Often these roles are filled by those fresh out of high school or college who have a love for the entertainment industry, the professionals said. Production accountants come from a variety of backgrounds and enter the field with diverse skills, said Lintinger. You could have an accounting and finance degree, or you could have a liberal arts degree, said Steinke. So opportunities abound for people with an interest in and an aptitude for budgets and filmmaking. And the good news is, you don’t need to be a certified public accountant to get into this lucrative role.
At its core, Hollywood accounting refers to the accounting practices used by studios to manipulate financial statements and make it appear that a successful film or TV show has not generated a profit. This is done to avoid paying profit shares to actors, writers, directors, and other participants entitled to a share of the net profits. These questionable costs include overhead, marketing expenses, distribution fees, or even interest charges that might not directly relate to the production. This practice can lead to a significant reduction in net profits, which affects the amount of money available for distribution to the talent and creators entitled to a share of those profits. Hollywood accounting is a strategic application of generally accepted accounting principles (GAAP) within the entertainment industry, not an illegal manipulation of financial records.
Directing a short film is expensive. How to crowdfund it
Many reputable companies in the entertainment industry follow transparent accounting practices and honor their contractual obligations to talent and profit participants. Artist may also have such books and records inspected by a lawyer or accountant, chosen solely by Artist; such representative must execute a confidentiality agreement with Studio before being given access to any records contemplated in this section. Any underpayment revealed by such inspection will be promptly paid to Artist.
What Interest Rate Cuts Actually Mean For Your Money
The studio (which, again, controls ZakWashCo Inc. completely) then adds onto it all, for example, a $250 million “distribution fee.” The audit clause is only as good as the accounting terms it seeks to enforce. To reiterate a point from earlier in this article, it is important for the artist’s lawyer to zealously advocate for fair and transparent payment terms that do not put the artist in a situation where everyone but the artist profits. Ultimately, the audit clause should be included anytime a creator is being paid, especially when the paying party has significant bargaining power, as is usually the case in the entertainment industry.
English lesson: ‘Hollywood Accounting’. Why do most films not make a profit?
So the talent whose compensation is based on gross end up benefiting and sharing the profits that the film pulled in. Sometimes people involved in the film receive a percentage of the movie’s gross. “If there is a gross participant and the movie succeeds, the gross participant’s share also increases the costs,” Goldberg said. Despite raking in hundreds of millions of dollars at the box office, some movies have still managed to report losses. This trope is also, strictly speaking, illegal under most interpretations of US Law, which is a fact that many lawsuits against Hollywood companies have taken advantage of. In effect, the reason that Hollywood gets away with this is just because no one in charge of the law is looking too closely at their actions, and they’d like to keep it that way.
When you dig into this murky practice, you realize that it is far more widespread than anyone imagined. It seems like a tentpole movie needs to have a lawsuit attached as if it is some kind of rite of passage. Hollywood accounting tries to maximise the tax rebates from the various states/countries where the movie is being made, while reducing the payments made to third parties (tax payments etc). After seeing how lucrative Sir Alec Guiness’ net-point deal was, he signed on for a similar payment.
- Hollywood studios will dabble in this sort of double accounting, and hardly anyone outside of its walls will ever know how much a film truly costs to produce.
- Negative pick-up deals are pre-arranged agreements where a distributor or studio commits to purchase the completed film for a fixed amount.
- Either way, the tax authorities won’t care so long as you pay proper taxes through whatever entity gets the profit (not that some studios haven’t tried combining this trope with actual tax fraud).
- Studios apply a percentage, often 10% to 20% of the production budget, as a general administrative fee, even for services not directly attributable to that project.
Alternatively, you set up a subsidiary to create the film itself, then have the parent studio charge the arbitrary fees (“distribution” is a common aspect). Either way, the tax authorities won’t care so long as you pay proper taxes through whatever entity gets the profit (not that some studios haven’t tried combining this trope with actual tax fraud). This is the opaque or creative accounting used by the film, video, and television industry to budget and record profits for film projects. So now you know payout for people in the production pipeline is based on profit and not an agreed upon constant. The studio is the entity that determines who gets their payout–and in a market where everyone wants to get paid, they also want their cut.
More From the Los Angeles Times
Distribution fees (think the marketing for a film) can send upwards 30% of what a film makes back to the studio by reporting outrageous marketing costs. Peter Jackson’s The Lord of the Rings trilogy also “lost” a lot of money when its box office runs yielded over $2.9 billion. With that in mind, it’s really hard to see why they would then choose to make six films and an extremely expensive spin-off television series with more reportedly on the way.
