Livent Fraud Case

Livent. Inc Overview

In the year 1979 Drabinsky and Myron Gottlieb decided to enter the show business world. These two young entrepreneurs were able to convince a well-known Toronto businessman to invest one million in “cinema complex”. Over the next several years Drabinsky and Gottlieb were successfully able to expand their company, while they convinced to gather up large sums for the development of multiscreen theaters complexes throughout Canada and the United states. By 1980 Cineplex Odeon controlled about Two thousand theaters, which made it the second largest theater chain in North America. With the company’s rapid expansion and increasing design for new theaters, it was necessary for Cineplex Odean to borrow massive amounts from
Two vendors were instructed to submit artificially inflated invoices to Livent which were charged for services that they had not provided to the company. After Livent paid the invoice amounts, Drabinsky and Gottlieb received kickback equivalent to the payments for the fake services. Over a four year period in the 1990s, as stated by SEC both of them received approximately $7 million in kickbacks from the two vendors. As to avoid detection the fake invoices were capitalized in “preproduction” coast accounts for the various shows that were being developed by the company. Valid costs charged to these accounts integrated expenditures to produce sets and costumes for new shows and cost were amortized over a maximum period of five years. With the kickback scheme being carried, by the mid 90’s and huge loses being registered by various Livents’ shows made it difficult for the company to achieve quarterly earnings targets. Concerned with company’s credit rating , stock price and Livent’s ability to gather capital needed to sustain its operation , in the beginning of 1994 Drabinsky and Gottlieb directed Livent’s accounting staff to deliberately engage in manipulation of company’s books and
Preproduction costs such as advertising, sets and costume were incurred prior to the opening of a production. In respect to Livent’s accounting policies, preproduction costs were to be amortized and expensed once a production began and only for a period not to exceed five years. However fixed assets were depreciated over their useful life not to exceed forty years. As a result, Livent significantly decreased expenses and inflated its income by improperly depreciating preproduction costs over a longer period of time.

2) Physically erasing expense and liability entries from the company’s general ledger
Livent erased its operating expenses from ongoing and reentered them as preproduction costs for company’s other shows. Livent simply erased certain expenses and related liabilities from the general ledger. And in the next quarter, those expenses and liabilities were re-recorded as original entries in the company’s book. With this particular accounting practice, the basic principle of GAAP was violated. The expenses transferred from current periods to future periods were internally tracked at Livent as the “Expenses Roll”. This particular manipulation assisted to reduce expenses and helped increase