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Livent Inc.

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Jesse Weening

on 18 July 2011

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Transcript of Livent Inc.

LIVENT INC. Part I: Prologue Sara Cousineau | Lianne Lew | Laura Peniston | Jesse Weening Part III: Subsequent Events Part II: What Happened Part IV: Lessons from Livent Inc. Livent Inc. Garth
Drabinsky Maria
Messina Michael
Ovitz 2002 March (cc) image by jantik on Flickr Myron
Gottlieb University of Toronto (Commerce & Law)
Fascination with Entertainment Industry
Founded Cineplex-Odeon with Gottlieb (1979)
Forced out due to accounting 'irregularities' (1989)
Founded Live Entertainment Inc. (1991) Long-time friend of Drabinsky
Business background
Oversaw accounting & reporting Audit Partner of Livent at Deloitte
Left Deloitte to become CFO
Livent Whistleblower Former Hollywood Super-Agent (CAA)
Former Walt Disney President
Majority stakeholder in Livent (1998) So...
What happened? FRAUD Well, here's who we're dealing with: And a brief history of Livent Inc. 1991 Garth & Myron co-found Live Entertainment Inc. x 20 Shortens to Livent Inc.
Goes public in Canada 1993 1995 Goes public in U.S. 1997 U.S. Investors control outstanding stock
Critics claim Garth had failed in his mission Mission:
"to bring corporate management to the
notoriously haphazard showbiz industry" 1998 Performs due diligence
Ovitz aquires controlling interest fraudfraudfraudfraudfraudfraudfraudfraudfraudfraudfraudfraudfraudfraud fraudfraudfraudfraudfraudfraud fraudfraudfraudfraudfraudfraud FRAUD 1998: Changes at Livent Michael Ovitz becomes Board Chairman
Elects former Disney executive as President Robert Webster, former KPMG Audit Partner
Executive VP of Livent Inc. Quincy Jones, Musician & Producer
Appointed to the Board The Fraud 1. Kickbacks
2. Accounting Manipulations
3. Revenue Generating Scheme
4. Inflating Results 1990 - 1994
Drabinsky, Gottlieb, & 2 Vendors
Billed for service not rendered
Capitalization of pre-production cost accounts
$7M payoff Needed to meet quarterly earnings targets
Erased expenses and liabilities
Transferred pre-production costs

Dual-booking system
Understated expenses by over $30M Savings on depreciation Sold production rights to 3rd parties
Wrote contracts as if refunds were impossible

1996 & 1997 : $34M in additional revenues Secret side agreements shielded 3rd parties
Guaranteed reasonable rates of return Agreements with theatres had clauses related to ticket sales
1997 Ragtime Needed $500K weekly ticket sales
Vendors purchased tickets and were reimbursed by Livent Payments charged to fixed asset accounts Trouble with Auditors 1996 1997 Too aggressive with revenue recognition Related party transaction wtih real estate company
Revenue recognition for sale of naming rights Livent Inc. Christopher
Craib Sr. Budgeting Controller
Chartered Accountant Garth
Drabinsky Chairman & CEO SEC sues Livent & 9 former employees

Filed $225M lawsuit against Drabinsky & Gottlieb Agreed to cease & desist from committing/causing violation of federal securities laws
Cooperate with investigation
Neither admitted nor denied findings Myron
Gottlieb Co-Founder 1999: SEC files claim alleging 17 false filings

Convicted of fraud & forgery in Ontario Superior Court
7 year jail sentence

$105M lawsuit against new owners Warrant issued for his arrest
Never extradited Appealed in Ontario Court
Remains free on bail March 2009: found guilty of fraud & forgery in Ontario Superior Court

SEC Sentenced to 6 years in jail
Free on bail, pending appeal

Warrant issued for arrest
Never extradited Maria
Messina CFO ICAO:

Strikeman Elliott Law Firm Pled guilty to 3 charges of professional misconduct
$7,500 fine
Suspended from practice for 2 years

Bankruptcy receiver Christopher
Craib Sr. Budgeting Controller 6 month suspension
$1,000 fine

Violated federal securities laws
Engaged in professional misconduct
3 year suspension
Agreed to cease & desist from committing/causing violations of federal securities law
Neither admitted nor denied findings ICAO:

SEC: External
Auditor 1998: Deloitte released unqualified audit opinion
ICAO: charges of professional misconduct against 4 Sr. Deloitte Accountants

Sued for $450M by 3 found guilty
Failure to ensure 1997 FS in accordance with GAAP
Failed to perform an audit in accordance with GAAS
Fined $100,000 and ordered to pay costs of $1.25M CEO President Sr. Mgmt. Accounting Staff Perpetrators of FS Fraud?
Method of FS Fraud?

Motivation? Falsified/Forged Sales
Deleting Expenses from Books
Under-Providing Depreciation

Personal Gain (Financial & Reputational) Organizational Factors Factors Related to Fraud? Responsibility for Detection? Weak internal control
Centralized power
Ineffective audit committee Auditors only to the extent of normal audit procedures Lessons When is it appropriate to issue a clean opinion?

How to apply professional judgement?

What to do with subsequent information? Professional Judgement Auditor's Argument
Audit process recognized appropriate audit risk
Increased level of professional skepticism

Professional Conduct Committee's Case
More than following a process and identifying relevant issues
Apply judgement correctly to arrive at conclusions Major Red Flags Tone at the top was extremely aggressive and growth-oriented

History of prior financial reporting indiscretions by top management

Consistent and growing need for additional capital

Existence of related-party transactions Deloitte's Risk Assessment Deloitte acknowledged Livent as a high-risk engagement
Auditor's response: Audit staff have requisite experience, skills, and expertise
Increase level of professional skepticism
Increase involvement of engagement management Subsequent Information 1998 April 3 April 4 April 9 Auditors become aware of hidden Put side-agreement
Agreement hidden by Livent
Disclosed by Dundee to Deloitte Management Meeting Audit Committee Meeting Should have precluded Deloitte from relying on management representation Interruption to Audit "We were trying to find a solution to an obvious
problem, rather than deal with the problem"
- Peter Chant Peter Chant recommended to resign from audit

Douglas Barrington & Anthony Power concluded they had sufficient audit evidence to dispel suspicions about the put Suggestion viewed as expression of frustration Key Takeaway Auditing is more than just a process Involves application of professional judgement in arriving at conclusions Questions?
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