NEW YORK (CNNfn) - Livent Inc., an entertainment company backed in part by entertainment mogul Michael Ovitz, disclosed Monday that its new management has uncovered "serious" accounting irregularities that could represent "millions of dollars" of fake revenue.
The developments came just weeks after Roy Furman, previously with investment bank Furman Selz, assumed control of the theatrical production company that was responsible for such Tony Award-winning shows as "Show Boat," "Kiss of the Spider Woman" and "Phantom of the Opera."
"As shocked as we all are by this discovery, we believe Livent remains a viable company financially and is operationally and creatively very strong," Furman said in a statement.
Some industry officials indicated Furman's presence at Livent has vastly helped the concern's credibility.
"I would say Roy Furman is a very substantial, very intelligent financial partner in this enterprise," said Charles Millard, president of the New York City Economic Development Corp., which has worked with Toronto-based Livent to restore the Times Square-42nd Street area.
"His presence is going to create stability," Millard said.
Furman's arrival came in conjunction with a $20 million investment for 12 percent of Livent by Ovitz, an ex-Hollywood agent to superstars and the former vice chairman of Walt Disney Co.
At the time, the investment represented a ringing endorsement for Livent, which previously had been beset by the financial difficulties associated with putting on Broadway shows. Because of the risks of sagging attendance or even one bad review, live theatrical productions generally don't turn a profit.
But Livent's former chairman Garth Drabinsky -- who was suspended Monday along with former president Myron Gottlieb pending the outcome of a full investigation -- is known for his survival instincts, as evidenced by his obvious limp suffered from a childhood bout with polio.
Drabinsky developed innovative ways to finance his shows, taking profits from long-running road companies to help fund new works.
Yet Drabinsky, who was ousted from the executive suite at Cineplex Odeon Corp., also has been criticized in the past as a "brash impresario" and a flamboyant spender with an oversized ego.
In a brief statement issued Monday afternoon, Drabinsky and Gottlieb said they were "surprised and dismayed" by the concerns raised by the new management.
"The accounting practices of Livent were addressed at the 1997 year-end and during the first quarter of 1998 as part of the due diligence conducted by the new management team prior to the infusion of equity in June 1998," the two executives said.
Livent said the irregularities involved improper recognition of revenue and failure to record certain expenses. While it is too early to determine the specific impact of the aberration, it "seems virtually certain" that financial results dating back to 1996 will need to be restated.
Livent, though, added the irregularities are not expected to have a significant adverse effect on its current cash flow or its operations. However, the restatement could cause the company to stand in default of its outstanding debt obligations.
The company plans to hire an investment adviser to resolve the issues. Accounting firm KPMG/Peat Marwick already has been retained to conduct a comprehensive review. Livent will request an extension from Canadian regulators to file its second-quarter results.
-- by staff writer Robert Liu