"Cooking the Books" Going Away in Hollywood?

Movie fans don't normally associate an organization as stodgy as the American Institute of Certified Public Accountants (AICPA) with the glamour of Hollywood, but as of Tuesday, September 14, the accountants' group will have had an everlasting effect on the industry and its notoriously loose accounting procedures. A new set of rules about the way the industry figures profits and losses will soon cause some irrevocable changes in the financial picture of the movie business.

Insiders have long reported that "cooking the books" is a way of life in Hollywood. During the 1980s accounting abuses were rampant among film studios, and several went bankrupt. The new regime will prevent studios from lowering their profits by inflating costs for films that tank at the box office—part of a system known as "cross-collateralization" (i.e., winners cost a bundle; losers, even more). In the near future, studios will be required to quickly write off marketing costs for films released in theaters, on television, or on home video, and to report expenses as they occur. They will be required to report estimated payouts to actors, cinematographers, designers, special-effects people, and others involved in producing films, including any percentage of profits they may receive.

Under the present system, studios can amortize production costs (which now average $50 million per film) over a period of decades if they desire. The new rules will shrink the amortization period to 10 years. Accountants expect to see industry-wide one-time write-offs in the $1.5 to $2 billion range the year after the new—and, presumably, more honest—system takes effect, according to CPA David J. Londoner. Schroder & Co., Londoner's accounting firm, helped write the proposals that were approved on September 14.

"It's going to tighten up the game for film companies," Dan Noll, an AICPA technical manager, told the Wall Street Journal. Not surprisingly, movie-industry executives are divided as to the need for such tightening. A great deal of mathematical sleight-of-hand will no doubt take place between now and January 1, 2001, when the new regulations are scheduled to take effect. The proposed changes have been discussed for well over a year.