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Our Presentation
 Presenting BY
• Group-02

Associates:

➢ Gopal Karmakar -21 AIS 001

➢ Md. Shamim - 21 AIS 012
➢ Shanti Ranjan Howlader - 21 AIS 025
➢ Mohiuddin Ahmed - 21 AIS 026
➢ Sabbir Ahmed - 21 AIS 048
Livent, Incorporation: A Case
Study
Part -01

Presenting BY:
Gopal Karmakar
ID NO: 21 AIS 001
 Overview of Livent Incorporation

• The Live Entertainment Corporation of Canada, better known as Livent, was a

theatre production company based in Toronto, Ontario.
• Founded in 1989 by former Cineplex Odeon executives Garth Drabinsky and
Myron Gottlieb, the company initially found success with its production of The
Phantom of the Opera at its Pantages Theatre in Toronto.
• In 1993, they brought Kiss of the Spider Woman to Broadway, winning the Tony
Award for Best Musical. They became known for lavish productions with their
1994 revival of Show Boat (estimated to be the most expensive production in
Broadway history at the time), and their ambitious 1998 original musical Ragtime.
• In 1998, Livent announced the discovery of "accounting irregularities".
• Revised financial statements showed previously undisclosed losses, and the
company filed for bankruptcy protection. As a result, the company's stock price
plummeted, and its assets were eventually sold off in 1999. The company's
collapse led to criminal and civil litigation.
 Overview of Deloitte and Touche
Type UK private company limited by guarantee

Industry
Professional services
Founded
1845; 178 years ago in London, England
Founder
William Welch Deloitte
Headquarters
London, England

Area served
Worldwide
Key people
• Sharon Thorne (Chairperson Deloitte Global)
• Joseph B. Ucuzoglu (CEO Deloitte Global)
Services
• Audit
• Management consulting
• Financial advisory
• Risk advisory
• Tax
• Legal
 Key Players

❖ Garth Drabinsky (Founder & CEO)

❖ Myron Gottlieb (Founder & President)
❖ Roy Furman (Investment & Banker)
❖ Maria Messina (CFO & Former Deloitte audit
partner)
❖ Robert Webster (Former KPMG audit partner & now
executive vice president)
❖ Michael Ovitz (Chairman of board executive
committee)

❖ Gordon Eckstein (senior vice president of finance &

administration)
 Background Information

• Garth Drabinsky and his close friend Myron Gottlieb decided to enter
the show business world via the “backdoor”
• The idea was to build a cineplex, creating a captivating experience for
movie goers
• By the mid 1980’s the company, Cinema Odeon, controlled nearly
2,000 theatres
 Background Information

• Major investors began to complain about Drabinsky’s unrestrained

spending practices
• Rapid expansion and sumptuous designs required the company to
borrow amounts from banks and lenders
• An internal investigation in 1989 uncovered irregularities in the
company’s accounting records turned a large profit into a significant
loss
 Background Information

• The controversy over the accounting irregularities gave the major

investors the leverage they needed to force Drabinsky and Gottlieb to
resign
• After negotiations Drabinsky and Gottlieb parted ways with Cineplex
Odeon after obtaining the Pantages Theatre and Canadian rights to
certain Broadway plays
• Livent, Inc. was formed shortly after and went public in 1993 and in
1995 filed with the SEC
 Background Information

• Livent, Inc. rapidly rose to prominence in the industry with 5 live

production theatres in Canada and the US. The company had many
successful productions including Phantom of the Opera and garnered
more than 20 Tony Awards
• However, Drabinsky had developed a bad reputation for being
complex, difficult, cranky, single-minded, and self-centered
• Often told his accounting staff to “keep their (expletive) mouth shut”
and “do as they are (expletive) told, they are not paid to think”
 Background Information

• Buckling under a huge load of debt, Roy Furman persuaded Livent to

accept a $20 million dollar investment from former Disney executive
Michael Ovitz, in exchanged for sufficient common stock voting rights
and control of the board
• Before agreeing to invest, KPMG was contracted to scrutinize Livent’s
accounting records
• The former audit partner at KPMG, Robert Webster, was hired on as
Executive Vice President
 Background Information

• Webster quickly discovered that the work environment and

accounting procedures were less than ideal at Livent
• 5 members of the accounting staff including Messina admitted that
the accounting records had been distorted by a series of fraudulent
accounting schemes
• On August 11th, 1998 Roy Furman issued a press release announcing
that “significant financial irregularities” adversely affecting the
financial statements for the past three years had been discovered
 Part -02

