Is Your Accounting Accountable?

Is Your Accounting Accountable?

By Senior Editor, Corey May

Whether we like it or not, everyone is susceptible to a lawsuit and where there is business and money there is liability. Accountants all know and understand that one day you may be required to stand in judgment before one of the almightiest (it could be God, or the IRS, or it might be a judge). The actual accounting forensics we are speaking of is what happens before your accountant gets the books; it happens at the stop at Starbucks, or for lunch or on a business trip; all might be scrutinized in a lawsuit. The liability begins when the business how to is designed to develop revenue stream and as to who owns what or how much of the equity pie each entity or person gets. Liability can be defended by simple accounting; or can it?

There are times when simple accounting does not favor an entity. Companies like to account and prepare budgets that support themselves, their mission and their need for revenue stream. The movie industry is one such business and it is responsible for more than big deals; the deals that companies like Disney, NBC, Fox, Universal and the other majors cut are into hundreds of millions of dollars with budgets and accounting that are thousands of pages long. It is very easy for onlookers to get lost in the diagnosis of the numbers. Worse yet, they count on it.

However, not true for one such jury in Hollywood on Wednesday, July 7, 2010 when they returned with a $270 million dollar verdict against Disney over the show Who Wants to Be a Millionaire. This is the largest jury award ever in a civil case of Producers vs. The Studio or downstream vs., upstream in a vertical integration case.

Vertical integration refers is the degree to which a firm owns its upstream and downstream suppliers. This degree can make significant difference in cost and profit and impact the overall success of the parent business. It allows a company to capture income from the upstream and downstream companies. In media and entertainment the producers are the downstream supplier of vertical integration; generally with intellectual property that has its own copyright and corporate identity for the sake of accounting, liability and asset protection. The extent to which a parent company owns the downstream supplier is the production deal. Producers who create the ventures share in the revenue with the parent partner or owner of the intellectual property. This can extend to residual income, merchandising, sponsorship money, derivative works, DVD and music sales, website revenue and syndication of the shows.

Put the Disney case aside for a second and consider the case of United States v. Paramount Pictures, Inc 334 US 131 (1948) reaching a landmark decision from the US Supreme Court to decide the fate of studios and their downstream, theatres. The court ruled that Paramount could not hold exclusive rights as to which theaters showed their films with the rationale that it would be a violation of US antitrust law. In retrospect this allowed the beginning of the independent film market encouraging smaller companies to supply intellectual property for the bigger companies (generally now known as distributors).

Now onto the Disney case. The award went to Celador Entertainment, the British company that created the hit game. Clearly I'm delighted, this was a David against Goliath story. I think that very few small independent companies would dare to take on the giants -- we did and we won," Paul Smith of Celador said, according to ABC.

There is a lesson learned from David vs. Goliath, notwithstanding here is a different moral to the story.

Disney, who plans to appeal said, "While we doubt that the economic consequences of losing this trial would be material to the Walt Disney Co., it would set a bad precedent for all large entertainment companies, because they're all vertically integrated," said Laura Martin, senior media analyst for Needham & Co. "It would encourage lawsuits."

It might do just that, but it might also encourage the creators of contracts to examine the accounting rules and practice more carefully to protect the creators of intellectual property and to protect the upstream vertical integration, for the sake of good continuing business. Production is a very complicated beast; a lot of business is comingled. The defendants Disney, in the case contended that Millionaire made no profit, and that a series of under the table "sweetheart deals" took place allowing ABC to buy the show under market price essentially undermining and depriving profit for the producers, Celador International, Ltd.

According to research firm Kantar Media Millionaire took in 1.8 billion dollars in advertising. Disney claims that it honored their contract and blames the company who packaged the deal, William Morris. A publically traded company like Disney certainly has plenty of qualified line items on a budget that constitute as bona fide business, not monkey business, but then this isn't what the legal wrangling was about.

This is a warning for new producers and their attorneys. They must examine the contracts with the vision of an eagle and the foresight of an astrologer and put it under the watch of a centurion. This does not mean all producers will sue or that independent business will conclude. It will hopefully point attorneys in the right direction to secure their clients future with fair deals and fair trade.

Hopefully, the next show title will NOT be something like; Everybody Loses in the Game of Cat and Mouse!