For the, perhaps small, Venn diagram overlap of people that like both football and accounting scandals, the last few weeks have been an exciting time. Both the back pages and business sections of newspapers were reporting that the prominent football club Manchester City has been found guilty by the Premier League of breaking all but one of the 115 rule infringements for which they were being investigated.
Under financial fair play rules, the Premier League has restrictions on losses that clubs can make. ‘Relevant income’ must be within a reasonable parameter of ‘relevant expenditure’. Importantly for this story ‘relevant income’ includes things such as ticket sales and sponsorship arrangements, but does not include direct funding from a club’s owners. Any direct funding from a club’s owners should be treated as either equity injections or owner grants, not operating income. This is important as funding from owners is treated very differently when calculating if the club has made a loss or not.
These rules are there to prevent football clubs spending more than they can afford and going bankrupt. There may also be some intention to prevent wealthy owners of clubs being able to completely take over the league by buying all the best players, although a more cynical interpretation is that the rules entrench the existing wealthy clubs in their currently good positions. Clubs found guilty of breaking the laws can face sanctions such as fines and points deductions, or in extreme cases expulsion from the league.
Manchester City has been found guilty of consistently breaking the financial fair play rules to the tune of £900m on a sustained basis between 2009 and 2018. It is alleged that what should have been shown as payments from the owner Abu Dhabi United Group (ADUG) were shown as ‘relevant income’ and that ‘relevant costs’ were also hidden. This overinflated income and understated losses, meaning the club showed it was meeting financial fair play rules when actually it wasn’t. Manchester City continues to deny all accusations of wrong-doing.
The club is accused of using more than one method to do this. This includes recording £360m in sponsor fees, when only £43m was actually sponsor fees (the rest came from the club’s owners). The difference is down to the club either not stating the true economic form of contracts, or simply inventing sham contacts that never existed. In a playbook that Enron also employed, the club is accused of the inappropriate use of related parties to hide expenditure and misstate income. This included ‘The Fordham Agreement’, ‘Fordham’ being a third party that was in reality part of ADUG.
Those of us who are trained accountants are taught from day one that the purpose of published accounts is to show a ‘true and fair view’ of the financial position of an organisation. Sins of omission are just as important as sins of commission: if you do not show something which, if you had shown it, would affect the reader’s ability to form a true and fair view, you are not doing your job properly.
Related party disclosures in accounts are important because a related party is not independent of the main organisation. Transactions with related parties are often not done on ‘normal’ market terms and if not interpreted in the right way could lead to a not ‘true and fair’ view of an organisation’s financial position. Manchester City stands accused of not disclosing that entities were related parties, and in a way that would not allow a user of the accounts to properly understand the club’s financial position. It is clear that the Premier League believes them to have acted deliberately and recklessly, and this is not viewed as a mistake.
Has the club broken any laws? It is important to be clear that, whilst some fans may think football is the most important thing in life, breaking ‘the laws of football’ is not actually the same as breaking ‘the law’. Breaking Premier League rules is not a criminal offence that is going to result in spending any time in prison, even if it does get you relegated or kicked out of the league. Many rules that apply to the Premier League do not typically apply to companies or other organisation – companies do not typically have restrictions on losses they can make for example. Deliberately falsifying your accounts and/or lying to auditors, however, are criminal offences. So, it remains to be seen whether further charges may be brought.
Sometimes it pays to go back to what you learned in day one. Your accounts should show a true and fair view of how it is. Rules around what you have to disclose in your accounts are there for a good reason. Those who don’t follow these rules, even popular football clubs, should face the consequences.
Arlingclose has extensive experience advising on accounting matters. If you require any assistance please contact us at info@arlingclose.com or on 08448 808 200.
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