Creative Accounting in Hollywood - Voluntary Post

What is considered to be a successful film? Well this depends on who you choose to ask. Those in the creative roles such as actors, directors, producers etc will undoubtedly crave critical acclaim and award recognition. The move companies such as Warner Brothers however, will judge a film's success by it's profit. For example, Tim Robbins, Morgan Freeman and Co. were no doubt overjoyed by the seven academy award nominations received by 1994's The Shawshank Redemption but Warner Brothers were probably underwhelmed by the relatively unsuccessful gross revenue of only $28,341,469 (http://en.wikipedia.org/wiki/Shawshank_Redemption)

This is where the accountants come in and suddenly the actors and directors are not the only ones being creative! In a bid to increase overall takings from big movies movie companies such as Warner Brothers are taking advantage of the creative accounting skills of those looking after their books.

The cast wages on a film represent one of the largest of the largest expenses. A growing trend has seen actors insist upon a percentage of gross profit as opposed to a fixed salary. This presents accountants working on a film with an opportunity to reduce the cast salaries figure on the balance sheet. They can endeavour to prepare the accounts in such a way that the gross profit figure is understated. Thus, the payment received by actors is less and the film company is able to retain a greater proportion of the film's takings. This form of creative accounting is ofetn referred to as "Hollywood Accounting". Of course this a fairly cynical point of view but in my opinion the movie industry is no different to any other industry - it is eat or be eaten!

Indeed, there are a number of high profile instances where such creative accounting has been suspected. The film My Big Fat Greek Wedding was considered hugely successful for an independent film, yet according to the studio, the film lost money. Accordingly, the cast, with the exception of Nia Vardalos who had a separate deal, sued the studio for their part of the profits. The original producers of the film have also sued Playtone, HBO and Gold Circle Films due to Hollywood accounting practices because the studios have claimed that the film had actually lost $20 million (http://en.wikipedia.org/wiki/Hollywood_accounting#Creative_accountants).

Of Course, indulging in these accounting practices can sometimes backfire for the movie companies. Peter Jackson, director of The Lord of the Rings, and his studio Wingnut Films, brought a lawsuit against New Line Cinema after an audit on part of the income of The Fellowship of the Ring". Jackson has stated this is regarding "certain accounting practices", which may be a reference to Hollywood accounting. In response, New Line stated that their rights to a film of The Hobbit were time-limited, and since Jackson would not work with them again until the suit was settled, he would not be asked to direct The Hobbit, as had been anticipated (http://en.wikipedia.org/wiki/Hollywood_accounting#Creative_accountants). Here, New Line Cinema has lost the services of a phenomenally successful director through its attempts to save a few dollars!

Those in Hollywood who choose to be salaried in such a way have to be aware of these accounting practices. Likewise, movie companies must think twice before adopting these practices because the pitfalls are illustrated in the example of Peter Jackson. It is not difficult to charge the purchase of the New Line Cinema CEO's new yacht against the gross profits of Lord of The Rings but it is difficult to convince a top director to work with you again once who creatively accounted yourself in to his bad books!