For any company that purchases license to use software, such as Microsoft’s Windows, Adobe’s Photoshop (or any of innumerable others available), software audits can be extremely troublesome.

These audits typically involve a software vendor sending its own representatives or a third-party auditor into a company to review the company’s software for compliance with licensing agreements and other obligations. The software vendor is looking for situations where the company is using unlicensed software or is utilizing more copies of the software than are authorized. Software audits can be stressful and can result in substantial legal problems and costs.

However, strategic planning – as outlined in 10 steps I offer below – may lessen the stress so company owners and executives can save their energy for growing their business instead of sweating out a licensing audit.

Difficult to comply with

Many companies have problems with software compliance. Software licensing audits

The increasing complexity and interconnection of modern software applications have made it difficult for companies to keep on top of compliance obligations.

Compliance is even more difficult when a company experiences rapid growth. For example, a company may legitimately purchase a license for a certain number of users. As the business grows, more people begin to use the software package. At some point, if the company is not careful, the number of software users will exceed the allowed number of users, and the company will no longer be in compliance with its licensing agreement.

Many companies just don’t have the resources to maintain an effective internal software compliance program – which can quickly lead to a host of problems.

The software audit

Unfortunately, the first time many companies discover they have a problem is with notice of the audit.

Depending on the terms of the license agreements, a vendor may have the right to begin a software audit quickly, which can be very stressful as company representatives attempt to confirm licensing compliance in a short period of time.

The real problems arise after the software audit is completed.

A company may be liable for a significant payment to the vendor based on lack of compliance with the licensing agreement or the unauthorized use of software.

The license agreement may also provide for other penalties or fees, and the vendor may be able to terminate the license agreement.

There may also be more serious consequences if the vendor can show that the company or its managers intentionally failed to comply with the licensing agreements or used unauthorized software.

It is difficult to predict if your company is going to get hit with a software audit. Economic conditions of the recent past have hurt some software vendors, however, and they may be seeking new revenue streams. A software audit can sometimes result in substantial financial gain for the software companies, and thus you may see an increase in the frequency of such audits.

Software vendors generally tend to audit companies with larger numbers of software users, but no company is immune to an audit.

But, even if a company is very small and the CEO absolutely knows the status of every software application that his or her employees use, it’s still good practice to create a “compliance mentality” before rapid growth or other factors lead to noncompliance and a software audit.

Steps to take

Here are some ideas about what you and your company can do to help avoid a software licensing audit:

1. Anticipate that a software audit will occur at some point in the future. Even if your company is small, build a compliance mindset now. Take the time to build an effective software asset management program early in your company’s life.

2. Be familiar with your company’s software licensing agreements and other associated documents. Be aware of your company’s and vendor’s rights and obligations, and make your employees aware of the company’s compliance requirements and the downside of not complying.

3. Enact a structured program for compliance. For example:

  • Confirm the software packages that your company currently has installed (both active and inactive; you could still have a problem with installed software, even if it’s not being actively used).
  • Verify the requirements of each software licensing agreement and associated documents.
  • Identify the existence and severity of any problem situations.
  • Develop detailed action plans for dealing with these immediate problem situations after consultation with your IT and legal advisors.
  • Plan how to avoid these problems and increase compliance going forward.

4. Conduct regular internal software audits. Knowledge is power here: know the situation and deal with it accordingly. It’s far better to do this on your own schedule rather than under the gun with an audit in progress.

5. Staying on top of your company’s compliance obligations can also provide benefits in the financing area. A bank, venture capital firm or underwriter may also investigate your company’s compliance with its software license agreements.

6. If you do an internal audit and discover problems, stop! Contact your company’s attorney first before you do anything else. It may make sense to contact the vendor at some point, but you don’t want to waive or compromise the company’s legal rights or position.

7. If you receive a software audit notice from the vendor or a third-party representative of the vendor, contact your company’s attorney immediately. These situations may quickly develop legal implications. Get legal advice before you proceed with any actions.

8. On the positive side, an internal software audit may show that your company has stopped or diminished its use of some software packages, and you may be able to find some savings. Be on the lookout for these positive situations.

9. You can also use an internal software audit as a way to discover and root out inappropriate software applications.

10. You need to be sure that your employment policies and procedures allow you to conduct the searches that you will need to do to conduct an internal or external software audit.

Get guidance on this from an employment attorney as this is a very sensitive area. You could inadvertently put the company in a bad position in the employment area while trying to do the right thing in the software-compliance area.


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