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The Producers - Corporate Scandals and Creative
Accounting
by John T. Wendt
There is a fine line between
comedy and tragedy. And nowhere can we see this fine line than
in the corporate scandals and "creative accounting"
that have been in the news, from the recent Tyco mistrial to
WorldCom to all the way back to the Enron debacle that is still
with us today.
The Tyco trial certainly had
its moments. These range from the allegations that a juror gave
an "OK" sign to the defense to the videotapes of Dennis
Kozlowski's excesses at a $2 Million party complete with male
and female models running about dressed as ancient Romans and
liquor flowing from the ice sculpted private parts of Michelangelo's
David. It was definitely in bad taste and like something created
by Mel Brooks' - something like Brooks' The Producers.
 The
recent Broadway musical is based on Brooks' 1968 movie of the
same name and co-stars Matthew Broderick and Nathan Lane. It
is the story of Max Bialystock (Zero Mostel in the movie, Lane
on Broadway) who once ruled Broadway with a string of hits but
now who has fallen on hard times. When his accountant Leo Bloom
(Gene Wilder in the movie, Broderick on Broadway) arrives to
audit his books, Max sees the road coming to an end. But Leo
discovers a loophole - a little academic accounting theory.
Hypothetically speaking, a producer could make more money off
a flop than he ever could off a hit, but only if it was a flop.
If the pair can mount a show so bad that it closes on opening
night, they can pay off the initial costs and run off with the
remaining funds. They find a musical called "Springtime
for Hitler" which is "guaranteed to offend everyone"
and hence guaranteed to be a flop. But, to their amazement and
eventual ruin, the show is a surprise hit!
Bloom: This is hardly a time
for levity. I've discovered a serious error here in the accounts
of your last play.
Bialystock: Where? What?
Bloom: According to the backer's
list you raised $60,000. But the show you produced only cost
fifty-eight thousand. There's two thousand dollars unaccounted
for.
Bialystock: I went to a Turkish
bath, who cares? The show was a flop. What difference does it
make?
Bloom: It makes a great deal
of difference. That's fraud. If they found out, you could go
to prison.
Bialystock: Why should they
find out? It's only two thousand dollars, Bloom, do me a favor,
move a few decimal points around. You can do it. You're an accountant.
The word 'count' is part of your title.
Bloom: But that's cheating!
Bialystock: It's not cheating...
It's charity. Bloom, look at me... look at me! I'm drowning.
Other men sail through life. Bialystock has struck a reef. Bloom,
I'm going under. I am being sunk by a society that demands success,
when all I can offer is you. Don't send me to jail. Help! Help!
Bloom: Oh dear, oh dear, oh
dear, oh dear.
Bialystock: Help!
Bloom: All right. I'll do
it. I'll do it.
Bialystock: Thank you, Bloom.
I knew I could con you.
Bloom: Oh, it's all right...
wha?
Bialystock: Nothing. Nothing.
Do it. Do it.
Bloom: Now let's see, two
thousand dollars. That isn't much. I'm sure I can hide it somewhere.
After all, the department of internal revenue isn't interested
in a show that flopped.
Bialystock: Yes. Right. Good
thinking. You figure it out. I'm tired. I'm gonna take a little
nap. Wake me if there's a fire.
Bloom: Now let' see, if we
add these figures, we get...
Bloom: Heh, heh, heh, amazing.
It's absolutely amazing. But under the right circumstances, a
producer could make more money with a flop than he could with
a hit.
Bloom: Yes. Yes. It's quite
possible. If he were certain the show would fail, a man could
make a fortune.
 Bialystock:
Yes???
Bloom: Yes, what?
Bialystock: What you were
saying. Keep talking.
Bloom: What was I saying?
Bialystock: You were saying
that under the right circumstances, a producer could make more
money with a flop than he could with a hit.
Bloom: Yes, it's quite possible.
Bialystock: You keep saying
that, but you don't tell me how. How could a producer make more
money with a flop than with a hit?
Bloom: It's simply a matter
of creative accounting. Let us assume, just for the moment, that
you are a dishonest man.
Bialystock: Assume away!
Bloom: Well, it's very easy.
You simply raise more money than you really need.
Bialystock: What do you mean?
Bloom: You've done it yourself,
only you did it on a very small scale.
Bialystock: What did I do?
Bloom: You raised two thousand
more than you needed to produce your last play.
Bialystock: So what? What
did it get me? I'm wearing a cardboard belt.
Bloom: Ahhhhhh! But that's
where you made your error. You didn't go all the way. You see,
if you were really a bold criminal, you could have raised a million.
Bialystock: But the play only
cost $60,000 to produce.
Bloom: Exactly. And how long
did it run?
Bialystock: One night.
Bloom: See? You could have
raised a million dollars, put on a sixty thousand dollar flop
and kept the rest.
Bialystock: But what if the
play was a hit?
Bloom: Oh, you'd go to jail.
If the play were a hit, you'd have to pay off the backers, and
with so many backers there could never be enough profits to go
around, get it?
Bialystock: Aha, aha, aha,
aha, aha, aha!! So, in order for the scheme to work, we'd have
to find a sure fire flop.
