Friday, 23 April 2010

The gilded stable doors of the Premier League – the new rules that won’t stop the next Portsmouth

The Administrator’s “Report to Creditors” of Portsmouth City Football Club Ltd which was published yesterday is at its heart an idiots’ guide on how to bust a football club in a very short space of time.


Lesson 1:
“Live the dream” and increase your wage bill by 163% in three seasons whilst your turnover only rises 66% (thanks Harry).

Lesson 2:
Spend money on planning for a new ground, fail to finance it and fail to build it (the so-called “scouse gambit”).

Lesson 3:
Let every other cost go through the roof, doubling in only two years.

Lesson 4:
Open and then close a pointless chain of shops, invest in a radio station and start a ticket financing business in order to “diversify your income”.

Lesson 4:
Borrow, borrow and borrow to fund lessons 1, 2, 3 and 4…..

I’m not going to dwell on the detail of Portsmouth’s situation, thankfully there has been a sea-change in the amount and quality of investigative journalism about the financial crisis in football in recent months, but instead I want to show how inadequate the Premier League’s (self) vaunted new rules which aim at avoiding repeats of the Pompey debacle really are.  The Premier League of course accept no responsibility for Portsmouth's problems (or anything else that goes wrong to be honest).  But just to be safe, the league introduced tough new financial rules last September.  Richard "under wraps during the election" Scudamore said at the time: “It's absolutely crucial that these clubs are run as ongoing viable concerns. These financial rules apply immediately.”

The new rules
Rather than reprint all of rules 71 to 82 of the Premier League rule book, here is a very good summary published by the BBC on 18th February (with my emphasis and explanations):

-   Clubs must submit independently audited accounts to the Premier League by 1 March each year, with requirements to note any material qualifications or issues raised by auditors.
-   Requirement for clubs to submit future financial information [i.e. financial projections] to the Premier League by 31 March each year. This will act as an improved early warning system should any club take undue financial risks which may have consequences for future financial stability.
-   An annual requirement to demonstrate to the Premier League board that a club does not have outstanding [i.e. overdue amounts] debts to other clubs.
-   An annual requirement to demonstrate to the Premier League board that a club is not in debt with regard to income tax or National Insurance and payroll taxes [i.e. overdue amounts].
-   These rules are to ensure that Premier League football clubs can meet their obligations throughout a season including being able to fulfil all fixtures, fulfil contractual obligations to the Premier League and demonstrate that they can meet all payments due during a season.
-   Any qualification raised in accounts or risk seen by the Premier League board could result in action to help prevent a club from exposing itself to financial difficulties that may be deemed unsustainable or put at risk the future financial sustainability of a club.
-   Clubs that fall into such financial difficulty could be subject to financial controls relating to transfer activity and/or player salaries.

There are some sensible things in here, especially the requirement to demonstrate that clubs aren't using Her Majesty’s Customs and Revenue as a piggy bank by not paying PAYE and national insurance on time.  Nor of course should clubs be able to avoid paying transfer fees or debts due to other clubs.  And the introduction of these rules is the first time the hands off, laissez-faire Premier League has ever contemplated imposing financial controls on a member club, even if it has taken seventeen years to put the powers in place.

But beyond these small positive steps, the rules are totally inadequate and crucially would have not have stopped Portsmouth FC from collapsing in the way it did.

Don’t rely on qualified accounts and future financial information
The fundamental problem with the new Premier League rules is that the things that can trigger Premier League intervention (other than breaking the two new rules about taxes and overdue transfer fees) are so, so weak.  Intervention can take place if:

Rule 81.1 the club fails to deliver annual accounts to the league by 1st March; or
Rule 81.2 the club fails to deliver interim accounts to the league by 1st March (which set of accounts are required depends on the club’s year end); or
Rule 81.3 the club fails to deliver “Future Financial Information” by 31st March; or
Rule 81.4 the club fails to deliver additional information requested by the Premier League relating to the auditor’s qualifications of its accounts; or
Rule 81.5 the club has failed prove its doesn’t owe HRMC or other clubs money it should have paid; or
Rule 81.6 the accounts supplied are qualified or part qualified by the auditors; or
Rule 81.7 the Premier League Board, having looked at the information supplied by the club doesn’t believe the club will be able in the next season:
Rule 81.7.1 to pay its “football creditors” or employees; or
Rule 81.7.2 be able to play its 38 league matches the following season; or
Rule 81.7.3 be able to fulfil its league obligations to broadcasters

Putting aside the rules about delivering information on time (something tells me even the most rotten club will manage to comply with those), the other main triggers are whether the club’s accounts are qualified or part qualified and whether the PL board thinks the club might not be able to play its matches or pay its football creditors the next season.  This is totally inadequate and no form of “early warning system”. To see why, just look at the Portsmouth situation.

