China's Film Regulators Launch Website to Create Appearance of Accounting Transparency

In response to pressure from representatives of the American movie industry, Chinese government authorities have launched a new website that will, for the first time ever, provide authentic looking online information intended to support the outward appearance that box office receipts are being accurately reported across the People’s Republic of China.

The new website, established last week in the wake of Chinese President Xi Jinping’s visit to the United States, offers impressive looking, multi-colored graphs and data carefully designed to make the viewer believe he or she is seeing real-time, accurate box office figures from actual Chinese movie theaters.

Source: There is no named source for this data, as that would presumably put the burden of accountability on the party that provided it.

American filmmakers and distributors can finally take comfort in the knowledge that China is doing its best to back up its financial reporting with realistic looking evidence. Hopes are high that this development will spur exhibitors, distribution executives and government authorities around the world to follow the Chinese example by doing more to assure filmmakers that they too are doing everything in their power to bolster the pretense of their trustworthiness.

Interestingly, the American side offered no reciprocal promise to promote the appearance that it too is providing honest and transparent accounting. To do so would presumably open up the floodgates and force American studio accountants to make similar promises to everyone they do business with.

It may come as a surprise to the reader that those who collect and disburse the cash receipts generated by selling movie tickets have not always been so forthright. I’ll be happy to share some first-hand experiences with you.

Back in the mid-2000’s when I spent three years in Russia setting up and running movie production companies, I often heard stories about exhibitors skimming revenues from the box office and reporting considerably shrunken figures to distributors. One audacious Moscow theater operator actually told me he’d decided that weekend revenues were his alone to keep, and that he shared only in the weekday receipts.

Having observed numerous similarities in the ethics (or occasional lack thereof) between the Russian and Chinese film industries, I’ve often wondered whether a similar phenomenon exists in China.

So during a trip to the People’s Republic a few years ago I made a point of visiting several people who are in a position to know, and I asked them. Their unanimous consensus was that extensive exhibitor cheating exists in China, and those who are closest to the source assured me that under-reporting runs as high as 40 percent of total box office takings.

My interviewees included a theater owner/operator, a distributor, several entertainment attorneys, and most significantly, two box office reporting software company executives. Because box office skimming is a crime punishable by severe penalties, these individuals spoke with me with the understanding that they would remain anonymous.

Although I have no access to the underlying data, enough experts independently confirmed the 40 percent figure that I can publish it with some confidence, as outlandish as it may seem. Only the distributor thought this figure was too high—they were convinced that skimming runs no higher than 20 percent—but they admitted to having no real basis for backing up that assertion.

The parties closest to the data, the box office reporting software company executives, claimed to have deep knowledge of cinema sales and operations. They told me they have direct access to actual ticket sales figures and also to the numbers reported to distributors. They said that, although China’s State Administration of Press, Publication, Radio Film and Television SAPPRFT requires cinemas to install sophisticated point-of-sale reporting systems at all box office locations, there are several ways in which exhibitors can short-change distributors on rental revenues.

One software executive said that his company, which has a significant share of the market, actively helps theater operators to cheat. He builds ‘back-door’ mechanisms into his tracking software that allow monies to be diverted out of the officially reported revenue figures. He said that SAPPRFT officials hate the cheating because it robs them of tax revenues and also, presumably, of the ability to funnel more money into their own accounts.

Another executive told me that online ticket selling, which accounts for a considerable share of movie ticket sales, also offers opportunities for mis-reporting. His company provides a platform for marketing, sales facilitation, tracking and delivery of tickets to end users, so he sees every aspect of the transactions. He said that theater owners offer bundled combos where a moviegoer can buy two tickets, two popcorns, and two drinks for say, 200 renminbi (RMB) (around US $32). The tickets would be worth 120 RMB if purchased separately, but the theater operator allocates 140 RMB in revenue to the popcorn and drinks, leaving just 60 RMB to the value of the tickets, thus cheating the distributor of 50 percent of their rightful revenue.

Sometimes the under-reporting is highly transparent and official. A theater operator told me that China Film Group (CFG) collected 1.1 billion RMB from ticket sales for Transformers 3. But, as the story goes, when it came time to pay Paramount its share, CFG told the studio that because it had already made more than enough money on the movie, its revenue share would be limited to the first 900 million RMB in receipts. CFG would be keeping all the revenue on the last 200 million, and there was nothing Paramount could do about it.

As recently as last month, Paramount was also reportedly deprived of as much as $11 million from its film Terminator Genisys, and earlier this year Universal Pictures was said to have been short-changed on some $30 million of receipts for its film Furious 7.

If China’s announcements lead to actual change and reliably accurate accounting, it could well be the first time in the history of the worldwide movie business that such honesty prevails. But let’s just say I’m not holding my breath.

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