Can Songwriters Demand Answers from CPAs signing statutory royalty certifications?

As we’ve discussed several times on MTP, songwriters and publishers who are compelled to accept a compulsory license under Section 115 have no way to know whether any of their statements are correct because the government denies songwriters and publishers the right to audit any royalty statement under the compulsory license.

Instead, songwriters are put in the same position they would be in if the IRS audited their tax return and refused to let them have their own representative defend them.  The government mandates moral hazard:  The only accountant who verifies the legitimacy of the royalty statement is the digital service’s own accountant.  (See the applicable section of the Federal government’s Code of Federal Regulations 37 CFR Section 201.19.)

This Kafka-esque rule may have a solution.  It’s hard to believe that the government somehow has it in for songwriters and wants to create distrust.  While the government refused to give songwriters an audit right, they have required that an officer of the digital music service must “certify” a monthly statement of account and the company’s certified public accountant–meaning that the accountant holds the CPA’s license and malpractice insurance–must issue an opinion letter directly to the songwriter with the following certification signed by the CPA:

Signature and certification. (i) Each Annual Statement of Account shall include the handwritten signature of the compulsory licensee. If that compulsory licensee is a corporation, the signature shall be that of a duly authorized officer of the corporation; if that compulsory licensee is a partnership, the signature shall be that of a partner. The signature shall be accompanied by: (A) The printed or typewritten name of the person signing the Annual Statement of Account; (B) the date of signature; (C) if the compulsory licensee is a partnership or a corporation, by the title or official position held in the partnership or corporation by the person signing the Annual Statement of Account; and (D) a certification of the capacity of the person signing. (ii)(A) Each Annual Statement of Account shall also be certified by a licensed Certified Public Accountant. Such certification shall consist of the following statement:

We have examined the attached “Annual Statement of Account Under Compulsory License For Making and Distributing Phonorecords” for the fiscal year ended (date) of (name of the compulsory licensee) applicable to phonorecords embodying (title or titles of nondramatic musical works embodied in phonorecords made under the compulsory license) made under the provisions of section 115 of title 17 of the United States Code, as amended by Pub. L. 94-553, and applicable regulations of the United States Copyright Office. Our examination was made in accordance with generally accepted auditing standards and accordingly, included tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion the Annual Statement of Account referred to above presents fairly the number of phonorecords embodying each of the above-identified nondramatic musical works made under compulsory license and voluntarily distributed by (name of the compulsory licensee) during the fiscal year ending (date), and the amount of royalties applicable thereto under such compulsory license, on a consistent basis and in accordance with the above cited law and applicable regulations published thereunder. ——————————– (City and State of Execution) ——————————– (Signature of Certified Public Accountant or CPA Firm) ——————————–

Certificate Number


Jurisdiction of Certificate

——————————– (Date of Opinion)

Remember, the certification applies to YOUR statement.

It looks like this opinion letter from the well-respected accounting firm Prager & Fenton:

Prager Fenton Annual SOA 2011Since songwriters and publishers do not have the right to audit the underlying statement (in this case from Rightsflow), the CPA rendering this opinion is the only one that songwriters can turn to.  The CPA is in a unique position of trust as to the individual songwriter and publisher (or the “copyright owner”).

You have to believe that this is exactly what the government had in mind when they declined the industry standard audit right and required the songwriter to place their entire trust in the CPA’s good faith determination of their royalties.  The CPA arguably undertakes a duty to act in the best interests of the songwriter and music publisher in addition to any obligations the CPA may have to their employer.

What exact duty the CPA has under the circumstances will be a matter of proof, but one thing is clear–the law requires that the CPA render an opinion letter to the songwriter or music publisher, the CPA makes representations to the songwriter or music publisher and the only person who owes an explanation to the songwriter is arguably the company’s officer–and good luck getting them to explain anything about anything–but really the CPA.  And of course you should check on the statute of limitations on applicable causes of action you might have.

Remember that in Aimee Mann’s litigation against Medianet, a declaration was produced that showed that 23% of songs available through Medianet were unlicensed. Before you blow that number off, realize that Medianet has approximately 20 million songs available in its white label service for digital retailers (I believe, for example, they do work for Beats).  So 23% is 4.6 million songs.  The rough justice odds that your song was unidentified (and possibly not paid royalties at all) is something like 1 in 5 or thereabouts.  When you take into account that MediaNet actually has had staff dedicated to licensing and accounting for quite some time, these are not great odds.  I’d say your chances could actually be worse–all the more reason why audits have a tendency to focus the mind.

The recipient of the CPA’s opinion letter seems to clearly have the right to ask the CPA a few questions at a minimum.  I would be interested in seeing the rationale for any refusal to reply.  Obviously, this is not meant as legal advice and you should consult with your own counsel before acting on any of these ideas.

Maybe questions like these might be relevant:

I request that you provide written answers to the following questions regarding your opinion letter [reference opinion letter date and accounting period]:

1. Please set forth the procedures you agreed upon with [RETAILER] that you would apply to the calculation of the sums in the Annual Statement, including all findings from application of those procedures;

2. Please describe any materiality definitions you utilized in determining your findings, and any materiality you agreed upon with [RETAILER];

3. Please identify any individuals within [RETAILER] (for example, the chief financial officer, internal auditors, legal counsel, compliance officer, or grant or contract administrators) from whom you acquired knowledge about [RETAILER]’s compliance requirements and procedures;

4. Please identify any individuals outside of [RETAILER] (including its current parent corporation) (for example, any employee of the U.S. Copyright Office or third party specialists) from whom you acquired knowledge about [RETAILER]’s compliance requirements and procedures;

5. Please describe [RETAILER]’s internal compliance requirements and procedures;

6. Please describe any noncompliance that you observed that may have occurred after the dates covered by the Annual Statement but before the date of your opinion letter;

7. Please describe any noncompliance you observed that may have occurred prior to the dates covered by the Annual Statement and before the date of your opinion letter;

8. Please describe the criteria you applied (or that was applied by [RETAILER]) regarding unallocated revenues;

9. Please describe the criteria you applied (or that was applied by [RETAILER]) regarding unidentitifed musical works;

10. Please describe the criteria you applied (or that was applied by [RETAILER]) that resulted in a determination that a musical work was not identifiable;

11. Please provide us with a list of any of musical works that you believe should have been included in the Annual Statement but which were not included for any reason;

12. Please provide us with a description of the “test basis” review described in your opinion letter, as well as copies of all work papers and other materials you relied upon in order to conduct such tests of the Annual Statements, including the musical compositions included in that “test basis” review, and the location of that testing;

13. Please provide us with, or with a written description of, the methodology you used to plan your “test basis” review and the rationale for that methodology, i.e., what data did you decide to test and why?

As a matter of formality, please provide us with any certifications you obtained or sought from the American Institute of CPAs regarding your compliance with the standards set by the AICPA regarding examinations of the type you conducted. If no certifications were obtained or sought, please provide us with your analysis of why Your Opinion Letter complies with the AICPA’s Standards on Attestation Examinations.

Thank you.

Have a nice day.