The contemporary economy is a sustainable, knowledge economy; driven by technology, artificial intelligence and robust scientific development. The dissemination of ideas, creativity and research is rampant and also pertinent to stay relevant in this innovation economy. While this phenomenon is a positive one, it also poses a challenge and an opportunity for businesses around the world. The opportunity lies in identifying intangible assets, and the challenge lies in exploiting and leveraging these assets in the right manner.
An enterprise’s value is determined by its economically well performing assets. There are two kinds of assets,
1. Tangible assets: physical assets such as land, machinery, infrastructure etc.
2. Intangible assets: assets that include the “know-how”, such as brand, skilled employees, intellectual property, which includes patent, design and model, copyright, etc.
Conventionally, businesses invested and were dependent more on their tangible assets for competitive value production in the market. However, only recently have the enterprises begun to realize the importance of intangible assets for their intrinsic value. Exploitation of IP assets within companies operating in the knowledge/ innovation sector can result in realization of latent commercial value and advanced R&D.
Hence, the answer to such intangible asset realization lies in IP Audit. In common parlance, audit is the examination and inspection of accounts and process of an enterprise, to understand its financial standing in the market. Therefore, IP Audit is the examination and identification of prospective Intellectual Property, intangible assets to derive business value for brand building and maximizing market presence.
What is an IP Audit
IP Audit is a comprehensive tool used by enterprises for systematic evaluation of the IP owned, used or required, generated or developed over a span of time. It helps businesses create an inventory of their IP assets, or update an existing inventory to determine, whether their assets are left unused or used, and if they are owned by a third party. It also helps to determine whether these assets are infringing the rights of others or if the enterprises’ rights are being infringed through these assets. Subsequently, the collection of this data helps in determining future course of action, to serve relevant goals of the company. To put it simply, IP Audit is one way of achieving an ‘X+Y’ position from position ‘X’.
Types of IP Audits
There are largely five kinds of IP audits:
1. General Audit: Done on a routine basis that a company undertakes from time to time, to identify its intangible assets.
2. Specific/Special Purpose/ Event driven Audit: Also called ‘IP Due Diligence’. Carried out for a specific purpose, to pin point special purposes of certain assets.
3. Limited Purpose Audit: Used to evaluate a particular IP asset, or justify a legal position. This type of audit has a narrow scope.
4. Internal Audit: One that is carried out through internal resources.
5. External Audit: One that is carried out through third party resources.
Purpose and Importance of an IP Audit
In most cases, IP assets of a company could be more than its physical assets. Hence, identifying such assets can help in risk mitigation and creation of a profitable inventory. The importance of IP Audit is highlighted below;
1. Competitive advantage in the market: IP gives exclusive right to an enterprise to operate and commercially use a product or service, hence eliminating competition.
2. Market Stronghold with innovative products/services: Generation of creative ideas by exploiting and identifying current intrinsic value of IP can result in development of unique products and services, hence resulting in a market stronghold.
3. Higher profits / returns on investment: If an enterprise invests highly in R&D, it can reap its profits through the tools of IP systems.
4. Income from licensing IP: An IP owner may choose to license or sell his product in exchange of a hefty amount and royalties, hence generating additional income.
5. Ability to take legal action against imitators: After identifying one’s potential IP, one may become credible to action against free-riders or imitators, that have been infringing one’s rights in the market.
6. Brand Image: IP portfolios are considered high level of expertise. This could propel more investments, attract stakeholders and raise market standing.
7. Mergers and acquisitions: IP assets play an important role in a third party’s decision of whether or not to merge with an enterprise
8. Cost-reduction: Identifying your IP assets will bring into your knowledge, those that are obsolete and unprofitable. This helps in disposing such assets and, or replacing them.
When to conduct an IP Audit
An enterprise may decide to conduct an IP Audit under the following circumstance:
- To enforce or defend its IP rights against a defaulter.
- To assess IP assets
- To sale its IP assets
- To acquire/ merge with another IP centric enterprise
- To check if any third party rights are being violated
- As part of a general, routine audit
- To keep itself up to date with changes in legal IP machinery and processes
IP Audit Process
The process of an Intellectual Property audit begins with determining its purpose. In order to determine the purpose of an IP Audit, WIPO (World Intellectual Property Organization), suggests a five-step process.
1. Purpose: The foremost step is to determine the purpose of the audit. The intention behind auditing IP assets can be multi-dimensional. Each dimension will subsequently have a separate course of action. Determining the type, scope and resources to be used for the audit is an essential step.
2. Research: Once the purpose is determined, researching on essential information and resource, current IP assets situation, inventory, business strategy etc, is an essential step.
3. Plan: An audit plan specifies the business areas to be covered, expenses, roles and responsibilities, and the form of final report.
4. Checklist: A checklist serves the purpose of cross-checking process and minimizes the chance of skipping any essential audit step.
5. Contracts: This step includes creation of relevant contracts during the audit process. Some examples include licensing, mergers and acquisitions, joint ventures, agents or independent contractors.
Once the purpose of the audit is identified, the following are customary steps implicated in an audit:
1. Define audit objective and appoint audit team: While appointing an audit team for a start-up or an enterprise that does not have an internal audit team, external resources are hired. While in case of a company that already has a well established audit system in place; an assessment of this system is the only process required.
2. Conduct Internal IP Identification through information gathering and assessment of company’s profile and organization structure: IP identification includes recognizing and listing IPs owned, acquired, along with their utility and usage. Assessing company’s organization and structure involves collecting information of inquiry from primary and secondary resources. This is followed by discerning the status quo of the company and deciding further course of action.
3. Analysis of accumulated data: Analysis includes determining company’s current functioning and also figuring out best functioning ability.
4. Producing an Audit Report: The audit report marks the conclusion of the auditing process, it includes objective, plan and result of the audit process, along with remedial measures.
Note: In India, no standard procedure has been laid down for IP auditing; every audit is unique and depends upon the purpose and process of the same.
Case Study of SME (Small & Medium Enterprise)
The SME in question is a diversified business conglomerate that deals in the sector of technology, manufacturing services and engineering, of beauty products. It has innovative products within the sector of female hygiene, makeup and wellness hence generating Intellectual Property.
Purpose of Audit
The current manner of IP functioning has not reaped into profits and market presence. Identification and re-evaluation of IP, to identify loopholes and suggest improvements is the main purpose of the audit.
The report of the audit contained several recommendations in regards to changes that need to be made in the current IP system and portfolio, to accrue maximum profits. The report began by listing various IPs that the SME owned, such as copyrights, patents, trademarks etc. Most recommendations suggested a better view at protecting the current IP, and establishing a more robust portfolio.
Benefits of Audit
Conducting an audit resulted in steady generation of IP in the company that was also well protected by internal mechanisms, contributing to business development.
IP Audit is an essential task for a firm that still chooses to depend on its physical assets for profitability. It may seem like a daunting task at first, but has immense utility for an enterprises’ foreseen future in today’s competitive market. With the advent of artificial intelligence and machine learning, it has become more so important for companies to realize their latent potential through intangible assets. Once a company undergoes its foremost IP Audit, it should commit to undergo subsequent audits on a routine basis, to stay updated with any infringements, obsolete assets, new legal machinery and requirements, etc.
This article has been written Vanshika Arora, B.A.LL.B student at Army Institute of Law, Mohali
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