Auditing State Film Tax Credits
January 18, 2011 1 Comment
I met with the State of Connecticut’s tax credit administrator, Ed Riggerio, before Christmas. Connecticut had a problem – to find a course which satisfied the following quote in the legislation:
“… the auditor must have sufficient knowledge of accounting principles and practices generally recognized in the film, television, commercial and digital media industry” (Note: this language is common to all State film tax credit regulations).
I have designed a course which references the AICPA’s (American Institute of Certified Public Accountants) auditing statement on “Understanding the Entity Addressed”. The AICPA refers to this as SAS 109 (Statements on Auditing Standards #109). The AICPA also has a statement on Fraud Risk Assessment (SAS 99) where it’s necessary to identify where management has the ability to override controls. I have also referenced SAS 99 into the course.
The course is not structured around SAS 109 and 99. Rather, the course has it’s own layout, but points that are relevant to SAS 109 anmd 99 are brought up and discussed.
In order to understand the Film Industry you really need to understand the Film Producer, the Film Accountant, the Film Budget and the Film Cost Report.
The Independent Film Producer, by necessity, is someone who doesn’t take to “rules” very well – if he/she was a rule-follower they wouldn’t be in the ‘Biz. For someone who is steeped in Standards the Film Producer may seem like a renegade, so lots of examples need to be interwoven into the course.
The Film Accountant is not an “accountant”, as known and thought of by CPA’s. The Film Accountant is a film industry professional who has apprenticed in the film production industry as an assistant accountant until he/she knows every nuance of the money-flows within any film or television production, and how to account for those money flows. The thought processes of a Film Accountant are quite different from a CPA. A Film Accountant is a cross between a Unit Production Manager and a strong bookkeeper. Since the CPA is trying to understand and assess the risks of “material misstatement” the CPA must understand the Film Accountant.
The Film Budget is viewed a lot like a financial/legal document in the Film Industry. It’s the document that the film producer has sweated over for months, if not years, to get the financing together for the film production. It is the foundation of bank loans, contracts made with key cast and crew and is on the lips of every experienced department head approached to work on the production. It sets the bar for the director, the cast and crew. The Film Budget leads the way – … was it based on lies? … was it based on mis-information? … is the account structure appropriate? … was it badly massaged from an earlier budget for different locations? … etc. A Film Budget that misrepresents itself can significantly raise the risk of misstatements all along the line thereafter.
The Film Production Cost Report is what the CPA will be auditing. It is the final “financial statement” of the film production and is a financial representation of the film itself. In the film industry, reading a Cost Report is like reading a report card on the producer and director. It tells the tone of “management” and sets the risk levels the SAS’s are so adamant in discovering.
The course is a one-day course, scheduled for January 29, 2011 in Hartford CT. It solves Ed’s problem. Hopefully other States will look for the same solution.
See http://www.talkfilm.biz/filmworkshops2.htm for more details.