Presenting BY:
Md. Shamim
ID NO: 21 AIS 012
 The Fraud: Red Flags

Drabinsky’s need for additional capital

History of financial reporting indiscretions

Extremely aggressive and growth-oriented management

team

Tyrannical and abusive” personality to subordinates

Contemptuous attitude towards independent auditor

 The Fraud: Pervasive and Multifaceted

Array of accounting
Kickback scheme (1990 - 1994)
manipulations (1994)

Drabinsky and Gottlieb received

TranDeleting accounting records
approximately $7M in kickbacks

Including two vendors designed to

sfer of preproduction costs
siphon millions for bogus services

Fake charges were capitalized in Defer the amortization of the major

“preproduction” cost accounts cost items

Charging preproduction costs to fixed

asset accounts
 The Fraud: “Pervasive and Multifaceted”
Revenue-generating
scheme (1996)
Involved several multimillion-dollar
transactions, mostly sale of
production rights $34M revenues
on transactions included in 1996
and 1997 income statements
Inflating box-office
results (1997)
Two vendors purchased several
hundred thousands of tickets
Livent reimbursed vendors for the
purchases, charging payments to
fixed asset accounts
 The Fraud: Financial Impact

1996:
1992:
Reported
Reported 1997: Total
pretax profit of
pretax profit of fixed assets of
$14.2M when
$2.9M when $200.8M were
the company
the actual overstated by
actually
figure was $24M
incurred a loss
$100,000
of $20M
 The Fraud: Keeping the Auditors in the Dark
• Collusion involving top executives and the active participation of its
accountants made the fraud difficult to detect
• Auditor’s personal relationship with Messina and Craib may have
impaired the auditor’s objectivity
• Among accountants’ primary responsibilities was concealing Livent’s
fraud from Deloitte - “Compromising” with auditors in regards to
accounting manipulations: Revenue recognition on large transactions
in question
• Taking advantage of significant related party transactions to conceal
contract stipulations
Part -03
Presenting BY:
Mohiuddin Ahmed
ID NO: 21 AIS 026
 Fight to prosecute

• Canadian and U.S. agencies fought to determine which

would be the first to prosecute key parties fraudulently
involved through several jurisdiction disputes.
• U.S. law enforcement failed to extradite Drabinsky and
Gottlieb
 The Fight: Don’t Blame Me

• Maria Messina subsequently revealed that Livent’s accountants were

common targets of verbal abuse by Drabinsky and other Livent
executives.
• “They [Livent’s accountants] were told on a very regular basis that
they are paid to keep their [expletive] mouths shut and do as they are
[expletive] told. They are not paid to think.”
• Reportedly, Drabinsky, Gottlieb, and Robert Topol, Livent’s chief
operating officer (COO), regularly met with Eckstein, Messina, and
other members of the company’s accounting staff to discuss the
details of the fraud
 The Fight: Don’t Blame Me

✓At these meetings, the three top executives reviewed preliminary

financial reports prepared by the accounting staff and instructed the
accountants on the “adjustments” needed to improve or embellish
those reports

✓In court documents filed with this lawsuit, Gottlieb alleged that he
was not “an expert on accounting practices” and that he had relied on
Livent’s accounting staff to ensure that the company’s financial
statements were accurate
 The Fight: Don’t Blame Me
➢Gottlieb filed a civil lawsuit against Messina, Craib, Eckstein, and
three other former Livent accountants; charging the individuals with
responsibility for the fraud
➢Eckstein charged Gottlieb with being a key architect of the fraud and
insisted that Messina was a key player as well
➢Ovitz and members of the new management team sued the company’s
cofounders for $325M
➢Drabinsky and Gottlieb then filed a $200M defamation-of-character
lawsuit against Ovitz and his colleagues.
➢Drabinsky sued KPMG for damages of more than $26M
➢Class-action lawsuit filed by Livent creditors, leading judge to
believe that Deloitte was reckless
 Auditor’s Liabilities

➢When Deloitte officials learned of the press release, they demanded a

meeting with Livent’s board of directors
➢ At this meeting, Deloitte threatened to resign. After considerable
discussion, Livent’s board and the Deloitte representatives reached a
compromise
➢ the board agreed to reverse the journal entry for the $7.4 million
transaction in the second quarter, recording it instead during the third
quarter
➢ The board also agreed to issue an amended earnings release for the
second quarter
 Auditor’s Liabilities

✓The Supreme Court's decision has significant implications for

auditors, clients, and shareholders in cases of corporate fraud.
✓The decision clarifies the scope and limits of auditor liability for
negligence, and emphasizes the need for auditors to exercise
professional judgment and skepticism when performing their audits
 Charged against auditors

