A little-known and specialized type of accountant serves as a behind-the-scenes guardian for musicians and other creative types in the complex field of royalty accounting. Their main job is to make sure musicians get paid accurately, and the work involves all the basics of accounting and audit work one would expect.

Chris Hull, practice leader of royalty contract compliance at accounting firm Citrin Cooperman, in recent weeks has been working on an audit for a composer of Christmas standards, which the firm has to do every three years.

Hull, a certified public accountant, said he grabs the streaming statements from digital service providers and downloads those into a database and creates a table of earnings of revenue by song. He then applies the royalty provisions to that revenue to recalculate the royalties that are payable to the interested parties.

“For Christmas songs, as you might imagine, there’s one big spike and then they don’t get played again for nine months and that big spike in revenue is going to come in probably between May and September,” Hull said, referring to the time lag in payments.

Holiday music is big business, with new performers jumping into the action every winter. Popular evergreen hits include Mariah Carey’s “All I Want for Christmas Is You,” Wham!’s “Last Christmas,” Brenda Lee’s “Rockin’ Around the Christmas Tree,” and Ariana Grande’s “Santa Tell Me.” Carey’s song alone shows more than 2.5 billion streams on Spotify.

But the performers can’t cash in without the help of back-office wonks.

Those wonks in turn say representing rock stars and pop icons makes their job more appealing. “It’s a relatively small field in the overall accounting world, but it’s certainly not dry accounting,” said Chris Fazzolari, co-head of the royalty group at business management firm Gelfand, Rennert & Feldman.

The work has become increasingly complex in step with proliferating streaming arrangements and data associated with music streams.

“Everybody thinks accounting is boring, but really, at the end of the day, everyone wants to get paid,” said Donna Budica, chief operating officer at TEN2 Media, a content distribution and marketing firm focused on artist rights on YouTube. “And the artists are the ones that get screwed if the accounting is misreported and misattributed.”

The royalties game

Music royalties span uses in areas such as radio, commercials, films and streaming. When a consumer streams a track, for example, the streamer pays the rights holder, including the distributor, for use of the sound recording. The streamer also pays a nonprofit called the Mechanical Licensing Collective royalties for reproduction and distribution, and pays performance royalties to groups like Broadcast Music Inc., or BMI, and the American Society of Composers, Authors and Publishers, or Ascap.

Accountants perform a royalty audit, in which they work to make sure writers and artists are paid for all uses of their works and that the royalties are properly calculated. The audit, unrelated to those for financial statements, involves tracing data on distribution and performance from source documents to the royalty statements that a client may have received.

The reason for those Christmas-in-July paychecks for holiday songs? Different royalties are paid on different schedules. The streamers generally pay the MLC and the record distributors on a monthly basis, but songwriters and recording artists are normally paid on either a quarterly or a semiannual basis.

Aside from the audit work, there are jobs called royalty accounting, usually at major and independent record companies, collective management organizations like the MLC, and performing rights organizations.

This work involves music industry-specific activities like setting up contract or license royalty terms and connecting them to recordings and songs, applying the terms to revenue received and recoupable expenses, and calculating the royalties due. It may also involve traditional accounting activities, such as tracking payments in a general ledger, involving debits and credits and double-entry accounting, as well as accounts payable activities of making payments.

Streaming it up

Streaming and social media usage has complicated this work due to the sheer volume of transactions on the royalty statements that accountants and others are reviewing.

The calculation now isn’t as simple as a percentage of price. Tracking all of the income due to a record company or publisher and then figuring out what portion of it to pay to the artist or songwriter is harder to do now, said Serona Elton, the MLC’s head of educational partnerships and a professor and chair of the University of Miami’s music industry department.

“The volume of places that money is coming in from has grown tremendously and the volume of transactions has gone through the roof,” Elton said.

That could go beyond a one-page invoice to include a plethora of rows of data to support those payments. “They don’t just get a payment for $100. They also want a data file that explains everything about how that $100 was calculated,” Elton said.

Different sources provide data in varying reporting formats, and larger data volumes increase the risk of errors in processing and calculating royalties, Gelfand, Rennert’s Fazzolari said. The firm set up a so-called royalty data intelligence team to analyze large data sets, he said.

“You’re talking tens or hundreds of millions of lines of data sometimes for our clients,” Fazzolari said.

Digital streaming service providers Spotify, Apple Music, Amazon Music and YouTube generate most of the streaming revenue in the U.S.

The rates used in these money flows are different from each other and governed by a combination of negotiated contracts or statutory federal regulations. The amount Spotify pays for the sound recording use is a matter of contractual negotiation with each of the distributors that provide it with the sound recordings. Distributors serve as the liaison between a record label and a retailer or streamer.

“Being attentive to where your artist is being exploited, or having their songs exploited, is going to make a difference in the kind of revenue that they generate,” Citrin Cooperman’s Hull said.