Rule Changes Due for Hollywood Accountants

As applied to Hollywood's profits and losses, creative writing could soon become a much more difficult craft. On September 18, a new set of strict accounting guidelines for film studios was taken under consideration by the Financial Accounting Standards Board, a movie-industry panel that establishes rules for accountants. The new standards are designed to bring Hollywood accounting more into line with standard business practices, or "to make the balance sheet tighter, more representationally faithful," as Standards Board project manager Frank Scheuerell puts it.

The industry has a well-established reputation for playing fast and loose with basic concepts like "cost of sales" and "net earnings." Many lawsuits have been undertaken by disgruntled investors as well as directors, writers, actors, and producers who were promised a percentage of profits only to find there were none after a film's theatrical run. Ron Shelton, who wrote and directed the 1992 basketball-buddy flick White Men Can't Jump, won a $9.8 million settlement last year in a legal wrangle over the film's profits. The film made over $76 million in ticket sales in the US and has grossed more than $34 million in video rentals.

In Hollywood, accounting logic is often turned on its head to create profits where there are none---as in the case of Orion Pictures in the 1980s, when the sinking studio was attempting to bolster its image among investors. In a similar vein, Sony Corp. was recently assessed a $1 million fine by the Securities and Exchange Commission for failing to warn investors of losses incurred before the company took an almost $3 billion write-off four years ago.

At other times, obviously successful films have been portrayed as losers by studios seeking to avoid payouts, as was the case with Coming to America, a 1988 Eddie Murphy film about an African prince venturing to America in search of the perfect wife. Humorist and syndicated newspaper columnist Art Buchwald and his partner Barry Blaustein successfully sued Paramount Pictures over the script, which was credited to Murphy and David Sheffield. At the time of the lawsuit, Paramount claimed the film hadn't made a profit, despite the fact that it had already done $147 million at the box office. The film eventually made more than $288 million worldwide and has generated $65 million in video rentals. Murphy was ordered to give 19% of his earnings to Buchwald for helping to develop the story.

The proposed changes now before the Financial Accounting Standards Board will require studios to accurately reveal fees paid to actors and directors, marketing and publicity costs, and losses incurred from abandoned projects. Hollywood's funny-money business is so pervasive that Arnold Schwarzenegger got plenty of laughs at this year's Academy Awards by introducing Titanic director James Cameron as the "guy whose film made profits no accountant could hide."

The move to revamp the studios' mysterious accounting practices parallels the publication of a new tell-all book on the subject: Movie Magic: Understanding Hollywood's (Creative) Accounting Practices by David Leedy, attorney-accountant Steven D. Sills, and attorney Bill Daniels, who is a former reporter for Daily Variety. The book is intended as a guide for those in the industry who are powerful enough to forge profit-participation deals, but it is said to be instructive for anyone whose business life might intersect with Hollywood's. If approved by the Board, the new accounting rules could take effect within 15 months.