Creative Accounting

Many of the recent memorial tributes to the comic actor Gene Wilder emphasized his portrayal of the title character in the initial film version of Willie Wonka and the Chocolate Factory. Indeed, though that movie was never a major hit, Wilder’s “whimsical yet obscurely menacing” portrayal perfectly captured his unique brand of humor.

But did you know that Wilder was also the originator of the business world’s phrase creative accounting? He played the psychotically repressed Max Bloom in the 1967-68 cult comedy classic The Producers, portraying an accountant who conspires with the producer of a Broadway show to swindle his investors.

The phrase creative accounting was a sarcastic reference to the manipulation of financial bookkeeping practices to enable the swindle. More specifically, it involved a scheme involving accounting principles for equity capital.

So how did the swindle work? The producer, a character named Max Bialystock, raised capital by promising investors that he would launch an extremely successful Broadway show. But he intentionally created an atrocious show that was designed to be severely criticized — and then closed down — after a single Opening Night performance.

Bialystock knew that traditional accounting debits and credits are recorded in dollars and not in ownership percentages. So he sold and resold the same shares of ownership over and over, and kept recording the cash inflows as new investment capital.

Once the show closed, Max assumed that the investors would be too embarrassed about investing in such an awful flop to demand their money back. And so he assumed that he and his conspirator Max Bloom could pocket the unspent funds.

Did they get away with it? You’re welcome to watch the film and learn the answer to that question. But here’s a hint: the outcome of the movie pivoted on the hilarious reactions of the Opening Night audience.

Incidentally, if you believe that such schemes could never be perpetrated in the real world, please think again. Until a few years ago, for instance, American politicians often raised millions of dollars through Political Action Committees. Then they announced their retirements and routinely kept the funds for their personal use.

Indeed, if The Producers were to be re-made for today’s movie audiences, there’s a good chance that it wouldn’t be situated in the world of Broadway theater. Nowadays, the most audacious producers of creative accounting techniques — and many other examples of financial chicanery, for that matter — practice in the world of politics.

But that’s another story!