What Is Hollywood Accounting?
Movie investment has long been held as a dirty route to tax evasion. Production-based schemes are frequently cited in court cases brought by various revenue enforcement agencies across the world when they prosecute tax evasion. Investors get caught, but the studios providing the engine room of this sordid business just keep on trucking. Writers seem to frequently be on the receiving end of these Hollywood accounting practices. Screenwriter Ed Solomon says that Sony still tells him that Men in Black is still a loss-maker despite a $600 million take on a $90 million budget. That grossed at least $288 million on a budget of $35 million yet Paramount claimed it made no profit.
Neville Johnson has even made a career of exploiting the fact that Hollywood doesn’t want any legal authority looking too closely at their accounting books to get justice for his clients. A good way to keep a movie out of profit is to keep going back and paying different departments for work ‘owed’, and delivering bonus’ upon bonus’. If you’ve worked on the film, and are ‘in on it’ (and willing to co-operate), if the film is successful there’s a good chance you’ll receive some kind of surprise ‘bonus’ (who’s real purpose is to stop the film having to commence net-point payouts). Studios can establish reserves for future expenses or losses by making deductions for contingencies, interest, and various additional costs that are also applied to lower the profits. They can then defer revenue recognition, get some bloke in a suit that went to Harvard to pull out an amortisation schedule, and tell you all about how your net points mean nothing.
- For artists and their representatives, advocating for the inclusion of an audit clause is a crucial step in protecting their financial interests.
- That grossed at least $288 million on a budget of $35 million yet Paramount claimed it made no profit.
- That means he has earned about as much as Sandra Bullock would make on “Gravity” nearly 45 years later.
- It allows major studios to retain greater control over revenue streams and allocate resources strategically, positioning the studio as the central financial entity that maximizes its share of returns.
- It involves manipulating financial records to make a film or television show appear less profitable on paper than it is.
- Anousha Sakoui is a former entertainment industry writer for the Los Angeles Times who covered topics such as labor and litigation in Hollywood.
Business Made Simple
Although ethically questionable, these practices are legal in the entertainment industry. Creative industries thrive on innovation and collaboration, but they also depend on fairness and trust. The audit clause is more than just a legal formality — it’s what is hollywood accounting a statement of principle. It affirms that artists deserve transparency and accountability in their business relationships and provides a mechanism to enforce those values. For artists and their representatives, advocating for the inclusion of an audit clause is a crucial step in protecting their financial interests.
This means anything that isn’t net profit goes back to the studio, and money they take in can be listed under “recouping costs.” If profit is a pie given out to actors, writers, etc. in slices, ballooning costs are how studios take their slice of the pie. Gross profit is what you make after subtracting the raw production costs of your product. So if you’re selling a burger, the gross profit is the cost of the ingredients between the buns (and the buns themselves). Net income is the profit you’re left with after subtracting all the other costs. That’s advertising the burger, paying the guy who came up with the idea to use onions and mayo instead of one of each, paying the guy who’s going to pay the guy to shill your burger on social media. You can see how you can just stuff extra costs into the net profit category to drive it down now.
Marketing Against the Grain
In most industries, corporations will use accounting tricks to hide losses from shareholders and investors to appear greater. But given the profit-sharing deals many actors and other creatives include in their contracts, as well as tax liabilities, Hollywood is occasionally inclined to do the opposite. Interest on intercompany loans also serves as a mechanism to reduce reported profits. Funds advanced by a parent company or another internal division for a film’s production may be treated as loans, accruing interest. While these loans are internal, the interest charges are added to the film’s expenses, increasing its cost base. The Internal Revenue Service (IRS) scrutinizes such intercompany loans to ensure interest rates align with market standards.
“As revenue from the movie goes up, the breakeven point goes up as well,” explained Victor Goldberg, a professor emeritus at Columbia Law School. Welcome to Last Movie Outpost – your ultimate destination for all things movies, TV, and pop culture. We’re a team of passionate fans who live and breathe cinema, from Hollywood blockbusters to hidden indie gems, and everything in between. Rather than open their books to independent forensic accounting, Paramount wrote a check to Buchwald for $900,000. Nobody would sign up for bonus points on the back end, based on net profits, as there very rarely are any. Murphy famously stated that only a monkey would sign up for points on net profit.