✓The trial court found Deloitte liable for negligence and breach of
contract, and awarded damages of $85.6 million to the receiver.
✓The court held that Deloitte owed a duty of care to Livent as its
client, and that Deloitte breached that duty by failing to meet the
standard of care expected of a reasonable auditor.
✓The court also held that Deloitte's negligence caused some of Livent's
losses, but not all of them, as Livent was already insolvent before the
fraud was exposed.
 Charged against auditors

✓The court apportioned liability between Deloitte (25%) and Livent

(75%), based on their respective degrees of fault.
✓The Court of Appeal upheld the trial court's decision, but reduced the
damages to $40.5 million, based on a different method of calculating
Livent's losses.
✓The Supreme Court of Canada partially overturned the lower courts'
decisions, and held that Deloitte was only liable for $10.5 million in
damages.
Part -04
Presenting BY:
Shanti Ranjan Howlader
ID NO: 21 AIS 025
 Punishment
Punishment
•Drabinsky and Gottlieb were found guilty on fraud and forgery charges by
an Ontario judge in 2009
•They were sentenced to seven and six years in prison respectively, but
they appealed their convictions
•In 2011, the Ontario Court of Appeal upheld their convictions but reduced
their sentences to five and four years respectively
•In 2012, the Supreme Court of Canada refused to hear their further
appeal
•In 2017, Livent’s receiver won a civil lawsuit against Deloitte & Touche,
Livent’s former auditor, for negligence in failing to detect the fraud
 Punishment (cont’d)
• Deloitte was ordered to pay $84.75 million in damages to Livent’s
creditors
• Maria Messina, who pleaded guilty for professional misconduct,
was fined $7500 and suspended from practicing as a chartered
accountant for two years.
• Christopher Craib received a six month suspension and a $1000
fine.
 Punishment (cont’d)
Civil Lawsuit Against Deloitte
• Livent’s receiver sued Deloitte for negligence in failing to detect the fraud
• The receiver claimed that Deloitte breached its duty of care in two instances:
• Issuing a comfort letter and press release to assist Livent in a public offering in
1997
• Failing to disclose the fraud in its audit opinion of Livent’s financial statements in
1997
• The trial judge and the Court of Appeal found Deloitte liable for both
instances and awarded $84.75 million in damages to Livent’s creditors
 Supreme Court of Canada Decision
• Deloitte appealed to the Supreme Court of Canada
• The Supreme Court applied a two-stage analysis to determine whether Deloitte owed
a duty of care to Livent and whether it breached that duty
• The Supreme Court held that Deloitte only owed a duty of care to Livent for the audit
opinion, not for the comfort letter and press release
• The Supreme Court reasoned that the purpose of the audit opinion was to enable
shareholder oversight of management, which was consistent with Livent’s reliance on
it
• The purpose of the comfort letter and press release, however, was to provide
comfort to investors, not to inform Livent of its own financial position
• Therefore, any reliance Livent placed on them for overseeing its operations fell
outside the scope of Deloitte’s duty of care
• The Supreme Court reduced the damages award from $84.75 million to $40.425
million
 Punishment (cont’d)
Negligence Claims Against Professional Services Firms
•The Supreme Court’s decision in Livent has implications for negligence claims
against professional services firms
•The decision clarified that the duty of care of a professional service provider is
defined by the purpose of the engagement
•The duty of care is owed only to the client, not to third parties, unless there is a
special relationship
•The duty of care is limited to the losses that flow from the purpose for which the
service was provided
•The decision also reaffirmed the importance of applying the Anns/Cooper test
to determine whether a duty of care exists and whether it is negated by policy
considerations
 Recent Developments in the US and Canada
Recent Developments in the US and Canada
•Since Livent, there have been more claims against professional services firms in the US
and Canada
•One example is the claims against McKinsey & Company for its role in advising opioid
manufacturers and distributors
•McKinsey reached settlements with 49 states, the District of Columbia and five
territories for its role in driving the purchase of opioid products in the US
•A proposed class action has been commenced in Ontario alleging similar claims about
the Canadian market
•These claims raise questions about the scope and application of Livent to negligence
claims against professional services firms in different contexts
 Findings
•Livent was a theatrical production company that engaged in massive accounting fraud to inflate its
profits and hide its costs
•Livent’s auditor, Deloitte, failed to detect and expose the fraud in two instances:
• Issuing a comfort letter and press release to assist Livent in a public offering in 1997
• Failing to disclose the fraud in its audit opinion of Livent’s financial statements in 1997
•Livent’s receiver sued Deloitte for negligence and won $84.75 million in damages at trial and on
appeal
•The Supreme Court of Canada reduced the damages to $40.425 million and held that Deloitte only
owed a duty of care to Livent for the audit opinion, not for the comfort letter and press release
•The Supreme Court clarified that the duty of care of a professional service provider is defined by
the purpose of the engagement and limited to the losses that flow from that purpose
 Recommendations
•Professional service providers should clearly define the scope and purpose of their
engagements with their clients and document them in writing
•Professional service providers should adhere to the applicable standards of care and
professional conduct in performing their services
•Professional service providers should be alert to any red flags or irregularities that may
indicate fraud or misconduct by their clients or third parties
•Professional service providers should communicate any concerns or findings to their clients
and relevant authorities in a timely and accurate manner
•Professional service providers should seek legal advice if they face any potential or actual
claims of negligence or negligent misrepresentation
 Part -05
Presenting BY:
Sabbir Ahmed
ID NO: 21 AIS 048
 Question 1 (Part-1)

