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Drabinsky and Gottileb: Accounting - Case Study Example

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Drabinsky and Gottileb: Accounting

Since the company was incurring heavy losses, so the two devised this kickback scheme that would help them gain a significant share of profit before paying dues of other shareholders. The vendors supplied Livent with inflated bills. There was in fact no activity that can be regarded as reasons for the inflated bills. As a result of the kick-back schemes and huge losses, Livent Inc started fudging the real data with false data. In order to make the company look financially sound and profitable, the two conspirators decided to create software that will help to create a systematic way of manipulating the financial data. These points to another instance of fraud scheme at Livent. The manipulation involves simple erasing from the accounting records expenses and liabilities that occur at the end of each quarter. In accounting standards this is illegal, since this inflates the profit artificially. In order to decrease the expenses the reproduction costs from a currently running show are transferred to an ongoing show. In accounting standards this cannot be done, since only those costs can be realized that have incurred and not those that are yet to occur. (Bajaj, 2001). This allowed the amortization of costs indefinitely. This is also illegal since certain costs can be amortized for certain period only. Livent accountants transferred the costs to fixed asset accounts to enjoy long term of amortization periods, for as long as forty years instead of the usual 5 years. This is not allowed in accounting standards since prepaid expenses can be capitalized as assets but cannot be amortized over a period of forty years. The Livent accountant debited the salary expenses and operating expenses to long term fixed asset accounts, although the same cannot be done under the accounting standards and rules. The scope of considering prepaid expenses as asset is restricted and involves only few items like rent expenses, power bill expenses, stationary items expenses. The massive manipulations did not serve the purpose they were supposed to serve in the first pace itself. So Livent executives devised more elaborate fraud schemes like “fraudulent-revenue generating schemes”. In this particular fraud scheme, the production rights owned by Livent were sold to third parties. The contract indicated that under no circumstances the fee of $1.2 paid by a Texas based company is refundable (Bonaccorsi and Daraio, 2009). In reality a secret pact was signed that indicated Livent would indemnify the Texas Company in case of losses by agreeing a reasonable rate of return. In accounting standards although the fee received can be treated as revenue but the deliberate way in which the expenses related to the payment of interests (in case of loss) undermines the expenses to the business. Thus, the profit is inflated in an artificial way. Livent inflated the box office results for key productions. In order to make sure that the revenue generated from Broadway does not fall below the anticipated level, the company illegally paid two vendors to buy all the tickets at Los Angeles. The payment made to the vendors are not considered as expenses but charged to fixed assets. If they are to be charged to the fixed assets, they have to be treated as prepaid expenses, although the expenses can never be treated as prepaid expenses in the first place itself. So this is another instance of gross ...Show more

Summary

Drabinsky and Gottileb operated a kickback scheme from 1990 to 1994. In the kickback scheme two Livent vendors are appointed who helped Drabinsky and Gottileb, siphon millions of dollars from the company directly into their own pockets…
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