Here's a comment from Tim Worstall who writes for thebusiness.co.uk pertaining to the Writers Guild of America - I have encountered stories about dodgy accounting in Hollywood but this reaches new dimensions!

Hollywood Accounting

Tim Worstall

16th October 2007 thebusiness.co.uk

I think everyone knows that beancounting in Hollywood runs up against the far side of mathematics, para-accountancy you might say. But as Chris Ayres points out, the results, even with that knowledge, can surprise:

The current dispute has arisen partly because the media companies are trying to replace the WGA’s system of residuals with profit-sharing agreements, which would be fine, in theory, apart from Hollywood bookkeeping being about as reliable as Britney Spears’s underwear. Case in point: Frasier ran for 11 seasons and made $1.5 billion in revenues, yet ended up $200 million in the red – according to Paramount’s accounts.

The number of people who have taken points (a share of the profits) only to find that a massive hit doesn't actually have any is very long indeed. That's why the major stars take "gross points", shares of revenue, which is harder to manipulate.

But the studios do face two economic problems. In any business where it's the talent that makes the profits, those profits will flow to that talent. The same is true of The City, of football clubs and of movie studios. The second is a problem they share with the record companies: they finance an awful lot of flops, the stellar success or two paying for all of them. That's why the "overheads" allocated to a specific project can drag even the most successful TV series into a loss. Those overheads are the losses on all the other projects totted up and it is true that they are an overhead of the studio system, if not of that specific project they're allocated to.

The thing is though, about Hollywood bookkeeping, that it isn't unreliable at all: it's extremely reliable in fact. The aim is to keep as much of the revenue as possible in the hands of those who hire the bookkeepers: the studios, that is. At that it's very reliable indeed.