March 2009 – all well in Pompey world?
Under the new rules, to play in the Premier League in the current season, Portsmouth would have had to file accounts with the league last March.  They actually had their 2008/09 accounts signed off on 27 February 2009 and crucially, there was no qualified auditor’s opinion in the accounts.  Grant Thornton did not issue a qualified opinion about the accounts because they were convinced by the club’s board that although the club had massive liabilities, loans would not fall due before the opening of the next transfer window when player sales could be made.  No doubt the club had a business plan at the time the accounts were signed off which it shared with its auditors and helped satisfy them that the business would continue as a going concern.  Under the Premier League’s new rules, this plan would have to be submitted to the league board of course.  But would the Premier League board have disagreed with the club’s own auditors about the viability of the business?  It would be an extraordinary, effectively inconceivable thing to do.  So the whole new system now relies on the auditors identifying a problem.  If they don’t, whether through their own fault or because they are misled by the management, the whole new system falls over.  No red lights flash.

You may be wondering if the collapse of Portsmouth was a sudden event, unpredictable by anyone in March 2009.  Since the Administrator published the details of the club’s financial position, journalists have expressed shock and dismay at the £122m of liabilities on the balance sheet.  If they looked a bit closer, they’d actually see that the last published accounts showed even greater liabilities.  You can see this in the following table (I have kept the classifications of assets and liabilities as they are described in the Administrator’s Report to Creditors and the Report and Accounts respectively, but the total numbers are completely comparable):


Current
May 2008
Liabilities from administrator


Owed to Portpin
-14,201,000

Owed to finance co.s
-1,035,943

Owed to financial instituions
-14,157,518

Staff holiday pay arrears
-100,000

Unsecured creditors
-92,698,695




Liabilities from 2008 accounts


Short term creditors

-114,909,135
Long term creditors

-22,135,100



Total liabilities
-122,193,156
-137,044,235



Assets


Freehold property
7,729,516
8,733,958
Other fixed assets

5,717,295
Stocks

152,360
Debtors

17,033,110
Financed Assets
1,914,630

Player transfers
14,157,518

Players
19,514,418
48,354,597
Other
17,954,770
203
Cash at bank
1,463,701
9,537,363






Total assets
62,734,553
89,528,886



Net liabilities
-59,458,603
-47,515,349

Now the net position has indeed worsened (unsurprisingly the club lost money between May 2008 and today), but the key point is that when these accounts were signed off by the auditors in 2009 (when no doubt the Premier League also would have nodded them through if its new rules had been in place), the situation was already hopeless without huge injections of new capital.  None of the Portsmouth’s recent owners had or were willing to inject the money required of course, but none of this is even considered in the Premier League rules and most importantly there is absolutely nothing in the rules to prevent a club getting into such a state in the first place.  As long as the accounts aren't qualified, all is well....

The answer of course is to take a far more fundamental approach to regulating football.  Specifically, English football needs binding rules limiting wages and salaries as a percentage of turnover, and limiting debt as a multiple of profits (with due allowance for borrowing for proper football investment like Arsenal building the Emirates stadium).  Such rules would have gone a long way in stopping Portsmouth or Leeds or Cardiff or Chester (or dozens of the other 50 professional clubs that have gone into administration or CVA in the last twenty five years) ever getting into severe trouble in the first place.

Preventing clubs running up debts at the expense of the taxpayer or other football clubs is a very welcome step, but it doesn’t go nearly far enough.  So next time Richard “over £900k a year but I’m not bailing out the St John Ambulance” Scudamore or Premier League spokesman Dan Johnson wax lyrical about the new “early warning system” and “a set of regulations designed to protect the viability and sustainability of the clubs” remember that these rules wouldn’t have saved Portsmouth and will do little or nothing to save the next football club which falls victim to greed, stupidity and mismanagement.

LUHG


9 comments:

Diem said...

thanks anders.

I feel that (some of) the blame laid at Harry's door is a bit much - it's not like he went of with Storrie's credit card and racked up a massive bill.

I'm not even sure how much involvement he had in negotiating the transfer fees / wages (was probably in the Panorama documentary but I can't remember). But I can't believe he just decided to sign a load of players - he must have been given a budget (or confirmation that there was no limit)?

I think this contrasts with other clubs where the manager provides a list of targets, who then go off and negotiate the transfer. Examples include David Gill at United, as well as the way that City operate: famously Crook's complaints that Milan 'bottled' the Kaka transfer he was trying to complete, I doubt Mark Hughes was sat at that table - nor should he be.

However, this is an aside to the fundamental point in your post, that the FA had all the information they needed to see that Portsmouth were in dire straits. The question of accountants' competence is a recuring theme in all major recent business failures - do they have sufficient industry knowledge to be able to challenge the board. Looking at the value of players on the books as of May 2008 (£48m), it seems that those numbers weren't far off - the sales of Crouch, Defoe, Diarra et al did net a sizeable amount of money, but whether the club could continue to find such amounts in *future* years to meet commitments coming due would have been more dubious.

