Thursday, April 22, 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