Livent's Fraud Summary

During the late 80s and 90s, a Toronto-based theater company showcased performances of popular acts like Ragtime, Showboat, and Phantom of the Opera. Livent, Inc. (Livent) founders, Garth Drabinsky and Myron Gottelieb, watched their small theater company grow from a partnership and become publicly traded on the NASDAQ a few years later. Eventually the duo sold off the “successful” theater company to Michael Ovitz, the head of Lynx Ventures, L.P. in 1998. The new owners came to discover that there was more drama happening offstage than onstage! (Jackson 2015).

As the “fraud architects, Drabinsky and Gottelieb were the masterminds behind Livent’s fraud schemes and delegated their wishes down the chain of command. Upon the two controllers’ completion
Drabinsky and Gottelieb, and their constituents were going to ensure their debut on Broadway by any means necessary. Ironically, the company created preventive controls that enabled them to continue committing the fraud while also concealing paper trails. Livent had a computer program designed than enabled the perpetrators to make desirable adjustments without leaving paper or transaction trails. Therefore, the company was able to manipulate financial records to make the adjustments appear original. A common red flag among the three fraud schemes involving the understating of expenses and liabilities is the decrease in expense as a percentage of sales. If sales are decreasing, then the percentage of expenses should be increasing or decreasing when sales are increasing. Livent’s sales figures were increasing due to fictitious revenues and expenses were either being removed or deferred. In Livent’s case, the numbers would need to be compared to prior years and industry standards to ensure that expenses were not being omitted or revenues were not being overstated. In addition, decreasing current liabilities as a percentage of sales could result from efficiency or accounting irregularities. An auditor would need to review Livent’s disclosures for further guidance regarding how the current liabilities were handled as the decreases could be seen as positive. Increases to both the deferred costs or prepaid expenses as a percentage of sales and deferred assets to sales are signs that expenses are being capitalized and recorded improperly as assets. However, further research would be necessary in Livent’s case, therefore, comparing results to industry standards and researching disclosures would be beneficial. Livent was guilty of contradicting its accounting policy when the company decided to miscapitalize preproduction costs. A contradiction in financial statement