The Accountant, staring Ben Affleck, Anna Kendrick and Jon Bernthal. At its core, its an action film with an autism-as-a-super-power protagonist. Middling reviews from critics, middle to positive reviews from audiences, made back it’s budget at the box office. Ben Affleck’s character is a forensic accountant for the criminal underworld. It is largely window dressing, except for one scene where Affleck breaks down his findings, including some accounting terms of art.
Over analyze the accounting implications of a two minute scene in a 10 year old movie? Yes please!
The Scene
Affleck: Living Robotics, ten years ago, earnings before interest, tax and depreciation: $14,495,719. Nine years ago, earnings before tax and depreciation: revenues go up, profits go down. Down? No large capital expenditures dragging profits down, no spike in raw materials or labor cost. Year eight, profits and revenue both go up, but not in a commensurate fashion. X no longer equals Y. (pointing to several numbers written on a whiteboard) six, five, four, three. You’re making money, but there’s a leak. The leak is right here.
Kendrick: SloWitt Manufacturing. I’ve signed these checks.
Affleck: Who authorizes them?
Kendrick: Ed. Mr. Chilton (the CFO of the company). They make electronic assemblies for the consumer division.
Affleck: No they don’t. Look at this (Affleck points to several numbers on a whiteboard) Do you notice anything?
Kendrick: The second number on each is a three.
Affleck: Yeah. Most people, when generating random numbers, tend to rely subconsciously on certain patterns.
Kendrick: I was right. I went through these ledgers for months and I got through one fiscal year. You went through fifteen? Overnight!”
Affleck: That’s not even the best part. They’re routing money to a company that doesn’t exist, and yet profits go up, and they continue to going up. It absolutely makes no sense.
Both: Where is the money coming from?
Kendrick: It’s not inventory?
Affleck: Inventory turnover is normal.
Kendrick: Chargebacks to vendors?
Affleck: No, perfectly notarized.
Kendrick: Internal offsets?
Affleck: No, that’s a terrible idea.
What Actually Happened?
Affleck has identified a false vendor scheme. In a false vendor scheme, the fraudster creates a fake vendor and submits fraudulent invoices for goods or services that were never provided and pockets the payment.
What Passes?
EBITDA: Affleck makes reference to “earnings before interest, tax and depreciation” and again to “earnings before tax and depreciation”. Neither of those are quite accounting terms. They are likely referring to EBITDA, or “earnings before interest, tax, depreciation and amortization.” EBITDA is not term from Generally Accepted Accounting Principles, but is commonly used as a proxy for a company’s functional earnings.
Financial Statement Analysis: Affleck evidently examined long-term trends in the company’s financials. This is a process accountants refer to as Financial Statement Analysis, and there are whole classes on the matter. He briefly goes into two kinds:
- The film focused on the company’s profitability, and how there were multiple changes to the company’s profitability over the course of several years. Long-term changes in profitability could quickly point to areas of further investigation. In fact, Affleck described two such areas he considered : “no spike in raw materials or labor cost”. Those are both Cost of Goods Sold expenses, also called Direct Costs. There are, of course, several other expense categories that could have affected a company’s EBITDA, including Selling, General & Administrative costs.
- Affleck also made mention of “inventory rollover” being normal. Inventory turnover is an efficiency measure, and indicates how much inventory a company has on hand relative to how much they sell. Think of it as a measure of how long the company could continue selling without manufacturing or replenishing inventory. Generally speaking, high inventory turnover is better because it indicates the company makes better use of their assets. But companies with high inventory turnover are prone to disruptions.
CFO signing checks: The movie didn’t linger on this, but depending on circumstances, it would be peculiar to have a CFO approving individual payments to vendors. I would first be interested in what normal internal controls call for. Other factors to consider are size of the company, and the size of the accounting team. Though the best indication is whether the CFO approving payments is a normal occurrence, or whether it occurs with an pattern (i.e., a specific vendor).
What Doesn’t Pass
Unrealistic Depictions of Our Industry: The amount of work depicted is impossible for a single person to have completed in less than twenty-four hours. The scene setting included at least seventeen stacks of banker boxes, four deep: minimum 68 boxes, plus multiple notebooks on a conference room table. Just the process of getting your arms around that many hard copy records would take all night. Which is to say nothing of performing the analysis needed to reach the sorts of conclusions Affleck reached.
But it’s a movie, have to keep the pace going!
The Volume of Records Proffered: The records depicted are actually underwhelming given the length of time Affleck examined and the supposed complexity of the accounting records. As part of the setup for this scene, Affleck requested fifteen years of records. The movie made a scene of commenting how “incredibly complicated” the accounting system was, with “depreciation schedules on hundreds of different items, full-time and contract employees, Department of Defense classified accounts”. The context of the scene implied that Afflect was examining everything in the books and records. “Everything” could have easily could have filled that conference room.
The Writers Made Things Up When they Didn’t Need To: The “second digit” analysis is not forensic accounting technique. It is close. Forensic accountants use a principle called Benford’s Law, also known as the First-Digit Law. Benford’s Law describes the frequency distribution of the first digits of numbers in large data sets. But specifically the first digit, not the second. Forensic accountants use Benford’s Law in statistical testing as part of the initial stages of work.
Link: Analytics previously wrote an article detailing Benford’s Law, and how it is used.
It’s possible some kind of statistical testing was used by Affleck, but the two seconds of screen time it is afforded does not allow us to explore it further.
Affleck Jumped Straight to Fraud: If you accept the “second digit” concept as part of his autism-as-a-superpower abilities, it was still premature for Affleck to conclude there was a vendor fraud scheme. Affleck potentially had good basis for investigating specific vendors further. But jumping straight to a vendor fraud scheme was entirely premature.
Capital Expenditures: In his meanderings about company profitability, he mentioned there being “No large capital expenditures dragging profits down….” Capital expenditures don’t affect profitability, they affect cash flow. Capital expenditures are capitalized (i.e., recorded on the balance sheets). This allows they company to reflect the use (expense) of multi-year assets over multiple years.
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