The entertainment industry had fascinated Garth Drabinsky from an early age. Unlike many of his colleagues in the industry, Drabinsky did not benefit from a network of family members and friends in show business. Instead, Drabinsky relied on his own drive, inspiration, and indomitable work ethic to claw his way to the top of the volatile and fickle entertainment industry. Born in Toronto in 1947, Drabinsky was struck down by polio at age three, leaving him with a severe limp for the remainder of his life. The young Canadian refused to allow his physical limitations to prevent him from reaching his goals. In fact, Drabinsky freely admits that his physical problems and his modest upbringing-his father sold air conditioners-were key factors that motivated him to "aim for the stars." During his college years, Drabinsky made his first foray into show business by publishing a free magazine that provided critiques of movies appearing in local theaters.
After graduating from law school, where he concentrated his studies on the entertainment industry, Drabinsky became involved in real estate development. The young attorney hoped to accumulate a nest egg that he could use to begin producing movies and live plays. A successful condominium project provided him with the funds he needed to begin dabbling in motion pictures and Broadway productions. By age 30, Drabinsky had produced three feature-length movies and one Broadway musical, none of which were particularly well received by critics or the ticket-buying public.
In 1979, Drabinsky and a close friend, Myron Gottlieb, decided to enter the show business world via the "back door." The two young entrepreneurs persuaded a prominent Toronto businessman to invest nearly $1 million in a "cinema complex" project they had conceived.2 This project involved converting the basement of a large shopping mall into a multiscreen theater. The design for the "cineplex" included plush interiors for each theater, luxurious seats, and cappuccino bars in the lobby.
Drabinsky intended to make a trip to the local movie theater the captivating experience that it had been several decades earlier in the halcyon days of Hollywood.
Most industry insiders predicted that Drabinsky's blueprint for his cineplex concept would fail, principally because the large overhead for his theaters forced his company to charge much higher ticket prices than competitors. But the critics were wrong. Toronto's moviegoers were more than willing to pay a few extra dollars to watch a film in Drabinsky's upscale theaters. Over the next several years, Drabinsky and Gottlieb expanded their company with the help of well-heeled investors whom they convinced to pony up large sums to finance the development of multiscreen theater complexes throughout Canada and the United States. By the mid-1980s, their company, Cineplex Odeon, controlled nearly 2,000 theaters, making it the second largest theater chain in North America.
Several major investors in Cineplex Odeon eventually began complaining of Drabinsky's unrestrained spending practices. The company's rapid expansion and the increasingly sumptuous designs Drabinsky developed for new theaters required Cineplex Odeon to borrow enormous amounts from banks and other lenders. An internal investigation in 1989 uncovered irregularities in the company's accounting records that wiped out a large profit for the year and resulted in Cineplex Odeon reporting a significant loss instead. The controversy sparked by the discovery of the accounting irregularities gave Cineplex Odeon's major investors the leverage they needed to force Drabinsky and Gottlieb to resign. During the negotiations that led to their departure from the company, Drabinsky and Gottlieb acquired the Pantages Theatre, a large live production theater in Toronto, as well as the Canadian rights to certain Broadway plays.
Within a few weeks after severing their ties with Cineplex Odeon, Drabinsky and Gottlieb had organized Live Entertainment Corporation to produce Broadway-type shows in their hometown of Toronto. Drabinsky's concept for this new company, which he coaxed several large investors and lenders to bankroll, was to bring "corporate management" to the notoriously freewheeling and undisciplined show business industry. Following a series of widely acclaimed productions, the company- renamed Livent, Inc.-went public in 1993.3 In May 1995, Livent filed an application with the Securities and Exchange Commission (SEC) to sell its stock in the United States. The SEC approved that application, and Livent's stock began trading on the NASDAQ stock exchange. Within two years, U.S. investors controlled the majority of Livent's outstanding stock.
By early 1998, Livent owned five live production theaters in Canada and the United States, including a major Broadway theater in New York. The company's productions, among them Fosse, Kiss of the Spider Woman, Ragtime, Show Boat, and The Phantom of the Opera, had garnered a total of more than 20 Tony Awards. Show business insiders attributed Livent's rapid rise to prominence to Garth Drabinsky. After organizing Livent, Drabinsky quickly developed a keen sense of the types of shows that would appeal to the public. Even more important, he was able to identify and recruit talented directors, actors, set designers, and the array of other skilled artisans needed to produce successful Broadway shows. The domineering Drabinsky micromanaged not only the creative realm of Livent's operations but every other major facet of the company's operations as well, although he relied heavily on his friend and confidant, Myron Gottlieb-who had an accounting background-to help him oversee the company's accounting and financial reporting functions.

Questions
1. Identify common inherent risk factors that companies involved in the entertainment industry pose for their independent auditors. 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.
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?
3. Explain why some corporate executives may perceive that their independent auditors are a "necessary evil." How can auditors combat or change that attitude?
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.
5. Do you believe Deloitte & Touche should have approved Livent's 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 for such transactions?
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 affecting Livent's accounting records?
7. What professional standards apply to "due diligence" investigations performed by accounting firms?