LIVENT, INC.: An Instructional Case
MAA350 ETHICS AND FINANCIAL SERVICES
Trimester 2, 2013
ASSIGNMENT: LIVENT, INC.: An Instructional Case
PART A
Question A1
Outline the frauds identified in the case and explain the inconsistencies with proper accounting treatment. Relate your answer to broad accounting concepts and accounting standards where relevant. (8 marks; approximately 800 words)
Answer:
Livent Inc. is a theatre production corporation registered in Toronto, Canada. Therefore, all the accounting behaviours were subject to the General Accepted Accounting Principles (GAAP) of Canada. In a broad sense, the GAAP imposes four main constraints on the accounting behaviours of companies – objectivity, materiality, consistency and conservatism. In the case of Livent Inc., there are several behaviours that was inconsistent with the proper accounting regulations in general.
Large kickback scheme
At the very beginning of the entire fraud by Livent, the two executives, Drabinsky and Gottlieb, fabricated transactions that did not exist at all, in order to transfer the revenue of the company secretly to their own pockets. They made the fake transaction on their balance sheet by colluding with their vendors. Drabinsky and Gottlieb received the money from vendors and asked them to fabricate evidences of charging fees.
Manipulation of accounting records
The kickback scheme sacrificed the net profit of the company, and as a result, Drabinsky and Gottlieb started manipulating the records. There were evidence from later investigation that Livent was exaggerating its revenue from the box office to show that it kept good income statement with good profit. Also, they asked the accountants at Livent to modify the financial statements to hide the potential financial problems Livent had and to exhibit good operating performance to attract more investment. Drabinsky even used special software to manipulate the financial statements to make them as
Trimester 2, 2013
ASSIGNMENT: LIVENT, INC.: An Instructional Case
PART A
Question A1
Outline the frauds identified in the case and explain the inconsistencies with proper accounting treatment. Relate your answer to broad accounting concepts and accounting standards where relevant. (8 marks; approximately 800 words)
Answer:
Livent Inc. is a theatre production corporation registered in Toronto, Canada. Therefore, all the accounting behaviours were subject to the General Accepted Accounting Principles (GAAP) of Canada. In a broad sense, the GAAP imposes four main constraints on the accounting behaviours of companies – objectivity, materiality, consistency and conservatism. In the case of Livent Inc., there are several behaviours that was inconsistent with the proper accounting regulations in general.
Large kickback scheme
At the very beginning of the entire fraud by Livent, the two executives, Drabinsky and Gottlieb, fabricated transactions that did not exist at all, in order to transfer the revenue of the company secretly to their own pockets. They made the fake transaction on their balance sheet by colluding with their vendors. Drabinsky and Gottlieb received the money from vendors and asked them to fabricate evidences of charging fees.
Manipulation of accounting records
The kickback scheme sacrificed the net profit of the company, and as a result, Drabinsky and Gottlieb started manipulating the records. There were evidence from later investigation that Livent was exaggerating its revenue from the box office to show that it kept good income statement with good profit. Also, they asked the accountants at Livent to modify the financial statements to hide the potential financial problems Livent had and to exhibit good operating performance to attract more investment. Drabinsky even used special software to manipulate the financial statements to make them as
References: Coleman, J W 1987, ‘Toward an integrated theory of white-collar crime’, American Journal of Sociology, vol 93, no. 2, pp. 406-439. Dellaportas, S 2013, ‘Conversations with inmate accountants: Motivation, opportunity and the fraud triangle’, Accounting Forum, vol. 37, pp. 29-39. Elrod, H & Gorhum, M J, ‘Fraudulent financial reporting and cash flows’, Journal of Finance and Accountancy, vol. 11, pp. 56-61. Llopis, J, Gonzalez, M R & Gasco, J L 2007, ‘Corporate governance and organisational culture: The role of ethics officers’, International Journal of Disclosure and Governance, vol. 4, no. 2, pp. 96–105 Nwachukwu, S LS & Vitell, S J 1997, ‘The influence of corporate culture on managerial ethical judgments’, Journal of Business Ethics, vol. 16, no. 8, pp. 757-776. Schwartz, M S 2013, ‘Developing and sustaining an ethical corporate culture: The core elements’, Business Horizons, vol. 56, pp. 39-50. Securities and Exchange Commission, 1999, Securities and Exchange Commission versus Garth H. Drabinsky, Myron I. Gottlieb, Robert Topol, Gordon C. Eckstein, Maria M. Messina, Diane J. Winkefein, D. Grant Malcolm and Tony Fiorino, 99 CIV.0239, Litigation Release No. 16022, retrieved 15 Aug 2013, .