A legal battle over accounting practices that has enveloped indie company LMNO Prods. has stirred a hornet’s nest in the tight-knit community of producers of unscripted television.

A number of prominent producers are dismayed at Discovery Communications for what they see as ruthlessness in its handling of a lawsuit and federal investigation into allegations of pervasive fraud in LMNO’s business operations going back more than a decade.

Beyond the support they’ve expressed for LMNO leader Eric Schotz, producers are on edge that fallout from the investigation could leave them vulnerable due to financial practices regarding production expenditures that have long been accepted as the industry norm.

Moreover, producers are up in arms about the prospect of shows they developed being taken over by Discovery or other large cable network groups, which hand them off to in-house production entities. That’s possible in many cases because of the traditional structure of unscripted-series deals, in which outside production entities are essentially providing work-for-hire services on shows the network owns outright, even if the producers developed the show from scratch.

Discovery counters that such concerns are wildly overblown. But executives acknowledge that there is a need for consensus on how producers account for various costs associated with production, among other issues.

“Discovery has a long-standing commitment to the growth and success of our independent production partners. They create the majority of our content and play a vital role in bringing our stories to life for viewers around the world,” says Marc Graboff, president of global business and legal affairs, production management, and studios. “We want everyone to be successful and look forward to engaging in productive conversations with the broader production community to discuss specific ways we can support the continued vitality of all of our businesses.”

Graboff is working with the Nonfiction Producers Assn. trade group on an agenda for a meeting to discuss the festering problems. PactUS, a trade association launched last year as an extension of the powerful PactUK organization, is also looking to address the concerns of its members.

“If you’re a producer, you have a healthy fear that networks will take more of the work in-house,” says John Ford, general manager of the NPA. “There’s a tension there that’s understandable.”

That tension comes at a time of transition for program buyers and sellers. A wave of consolidation has swept through unscripted production entities during the past five years. Even small outfits commanded high multiples in acquisition deals as globally focused production conglomerates like ITV, Endemol Shine, FremantleMedia, Tinopolis, and All3Media (partly owned by Discovery) sought to bring production talent under a single roof to achieve greater scale in selling to TV buyers worldwide.

But that burst of buyouts came at what now appears to have been the peak of the U.S. cable TV marketplace. In recent months, traditional MVPDs have been reeling from heightened competition from streaming competitors. Cable networks are facing tough adjustments on the advertising front as live ratings fall and viewers embrace time-shifting options. A fragmented TV marketplace means it’s becoming harder and more costly to bring audiences to any new program.

Cable networks used to enjoy profit margins as fat as 50%, but not anymore. That pressure has trickled down to program suppliers, who are tasked with delivering better shows despite having budgets that have been reduced or stagnant for the past few years.

“There are headwinds through the whole cable ecosystem,” says PactUS president David Lyle, who was formerly CEO of National Geographic Channels. “Increasingly, more costs are being shoveled toward the production companies by some buyers. The margins are under relentless pressure.”

Independent unscripted production companies traditionally have earned a 10% profit margin on shows produced for cable — a fee that is baked into the show’s budget agreement. It has been the norm for years that “padding” is accepted in situations where producers can squeeze out some savings without affecting the quality of the production. One industry veteran offers this example: If a show’s catering budget is set at $1,000 but comes in at $650, the extra money remains with the producers. Similarly, a production company might charge its shows a weekly rental fee for use of a copy machine that the production company owns outright.

These practices, which transpire in a gray area of financial accounting, were rarely questioned before the LMNO case blew up in June. After the FBI contacted Discovery in March as part of its investigation, Discovery terminated LMNO as the production entity on six series it supplied to Discovery networks, including the TLC hit “The Little Couple.” That move led to LMNO filing a lawsuit against Discovery. LMNO asserts that the irregularities with its accounting came as the result of fraud and embezzlement by its longtime accountant.

The LMNO mess has galvanized veteran producers to share grievances about what they see as an industry trend toward increasingly onerous terms being forced on producers by Discovery and other big buyers such as Scripps Networks Interactive, parent of Food Network and HGTV.

One issue that cuts across most major cable networks, producers say, is the increasing flood of notes on shows and demands for multiple versions of episodes — all of which add to costs that usually come out of the producer’s pocket.

Producers emphasize that the development of new series can take months, if not years, and require significant up-front investment before a project is ever set up at a network. Companies often fund talent deals on their own, producing sizzle reels and accomplishing other pre-production work before the show is shopped to buyers. In the view of the NPA and PactUS, that activity amounts to an invaluable R&D service for networks. But producers of unscripted shows are rarely reimbursed for those costs — unlike major studios and networks under the generous terms for scripted series. The nightmare scenario for an unscripted producer is making that major investment, only to have the show taken away by the network after a season or two.

Beyond the LMNO case, two recent incidents involving shows moving from original producers to Discovery-owned entities have set off alarm bells. “Outdaughtered,” a TLC show about a couple with quintuplets, shifted from developer Boardwalk Entertainment Group to Discovery in June, after its first four episodes. Animal Planet’s “Treehouse Masters” moved from Stiletto Television.

“The scary part for producers is that you can work really hard to develop this intellectual property, and the networks can arbitrarily take it away from you,” says the NPA’s Ford, a Discovery alum. “There’s a perception on the part of producers that it is becoming more likely to happen.”

Discovery sources scoff at the notion that they would threaten the success of a hit show just to save $20,000-$30,000 per episode. The sources emphasize that only a handful of the hundreds of shows airing across Discovery’s 13 U.S. networks have shifted producers in recent years. Some of those were transferred to other outside producers, they say, and those moves were undertaken only when execs believed the shows would be significantly better served by the change.

In the case of “Outdaughtered” and “Treehouse Masters,” from Discovery’s perspective, there were problems that required immediate action on both shows. Moreover, in one recent case, a show was transferred from a Discovery-owned banner to an outside producer because of its creative needs.

Some producers have the clout to be contractually “locked for life” on a show; this generally means the producer will continue to receive the 10% premium fee, but such an agreement doesn’t prevent the network from moving the show to another producer. Scripps Networks Interactive has recently signaled to producers that it is tightening up on granting “locked for life” clauses in the first season of a show — a move that has added to the unease in the production community.

“We are always evaluating what is best for our business, including provisions within our agreements with external producing partners,” said Jon Sichel, Scripps Networks Interactive’s managing director of global commercial affairs.

On the network side, sources see mounting friction between buyers and sellers as a repercussion of the spate of high-priced acquisition deals. Companies that were sold under the promise of generating margins of better than 10% on productions are now on the hook to deliver to their new parent companies. The pressure that some producers are facing is all the more reason why Discovery supports a meeting of the minds on narrowly defined issues such as accounting practices and overhead costs.

“We don’t have a magic fix. We’re not an industrial body trying to bring industrial action,” Lyle says. “What we’re trying to do is work with channels and producers so there is a more healthy ecosystem serving both sides.”