Most book publishers' contracts have provisions granting authors the right to examine the books and records of their publishers under certain conditions: for example, the examination must take place on the premises of the publisher during normal business hours; no more than two audits may be conducted in any given year; an audit must be commenced within a reasonable time after the issuance of the royalty statement in question; the records on any given book shall not be examined more than once; the publisher is not required to keep records on a book for more than a certain period of time, etc.
Examinations of publishers' accounts are not a daily phenomenon and when they do occur, they are invariably conducted by authors with lucrative contracts. But the vast majority of authors has only the vaguest notion of what is involved in an audit. Perhaps we can rectify that problem here.
Harder to rectify is the somewhat bovine attitude on the part of many authors that their contracts are too small to merit auditing and the royalties to be liberated by an examination of a publisher's books would not be worth the cost, which can run to a thousand dollars a day or more.
These assumptions are not necessarily correct. While a publisher's profits from midlist and category books are indisputably smaller than those from bestsellers, the total profits from the former can be immense by virtue of the fact that there are so many more of them on publishers' lists than there are bestsellers. And because most bestsellers are by established big-name authors, the huge royalties they earn are usually paid in advance, giving publishers little leeway to reserve royalties, whereas publishers commonly hold at least half the royalties collected on midlist and category books for which modest advances are paid. Sometimes more than half. Sometimes, all of it.
If there is widespread suspicion that a publisher's royalty accounting practices are not completely kosher, a collective audit could be undertaken by an accounting firm or an author or agent organization, thus spreading the cost per author. Even if no impropriety is suspected, group audits can keep publishers honest by examining their accounting practices and the assumptions underlying them, such as their formulas for reserving royalties against returns.
Because your book or books similar to yours could be spotlighted by an audit, you might want to tag along with the certified public accountant for a visit to a publisher's ledgers.
Before we embark, however, let's discuss just what gives us the right to audit a publisher in the first place. As I said at the outset, many publishers grant that right in the boilerplate language of their contracts. Certainly, every author or agent negotiating a book contract should insist on an audit provision. But if it is absent from a contract through oversight or design, or if a publisher refuses to grant that right to an author, does that necessarily rule out the possibility of an audit? Not according to the attorneys and accountants I have spoken to. They maintain that any licensor (that's you)whose contract calls for royalties is entitled to examine the statements and supporting data of the licensee. Therefore, whether your contracts stipulate that right or not - indeed, even if you've been so foolish as to waive that right - your publisher cannot legally prohibit you from auditing its books. They can make it extremely difficult: they can postpone and stall, "misplace" and "lose" documents, subject your accountant to unpleasant conditions - a monastic cell with a hard chair, rickety table, and one flickering taper. But they must, ultimately, let your accountant go over the books.
Within recent memory there were some shady publishers who did that sort of thing, but happily they were driven out of business by their legitimate competitors. Today, while some publishers are frugal with their hospitality toward accountants, many shrug and say, "Come on in, we have nothing to hide."
Assuming your publisher is cooperative, the first step is for the accounting firm to make an appointment. The accountants will have examined the author's contract and all royalty statements from publication date to the present and will use these as the jumping-off point for their investigation. They will then request the printer's affidavits stating how many copies of the book were run off, along with information about damaged or destroyed copies. They will, of course, expect affidavits for all printings of the book. If there has been more than one printing, the accountants will want to know if the cover price of the book was raised.
Then the accountants will examine the records pertaining to distribution of the books, either to wholesalers or directly to independent stores or book chains. The number of copies distributed plus the number of copies left in the warehouse plus the number of copies damaged, destroyed, or given away (to reviewers etc.) should add up to the number of copies printed. If they don't, suspicion will certainly be aroused that the publisher has printed copies that have not been reported.
The next critical source of information is copies returned. In hardcover and trade paperback publishing, the books themselves are returned to the publisher for credit, and counting these, while tedious, is not as stupefying a task as counting returned mass market paperbacks, for the dimensions of hardcover and trade paper printings and distributions are nowhere near those of paperback. In paperback publishing, however, returns are usually effected simply by stripping the covers off the bound books and returning the covers to the publisher's warehouse, saving the substantial cost of shipping whole books back whence they came.
Obviously, the job of counting paperback covers, which even for a modest-sized publisher number in the hundreds of thousands each month, is impossible to do by hand. Modern paperback houses handle the problem by printing product bar codes, similar to those you see on canned and packaged goods at your grocery store, on the backs of their book covers. The stripped covers are fed through machines that read the codes and compute title, author, list price, number of copies returned, and other data.
