MLC Financial Audit Uncovering Key Questions Chris Castle
Highlights
The MLC’s latest financial audit reveals surprising details that raise crucial questions about its operations. Discover what the audit uncovered and why it matters for the music industry.
The sainted Title I of the Music Modernization Act is the part of the voluminous bill that established the government’s compulsory mechanical license and baked in the governance rules that spawned the mechanical licensing collective. One of those rules requires a financial audit of the MLC, Inc., the organization created by the smart people to execute Job One (hiring HFA), administer the blanket license, and, to hear them tell it, invest the hundreds of millions in unmatched funds aka the black box.
What is a financial audit? A financial audit is not the same thing as a royalty compliance examination often referred to as an “audit.” In a nutshell, the term “financial audit” typically refers to the annual examination of an organization’s financial statements. You’ve probably heard the term “audited financial statements”, so this is that. Independent auditors review these records to ensure they accurately represent the organization’s financial transactions. The audit includes the income statement, balance sheet, and cash flow statement and underlying ledgers, etc., aiming to provide reasonable assurance of the company’s future performance, essentially for the benefit of the public. In this case, for the benefit of the Congress, the Copyright Office, and especially for songwriters who are compelled by government fiat to allow these people to handle their money.
I find it very odd that the auditors, who Congress mandated as the songwriters’ last line of defense in many ways, never once mentioned the black box, never mentioned the MLC’s bogus investment policy, never mentioned whether they thought it was perfectly acceptable for the organization to be running hundreds of millions in unmatched and holding close to a billion dollars in publicly traded securities.
The MMA Audit Provision directs the qualified auditor retained by MLC to further prepare a report for the board of directors addressing the implementation and efficacy of procedures of MLC:
- for the receipt, handling, and distribution of royalty funds, including any amounts held as unclaimed royalties;
- to guard against fraud, abuse, waste, and the unreasonable use of funds; and
- to protect the confidentiality of financial, proprietary, and other sensitive information
But in the next sentence, the auditors say “Our audit was solely designed to audit the financial statements of the MLC.” So that’s not the same thing. That switch in language is an attempt to redefine the purpose of the audit and the task of the financial auditor as defined in Title I.
Understand that part of the auditor engagement science is being very clear about what the auditor is and is not responsible for. So by limiting the scope of the auditor’s report to “the financial statements” that’s not quite the same thing as what Congress required. It’s an open question as to who that requirement falls on, the collective or the auditor, but I think a good case can be made that it falls on both, and also on the Copyright Office to raise any questions.
Would it be a “material misstatement” if the MLC was investing black box funds to the tune of hundreds of millions? For example, according to Part X, Line 11 of the MLC’s 2022 IRS Form 990, the MLC held $804,555,579 in stocks as of the end of 2022. That money presumably did not disappear on January 1, 2023 so some part of it and any subsequent inflows and outflows were covered under the audit report (and in any event prior years also audited by the same firm as they footnote).
I guess we may never find out, although the Copyright Office may want to revisit these compliance issues with the auditors or wait for a judge to do so. Because you can’t find what you don’t look for.