Hollywood Applies Creative Accounting to 'Harry Potter' Movie

Harry Potter
Harry Potter

It's common practice in Hollywood to find ways to transform profit-making movies into those that bleed into the red. But Warner Brothers (TWX) may have made the most audacious creative accounting move with respect to the Harry Potter franchise, claiming the most recent movie's near-$1 billion-dollar gross actually didn't make any money for the studio at all.

An accounting statement obtained by Deadline for Harry Potter and The Order of the Phoenix, released in 2007 demonstrates the blatant disparity between truth and accounting. Though the film grossed $938.2 million worldwide, the statement claims Warner Bros. is actually $167 million in the red, largely due to studio distribution fees, multi-million dollar spending on advertising and promotion, and almost $57 million in interest charges. But if one of the most successful movie franchises in history can't "officially" make money, what can? And how will those who sign net profit agreements ever be paid?

That question has come up in court every now and then, most notably when humorist and newspaper columnist Art Buchwald successfully sued Paramount in 1990 for hiding rightfully owed net profits on the film Coming to America. And this week two separate California court rulings sided with content providers over the studios: Disney (DIS) was ordered to pay nearly $270 million to a British production company that licensed popular game show Who Wants to be a Millionaire, while actor Don Johnson won $23.2 million in damages from Rysher Entertainment for unpaid past profits and future royalties on the hit 1990s drama Nash Bridges.

Unless there is a concerted effort by the SEC or the DOJ to investigate studio accounting practices, however, all the piecemeal judgments in the world will not budge Hollywood from changing its tactics and engaging in the financial equivalent of a 3-card-monte trick for writers and other creative types lacking A-list clout. And that, for now, means repeating an oft-used mantra: if you're being paid to work on a film, "you want a piece of the gross, not the net."

Originally published