I realize this procedure sounds primitive, but just to be sure I checked with a mass market paperback editor as I was drafting my update of the above paragraph. And this is what he wrote me:
"Yeah, stripping covers is still the usual method of mass market paperback returns. Trade paperbacks are still returned as whole copies.We now have all the information we need: number of copies printed, distributed, and returned. But there is still a gap between what the author feels is owed and the actual amount of royalties paid. That gap is the royalty on the number of copies the publisher has reserved against returns.
There were a few accounts who tried to handle returns via what they called affidavit returns, in which they just told publishers how many copies they were 'returning' with no physical evidence at all, just their word in an affidavit, but last I heard I don't think that caught on most places.
For the most part it's still the painful procedure of stripping."
As most authors now know, publishers create such reserves in order to give credit to distributors and stores that might return copies of books in the future. The reserve is determined by the executives who run the publishing company, and while it is to be hoped that these individuals will base their judgments on experience, reasonable evaluations of market conditions, and common sense, the existence of this tempting pool of undisbursed money has a tendency to cloud executive judgment, particularly in the pressure cooker of corporate bottom-line expectations.
Here, then, is the answer to the commonly asked question, "Is it possible for print, distribution, and return figures to be falsified?" The answer is no, not without enormous difficulty, for it is neither safe nor practical to do so. In order for that to happen, the entire publishing organization - the clerks who document the printing and distribution information and tally returns, the bookkeeping and accounting departments of the publishing company, and the staffs of the printer and distributor - would have to be in on the conspiracy and sworn to secrecy. That is plainly preposterous: there simply isn't enough profit in the publishing business to make such wide-scale corruption worthwhile.
It is also completely unnecessary, because the same results are achieved by the decision of a handful of publishing officers to set reserves at an excessively high level. And it's all perfectly up-and-up from the publisher's viewpoint, because the establishment of reserves is a business judgment that may be argued but cannot be cited as fraudulent - unless one takes the position that the entire system is a license for publishers to earn interest at the expense of authors.
No, my observation is that print, distribution, and return information are not falsified, at least not in a way that could be described as deliberate and systematic. It would be closer to the truth to say that publishing bookkeeping is subject to the same goofs as the bookkeeping of any other industry. And though it may seem that the errors always fall in favor of publishers, the accountants I've spoken to state that as many fall in the authors' favor. Thanks in good measure to the consignment method of selling books, publishing bookkeeping is far, far more complex than it has to be, and that makes it a breeding ground for error.
One of the standard provisions of every audit clause in book contracts is that if errors of more than a certain amount - usually 10 percent of the sum stipulated in the publisher's royalty statement - are found by auditors, the publisher pays for the cost of the audit. Such a provision might make it tempting for authors who feel shortchanged by their publishers to hire an accountant, figuring the accountant will certainly be successful in detecting an excessive reserve against returns and get at least 10 percent of that reserve released. Thus the publisher would be required to pay for the audit, right?
Wrong. A high reserve against returns may not be considered an error. It's merely - in the publisher's eyes at least - a judgment call, a prediction or anticipation that a certain number of copies will be returned. Anybody contemplating an audit of a publisher's records should therefore be prepared not to recoup his or her accountant's fees from the publisher. Released royalties might defray or pay for the audit, but the publisher will stoutly maintain that no bookkeeping error was made.
Is there some alternative to hiring an accountant to find out whether your publisher is giving honest weight? Well, if you can prevail on your publishers to furnish you with information about the number of copies printed, distributed, and returned, you need nothing but a pencil and paper and a grade-school math education to figure out whether you have collected everything that is due you, and what the reserve against returns is. Then it's simply a matter of arguing with your publisher over the propriety of holding so much reserve money, or holding it for such a long time - which is what agents routinely do. The problem is getting that information. Some publishers state it in their statements, some do not. If not, with persistence you or your agent will be able to secure the information.
After reviewing it, however, you may feel in your bones or have other reason to believe that the figures furnished to you are incorrect, that your publisher printed or distributed more copies than he's told you, or took in fewer returns. You will then have to hire a professional accountant to examine the publisher's books, as the job is too complex and time consuming for untrained individuals. This is especially true if there is reprint, book club, foreign translation, or other subsidiary rights revenue - another very common source of bookkeeping errors among publishers but one that space prohibits me from analyzing in detail. Let's just say however that audits of foreign revenues collected by American publishers have sometimes yielded some gratifying rewards.
Some agents are able to build into book contracts provisions requiring publishers to furnish details of printing, distribution, returns, and reserves against returns in royalty statements, or copies of contracts and statements from sublicensees, such as book clubs and reprinters. For many agents and authors, however, it is futile to attempt to make publishers comply with such demands. This can only be achieved by collective action on the part of a determined, organized, and fearless cadre of professional writers or agents.
This article was originally written for Locus, The Newspaper of the Science Fiction Field. It's reprinted in Mastering the Business of Writing. Copyright © 1990 by Richard Curtis. All Rights Reserved.