Expert Answer:Financial Accounting Principles. I need someone wh

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TVO ILC
BAT4M Lesson 15
Livent and the auditors
Livent and the auditors
Livent Inc. was a Toronto, Ontario-based company that produced live theatrical
entertainment, generally at one of its own theatres, but also obtained touring engagements,
when warranted. They produced established musicals, such as The Phantom of the Opera
and Joseph and the Amazing Technicolor Dreamcoat, as well as new productions originated
by the company, such as Ragtime, Kiss of the Spider Woman, Sunset Boulevard, and
Fosse. Livent owned and operated theatres in Toronto, New York, and Vancouver.
The company’s revenue was derived from performance revenue, the sale of merchandise,
corporate sponsorships, gains on sale of rights and exclusivity arrangements, royalties,
concession income, and other related fees. Livent became a public company in Canada
in May 1993, and its stock was traded on the Toronto Stock Exchange in Canada and on
the NASDAQ national stock exchange in the U.S. However, Livent declared bankruptcy on
November 18 and 19, 1998, in the United States and Canada, respectively.
The Offer of Settlement between the U.S. Securities and Exchange Commission (SEC) and
the company lists the following allegations against the company:
1. During the period 1990–1994 (prior to the time Livent became a SEC registrant), Livent
was involved in a fraudulent kickback scheme whereby Drabinsky and Gottlieb (Livent’s
main executives) received directly, or through a company Gottlieb owned, approximately
$7 000 000. About $4 000 000 of that amount was capitalized as pre-production costs.
2. Livent transferred pre-production costs for shows to fixed assets, where the amortization
period was significantly longer.
3. Livent simply removed certain expenses and corresponding liabilities from the
accounting records at the end of each quarter to improve quarterly results.
4. Livent transferred costs from a currently running show to a show that had not yet opened
or which had a longer amortization period.
5. The dollar effect of items 2 to 4 was to understate expenses by $3 500 000 in 1995, by
$18 100 000 in 1996, and by $8 500 000 in 1997.
6. During 1996–97, Livent entered into a series of transactions that supposedly
represented the sale of rights to present certain Livent shows in return for fees from the
counterparties, or buyers. These fees were reflected in revenues. Side agreements were
signed that obligated Livent to repay the fees. As a result, Livent overstated revenues by
$34 000 000 ($16 400 000 in 1996 and $17 600 000 in 1997).
Copyright © 2018 The Ontario Educational Communications Authority. All rights reserved.
1
TVO ILC
BAT4M Lesson 15
Livent and the auditors
The Securities Exchange Commission (SEC) alleged that misstatements were dealt with in
the accounting records in the following ways:
•
The accounting records were fraudulently manipulated.
•
Senior management, including Drabinsky, Gottlieb, Topol, Eckstein, Winkfein, Malcolm,
Craib, Fiorino, and Messina, were involved in the manipulations. They were, respectively,
the chairman of the board and CEO, the president (who was also a director), the senior
executive vice president and COO, the senior vice president finance & administration,
the senior corporate controller, the senior production controller, the senior controller
budgeting, the theatre controller, and the chief financial officer (who was also the
engagement partner for the 1995 audit).
•
Drabinsky, Gottlieb, Topol, Eckstein and others concealed the manipulations by
concealing information from the auditors, and Drabinsky and Gottlieb signed false and
misleading management letters of representation to the auditors.
It appears that the auditors were the victims of a massive scheme to fraudulently
misrepresent the company’s financial position, a scheme that involved most of the senior
management (especially the senior financial management).
Copyright © 2018 The Ontario Educational Communications Authority. All rights reserved.
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