Hollywood Accounting: Why Every Creator Needs an Audit Clause

The term “Hollywood accounting” describes the stigmatized financial practices employed not only by film studios but also other powerful entities that pay creators, whether they are streaming platforms, recording labels, or publishing companies. The sometimes-complex accounting calculations, which can obscure how profits are calculated and distributed, frequently leave creators feeling shortchanged — or worse, walking away empty-handed despite others profiting off their work. A couple notorious examples that may have involved some “Hollywood accounting” include the Lord of the Rings lawsuits, involving Peter Jackson and J.R.R. Tolkien’s estate, and the Beatles’ decades of royalty battles with EMI. Such accounting practices have pushed many writers, like fantasy author Brandon Sanderson, to create their own publishing companies (an option that may not be realistic for most start-up and mid-level authors).

Regardless of what phase they are in, striking a “deal” is always an important event in the timeline of any creator’s career. Upon receiving the deal documents, a creator’s (or creator’s agent’s or lawyer’s) instinct may be to immediately analyze the deal terms as written. While scrutinizing and proposing revisions to initial terms, it is also important to take a step back and consider concepts that may have been omitted from the document. Most studios, labels, and publishers will expect the creator to come back with some proposed revisions to the initial draft. From a lawyer’s perspective, it is usually odd when such a back-and-forth does not ensue. This is true even when there is a massive distance in bargaining power of the parties, like a developing artist signing with a major label.

While it’s the responsibility of a creator’s lawyer to negotiate and simplify the financial terms in contracts before they’re signed, there’s one often-overlooked and under-included provision that can serve as a critical safeguard: the audit clause. This small but mighty clause is a proactive tool that seeks to increase transparency and accountability, giving creators the right to review and verify the financial records of their counterparts.

Why the Audit Clause Matters

The right to audit allows creators access to the financial records of the other party — be it a studio, label, or publisher — to confirm that payments are being calculated and distributed fairly and in accordance with the agreed-upon terms. By including this clause in an agreement, creators and their representatives can hold studios accountable, ensuring that the terms of the contract are being honored.

Without the audit clause, a creator may be left relying on the goodwill of a studio to produce the requisite accounting information in order to determine if the creator is being compensated fairly. Beyond that, a creator’s only avenue to compel a studio to produce its financial information may be through the discovery process during litigation or arbitration. Litigation is costly and lengthy and the last thing a creator should have to spend their time and money on to make sure they are being paid correctly.

Example Audit Clause

Below is an example of an audit clause, which is provided for illustrative purposes only. The audit clause could be a single sentence that grants the creator a right to access the financial records of the studio, but a more robust clause, like the one below, will do more to enshrine a creator’s audit rights.

Studio shall provide an accounting of all monies becoming due to Artist hereunder within ninety days of the end of June and December in each year and shall send Artist a financial statement setting out the calculation thereof together with (where applicable) payment of all sums due to Artist. Artist has the right, upon five days’ written notice within two years from the date upon which any financial statements have been provided from Studio to Artist, to obtain Studio’s books and records related to the exploitation of the Art, such books and records shall include, but not be limited to, all financial statements, sales data, billing and collection data, general ledgers, contracts, and internal spreadsheets used to calculate payments to Artist. Artist may also have such books and records inspected by a lawyer or accountant, chosen solely by Artist; such representative must execute a confidentiality agreement with Studio before being given access to any records contemplated in this section. Any underpayment revealed by such inspection will be promptly paid to Artist. If such underpayment exceeds five percent of the amount paid under any respective payment, then Studio shall reimburse Artist for all reasonable costs of such inspection thereby incurred and actually paid by Artist in connection with the applicable audit.

Some audit clauses also require that all audit activities carried out by the auditor must occur on-site and during business hours, but such a restriction in today’s increasingly remote business world seems unnecessary. Other unnecessary restrictions not appearing in the example above include placing limitations on the auditor’s ability to review any financial record more than once and setting a limited number of days that an audit can last.

A Call for Transparency in Creative Industries

The audit clause is only as good as the accounting terms it seeks to enforce. To reiterate a point from earlier in this article, it is important for the artist’s lawyer to zealously advocate for fair and transparent payment terms that do not put the artist in a situation where everyone but the artist profits. Ultimately, the audit clause should be included anytime a creator is being paid, especially when the paying party has significant bargaining power, as is usually the case in the entertainment industry.

Creative industries thrive on innovation and collaboration, but they also depend on fairness and trust. The audit clause is more than just a legal formality — it’s a statement of principle. It affirms that artists deserve transparency and accountability in their business relationships and provides a mechanism to enforce those values. For artists and their representatives, advocating for the inclusion of an audit clause is a crucial step in protecting their financial interests. It’s a way to ensure that the creative process remains unburdened by doubts about fairness, allowing artists to focus on what they do best.