A production audit may be needed for one of the following reasons:-
1) The production company requires an audit;
2) One of the funding bodies requires an audit;
3) An audit is required in order to qualify for a tax break (such as UK film tax relief) or to ensure that the production meets the terms of a co-production agreement.
Such audits must usually be performed by registered auditors and they should generally be performed by auditors who specialise in the film/TV industry and are therefore familiar with the regulations and how they should be interpreted. In cases 2 and 3 it is important to ascertain exactly what the auditor is being required to certify; the contract with the funding body will usually detail exactly what is required.
At the start of a production which is to be subject to such an audit it is important to identify information that needs to be made available to the auditor so that systems can be put in place to make that information easily available. For example, the following information may be needed:-
- a) Nationality of members of all the production crew and staff including those used by the post production facility (crew start forms should ask for nationality and should be supported by a photocopy of the person’s passport).
- b) An analysis of expenditure by country or region (at the start of a production it may be worth setting up separate departments in the accounting software to enable expenditure to be easily broken down as required).
- c) A cost report in a set format (where an application for a grant or for co-production status is made, the DCMS or the funding body usually require the audited cost report to be in the same format and use the same budget headings as the application form. In such a circumstance, it is important to set up the chart of accounts in a way that makes it easy to report in the required format).
- d) Non-qualifying expenditure, tax law usually has strict rules as to which expenditure can qualify for the tax relief, so the Production Accountant needs to be familiar with the regulations so that non-qualifying expenditure can be easily identified. Where expenditure does not qualify, the Production Accountant must consider whether this has any possible impact on key ratios which must be met to qualify for the tax relief. For example, the tax relief may require that UK qualifying expenditure must be at least 25% of worldwide qualifying expenditure.