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Finance: How Do Some Accountants "Cook the Books"? 103 Views


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How do some accountants “cook the books”? Cooking the books refers to accountants making company’s financials look much better than they are. They can do this in a bunch of different ways, including accounting for revenue that isn’t promised, pushing back payments owed, and messing with what is owed to employees, among other fancy tricks.

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Transcript

00:00

Finance allah shmoop we'll have new Some accountants cook the

00:05

books Ah those hollywood accountants You know they just make

00:10

up numbers to mess with poor naive innocent little actors

00:14

and actresses Brad pitiful is making a movie about an

00:18

alien who comes to earth and gets elected president brad

00:22

gets fifteen percent of the movie's profits as compensation Well

00:25

the flick is a block but a a monster hit

00:29

doing two hundred million box the box office another one

00:31

hundred million in licensing revenues from netflix the network's youtube

00:35

and like well brad has his eye on a shiny

00:38

new g six jet and has all said to buy

00:41

one when the studio says sorry no profits Well how

00:45

can this be He wonders the studio accountant lucky jim

00:49

here does the math Well the two hundred million dollars

00:52

was just box office sales and the theaters keep half

00:55

the money So that's one hundred million bucks to us

00:58

Same deal with the aftermarket hundred million So only fifty

01:02

million came to us Brad says don't i get fifteen

01:04

million of that new small thing called production costs while

01:09

we needed toe actually make and then market your movie

01:12

Well the movie cost eighty million dollars a shoot And

01:14

then we spent thirty million dollars to market it Well

01:17

brad sighs thinking about a much smaller plane and says

01:20

well then okay that's one hundred fifty million to you

01:23

and one hundred ten million in expenses So we made

01:27

forty million dollars and i get six million write Well

01:31

here comes the book cooking paradigm that eighty million dollars

01:34

wasn't spent the day before the movie rolled out into

01:37

theaters It was spent years beforehand and renting money costs

01:43

money so the studio had to use its credit I

01:46

even rent money from banks and partners to fund the

01:49

movie's production Well the studio borrowed eighty million bucks for

01:52

five years in fact and then another thirty million for

01:55

two years The market it now this is extremely risky

01:59

capital And if this movie had bombed then the banks

02:02

might have lost everything So if you were the bank

02:05

would you charge just three percent for that extremely risky

02:09

capital You have no way So the studio could have

02:12

rightly told the producer tio go fund himself you know

02:15

to fund the movie elsewhere and get whatever interest rate

02:18

on the money he could find and the studio would

02:21

match it And surprise surprise Other than in somalia there

02:24

were no takers Not a single lender was willing to

02:27

take on such enormous risk even at a twenty percent

02:30

interest rate So the studio generously loans the production money

02:34

at fifteen percent interest and here's the math fifteen percent

02:38

on eighty million dollars for five years That's twelve million

02:41

of interest per year for five years or so sixty

02:44

million dollars in total And that fifteen percent interest rate

02:47

was a gift The real market price was more like

02:50

twenty percent Well then fifteen percent on the thirty million

02:53

for two years to market it Yeah at another nine

02:56

million dollars of interest costs So what happened here Well

02:59

the interest charges ate up all the profits Yes the

03:03

film had operating profit ignoring interest costs over forty million

03:06

dollars But it had to rent the money to go

03:08

make the film the rental cost or the interest costs

03:12

of the money with sixty million dollars for the production

03:14

and nine million for the marketing Oh and there's this

03:16

other little thing called a distribution fee that studios taken

03:20

Return for pushing the film into the difficult to deal

03:24

with theater owners and usually that's thirty percent off the

03:27

top but those are details So were the books cooked

03:29

here No not at all If making movies was such

03:32

an easy profitable business well there would be legions of

03:35

venture capitalists throwing money at the business the way there

03:38

are in silicon valley with computer software engineers Unfortunately hollywood's

03:43

heyday was a half century ago and economically hollywood is

03:47

dying The studio and the banks behind it have to

03:50

charge a very high interest rate to accommodate for the

03:53

sad fact that most movies don't make back the money

03:57

invested in them Most movies lose money so the one

04:00

in ten movies that actually make money have to be

04:03

Hey for all the rest of the studio only charged

04:06

three percent interest for years I work out great for

04:09

brad pitiful in his profit sharing story In a world

04:12

where the movie made forty million dollars in revenue and

04:14

had only ten million in interest costs With then thirty

04:17

million of you know pretax profit well then brad would

04:21

have gotten fifteen percent of thirty million or four point

04:24

Five million in bonus dough But that's not the way

04:26

things work The books aren't being cooked here People They're

04:29

just being zapped by interest costs It's almost enough to 00:04:33.104 --> [endTime] make you lose your

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