Carl said...

Still pisses me off that these bastards, with the help of referee Martin Atkinson, robbed United in that FA Cup game at Old Trafford in 2008. The only other teams left in the Cup were West Brom, Barnsley and Cardiff. Do you realise we should have won our second Treble in 2008? Denied by a shitty little club punching well above their weight, spending obscenely beyond their means, trying to "live the dream" (copyright Peter Risdale.)

I was listening to the Guardian football podcast and one of their pundits said that according to the creditors' report, amongst the money Portsmouth owe are "ransom payments" FFS!

Am I right in saying Tottenham paid them £1m for a player who they promptly sold to Stoke instead and pocketed Tottenham's money?

Everything about the way that club was being run is shady. You've got to feel for Portsmouth fans. Shame on Scudamore and the Premier League fat cats for letting this go on.

For the record, I think Redknapp and Storrie must take the lion's share of the blame. They ran the club into the ground then got out before the shit really hit the fan, like rats deserting a sinking ship.

David Rourke said...

Apparently that is correct re the goalkeeper and the payment to Spurs. Basically 1m compensation for him going to Stoke instead of Spurs!

I currently live in Melbourne, where the Portsmouth story is reported with some bemusement. Out here, the principal winter sports are Aussie Rules and Rugby League. In both cases, the governing body is very hands-on regarding club management, assisted by mechanisms such as power to independently audit clubs, salary caps and a limited / non-financial transfer market (ie players are traded rather than money paid).

The system isn't perfect - salary cap breaches (brown envelopes full of cash) are commonplace in both codes, Melbourne Storm have been stripped of various Rugby League titles this week for such breaches. Nor would such restrictions easily sit with EU legislation.

The strength Down Under, though, is that the governing body is far more in control and intentionally so; seeks to promote an open and fair competition; this concept is accepted by the clubs; and appropriate penalties apply for breaches of the rules.

Scudamore could learn a lot from a couple of weeks in Melbourne and Sydney, talking to the sports administrators here. But the English clubs would never willingly agree to such shackles, would they?

andersred said...

Sense as always Diem. "'arry" R always seem to get an easy ride from the media. You're right he was given a budget, but the whole "industry" is rife with people (managers included) absolutely refusing to point out that the Emperor is stark bollock naked.

Two things make football so easy to regulate 1) the biggest cost is player wages and 2) the employment of players is regulated and recorded. So each FA knows who employs who and when, how much was paid and what the agent got (Tevez like cases being the exception).

This means that a wages/turnover (last year's reported turnover perhaps) is a piece of cake to monitor and regulate.

"Mr Storrie?"

"Speaking."

"FA Transfer Processing team here Sir, we've just received the transfer documentation for Zzzzxxxxyyyy, the young Moldovian midfield enforcer. Just made it in before the window closed."

"....and? Paperwork's OK isn't it?"

"Yes Mr Storrie you've met the new requirement to submit the full signed contract with player, but it says here that Mr Zzzzxxxxyyyy is to be paid £2m a year sir."

"...so?"

"Well your total contractual wage bill of all registered players is £35.2m. This would take it to £37.2m and that would be more than 60% of your £59.9m turnover last season sir. We cannot progress the transfer unless you sell or release other players and come back below the limit."

Now that's not hard is it?

anders

DR said...

I couldn't agree more that that's what should happen.

However, without a change of attitude from the Premier League and its clubs, such a reasonable and sensible rule won't be introduced.

Instead, if such a rule was proposed, the clubs would spend cash on smart-a*se & expensive lawyers, to advocate the clubs' right to spend spend spend, to 'keep up with European clubs' and 'live the dream', whilst doubtless leaving the St John Ambulance invoice in the 'In' tray. (Does Glazer pay the St John bills on time, do we know?)

I hope that my cynicsm proves to be misplaced!

Diem said...

I've often wondered why the FA don't take more of an active role in transfers - it would be extremely easy to mandate that all transfer fees, and also agent payments, *must* flow through their accounts - each club would have a designated account at the FA, through which fees would be paid and received.

At a stroke, that would also cut down on the dodgy use of agents - since all agents must be paid through the FA, and payments by the club to the agent must therefore be illegal!

Anonymous said...

didn't the former owner of Chester fail the "fit and proper person" test, what was he up to for that to happen?

Carl said...

Dear God, I thought they were bad for pocketing the money Tottenham paid them for that goalkeeper then selling him to Stoke instead. The latest is they raised money for cancer charities then, you guessed it, kept the cash for themselves.

http://www.newsoftheworld.co.uk/sport/793895/Shameful-strugglers-pocket-charity-money-raised-for-cancer.html

Quite pathetic really.

andersred said...

Carl,

That is bad. And if true, not even keeping records of it is very, very bad.

Don't forget "football creditors" - players, other teams, the PL itself. Have to be paid out in full before people like that get offered a few pence in the pound.

anders