Bloom: What scheme?
Bialystock: What scheme? Your
scheme, you bloody little genius.
Bloom: Oh, no. No. No. I meant
no scheme. I merely posed a little, academic accounting theory.
It's just a thought.
Bialystock: Bloom, worlds
are turned on such thoughts!
Bialystock: Don't you see,
Bloom. Darling, Bloom, glorious Bloom, it's so simple. Step one:
We find the worst play in the world - a sure flop. Step two:
I raise a million dollars - there's a lot of little old ladies
in this world. Step three: You go back to work on the books.
Phoney lists of backers - one for the government, one for us.
You can do it, Bloom, you're a wizard. Step four: We open on
Broadway and before you can say 'step five' we close on Broadway.
Step six: We take our million dollars and fly to Rio de Janiero.
Bloom: But if we're caught,
we'll go to prison.
Bialystock: You think you're
not in prison now? Living in a grey little room. Going to a grey
little job. Leading a grey little life.
Bloom: You're right. You're
absolutely right. I'm a nothing. I spend my life counting other
people's money - people I'm smarter than, better than. Where's
my share? Where's Leo Bloom's share? I want, I want, I want,
I want everything I've ever seen in the movies!
Bloom: Hey, we're going up.
Bialystock: You bet your boots,
Leo. It's Bialystock and Bloom -- on the rise. Upward and onward.
Say, you'll join me. Nothing can stop us.
Bloom: I'll do it! By God,
I'll do it!
Bialystock: This is where
we belong, Leo. On top of the world. Top of the world!
Bloom: Max, as I was saying,
maybe we should go easy on the spending. I mean these offices
and everything.
Bialystock: Why? Take it when
you can get it. Flaunt it, baby, flaunt it!
Bloom: But if something should...
God forbid... go wrong, at least we could give them some of their
money back. It would look better in court.
As with all the recent corporate
scandals there is a lot of money, flaunting, creative accounting
and most of the time investors don't get their money back. We
are all familiar with the disastrous collapse of Enron, mostly
tragedy - part comedy - all accounting and law. Former CEO Kenneth
Lay, in an August 20, 2001 interview with Business Week said,
"There are no accounting issues, no trading issues, no reserve
issues, no previously unknown problem issues. The company is
probably in the strongest and best shape that it has ever been
in. There are no surprises. We did file our 10-Q (with the Securities
& Exchange Commission) a few days ago (Aug. 14). And, if
there were any serious problems, they would be in there. If there's
anything material and we're not reporting it, we'd be breaking
the law. We don't break the law."
In his Aug. 14, 2001 Lay stated
in E-mail to Enron employees, "I have never felt better
about the prospects for the company... Our performance has never
been stronger; our business model has never been more robust;
our growth has never been more certain." And in an Enron
press release on October 16, 2001 "Our 26 percent increase
in [profits] shows the very strong results of our core wholesale
and retail energy businesses and our natural gas pipelines."
Three weeks later, Enron admitted that it had overstated earnings
by $586 million since 1997.
Former Enron CEO Jeff Skilling
talked about Enron's management with Larry King, "The entire
management and board of Enron has been labeled everything from
hucksters to criminals with a complete disregard for the facts
and evidence assembled. These untruths shatter lives and do nothing
to the public understanding of what happened at Enron."
And in Business Week Skilling stated, "We're on the side
of angels." And finally he was quoted in the New York Times
as "We're all trying to figure out what happened…This
was a tragedy. I had no idea the company was in anything but
excellent shape."
In hearings before the United
States Senate Skilling was repeatedly criticized by Sen. Barbara
Boxer, who held up a placard with the joke that Skilling has
made during the energy crisis in California, "You know what
the difference is between the state of California and the Titanic?
At least when the Titanic went down, the lights were on."
Boxer told Skilling, "That comment does not sit well with
the people of California… And clearly, the Titanic was not
California. It turned out to be your company."
In another corporate scandal
former WorldCom CFO Scott Sullivan initially talked about his
work at WorldCom, "Every time there is another move, another
merger, I ask myself, 'How can you top this?' and every time,
there has been something new to come along to offer that challenge
that makes this life so interesting." When the scandal
was first reported Sullivan acknowledged that, "This whole
financial story has gotten a little out of hand." A short
time later WorldCom disclosed nearly $4 billion in accounting
irregularities - a little out of hand.
It is easy to reduce these
corporate problems to comedy and tragedy; the bottom line is
the responsibilities of corporate governors. And we get that
from Dennis Kozlowski. In May 2002, just before his indictment
that would end his tenure at Tyco Kozlowski gave the commencement
address to the graduates of St. Anselm's College in Manchester,
N.H. Kozlowski told the graduates, "As you go forward in
life, you will become leaders of families, communities and even
companies. You will be confronted with questions every day that
test your morals. The questions will get tougher and the consequences
will become more severe. Think carefully, and for your sake,
do the right thing, not the easy thing."
These are just a few examples
of "the creative accounting" of Leo Bloom in The
Producers. Who knew that Mel Brooks was such a soothsayer?
Who knew that a 1968 movie could come back to be the hit of
Broadway!
Posted April, 22, 2004
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