Identify common inherent risk factors that companies

involved in the entertainment industry pose for their
independent auditors.

Answer

▪ Production expenses that differ from show to show.

▪ Projection of success or failure very difficult.
 Question 1 (Part-2)

List and briefly describe specific audit procedures that would not be
used on “typical” audit engagements but would be required for
audits of companies involved in live theatrical productions, such as
Livent.

Answer

▪ Contract expenses for actors/actresses must be tested, due to the size

and variability of each contract.
▪ Production expenses must be scrutinized to determine accuracy,
valuation, and existence.
▪ Revenue recognition risk is higher due to the nature of ticket sales.
 Question 2

Compare and contrast the responsibilities of an audit partner

of a major accounting firm with those of a large public
company’s CFO. Which work role do you believe is more
important? Which is more stressful? Which role would you
prefer and why?
 Question 3
Explain why some corporate executives may perceive that their
independent auditors are a “necessary evil.” How can auditors
combat or change that attitude?

Answer
Why are auditors viewed as a “necessary evil?”
• Audits are required by the SEC for all public companies.
• The investigative and intrusive nature of an audit is uncomfortable.
What can we do to change this perception?
• Help clients identify risks and provide suggestions on how to
mitigate those risks.
• Use the engagement to provide value to the client.
 Question 4
When auditor-client disputes arise during an audit engagement,
another accounting firm is sometimes retained by the client and/or
the existing auditor to provide an objective report on the issue at the
center of the dispute - as happened during Deloitte’s 1997 audit of
Livent. Discuss an accounting firm’s responsibilities when it is
retained to issue such a report.

Answer
●The auditor's responsibilities related to the work of assistants
engaged from outside the firm are governed by the same standards as
the auditor's responsibilities related to the work of assistants who are
associated with the auditor's firm as a partner, shareholder, or
employee.
●the principal auditor also should adopt appropriate measures to assure
the coordination of his activities with those of the other auditor in
order to achieve a proper review of matters affecting the consolidating
or combining of accounts in the financial statements
 Question 5

Do you believe Deloitte & Touche should have approved the

decision to record the $12.5 million “naming rights” payment as
revenue during the third quarter of 1997? Defend your answer.
What broad accounting concepts should be considered in
determining the proper accounting treatment process transactions?

Answer

I believe that Deloitte and Touche should not have

approved to record the $12.5 million naming rights
payment as revenue as of 1997.
 Question 6

Maria Messina testified that when she learned of the accounting

irregularities at Livent shortly after becoming the company’s CFO she
felt “guilty by association” which prevented her from revealing the
fraud to regulatory or law enforcement authorities. Explain what you
believe she meant by that statement. Place yourself in Messina’s
position. What would you have done after discovering the fraudulent
schemes in Livent’s accounting records?
 Answer

She felt that she had ties to both Livent and Deloitte and these ties
would be hurt either way if she reported wrong doings in the
accounting practices. No matter what she felt she was guilty because
she knew about it on the Livent side and she knew what was
happening incorrectly on the Deloitte side as well. Either way she
looked she felt that she had some responsibility to report the fraud.
After finding the fraudulent activities you have to report them and
alter the ways of the how they are clearly just doing it on a day to day
basis. Clearly she knew there was fraud and she could have done a lot
more to help solve the problem and clear everything up.
 Question 7

What professional standards apply to “Due diligence” investigations

performed by accounting firms?

Answer

Sarbanes Oxley Act Sections 302 and 404

• CEO and CFO Must certify financials

• Auditors must have knowledge about the entity
• Auditors must be independent in fact and appearance
Thanks for being with us