner than minimizes disruption to Company’s business. However, Contractor may conduct such a review more than once per calendar year if it has a reasonable, demonstrable belief that Company may be in breach of its obligations under this Section. Company further agrees to cooperate fully with Contractor with all reasonable requests during such review. In any review conducted under this provision, Company has the right to identify certain proprietary, confidential information that the third party may not share with Contractor.
Exemplar C9-8
Supplier may conduct an Audit of Customer no more than once during each 12 month period during the Term and for one year thereafter, during normal business hours. Once an Audit has been conducted for a period of time, any subsequent Audit shall not be made for the same period for which records have been inspected. The Customer will make available, in the required form and in the required manner, all information and documentation that the Auditor considers reasonably necessary for the proper performance of the Audit. Supplier shall bear the cost of conducting the Audit unless the Audit reveals an underpayment of five percent (5%) or more. In such case, Customer shall be liable for reasonable fees and expenses in connection with the Audit.
Cost
The significant cost associated with conducting an audit (including audit and legal fees) presents an inherent control against the abuse of audit rights if such costs are to be borne by the auditing party as a default. However, such costs may be shifted to the audited party if a meaningful discrepancy is discovered:
Exemplar C9-9
Audits will not be performed more than once every 12 months, unless an audit discloses a Material Discrepancy, in which case follow-up audits may be conducted until the Material Discrepancy has been resolved. Customer will pay the costs of any audit(s) (including reasonable attorneys’ fees) that reveal a Material Discrepancy within thirty (30) days of receipt of an invoice for such costs; otherwise, Supplier will be responsible for the costs. “Material Discrepancy” means, with respect to Royalties, the greater $10,000 or 5% of the amount that was reported during the period subject to audit; and with respect to other terms of this Agreement, material non-compliance with any other material terms.
Exemplar C9-10
Distributor agrees to maintain records supporting the collection of gross revenues, as well as any deductions thereto, and payments made hereunder throughout the Term of this Agreement and for a period of six (6) months following termination thereof. Such records and accounts shall be available for inspection and audit by Distributor’s independent certified public accountant (but not more than once in any twelve (12) month period) during regular business hours and upon reasonable advance notice (not less than ten (10) business days). Except as provided herein, Distributor shall bear the sole costs and expenses in connection with such audit. Any underpayments discovered under any audit performed pursuant to this Section shall be paid promptly by Developer following the receipt of a final report from Distributor’s independent auditor. Any overpayments found by the independent auditor shall be deducted from any following payments due until such overpayment is fully recouped therefrom. In the event that the audit uncovers underpayments to Distributor of greater than five percent (5%) of the amount payable thereto for the period that is being audited, then Developer shall bear the reasonable costs of the audit.
Exemplar C9-11
During the Term of this Agreement Vendor agrees to keep records, in accordance with United States generally accepted accounting principles, relating to the calculation of the Revenue Share. To verify such calculations CUSTOMER may, during the Term and no more than one (1) time per calendar year, at its sole cost and expense, request such records and Vendor shall provide such records to CUSTOMER. If any such audit demonstrates that Vendor has underpaid the Revenue Share by at least five percent (5%), Vendor shall immediately pay to CUSTOMER the reasonable costs of such audit and the amount of such underpayment, and CUSTOMER shall be entitled to perform such audit two (2) times per calendar year. Further, CUSTOMER may appoint a third party, selected at CUSTOMER's sole discretion, to perform such audit.