NICHE WORK!
THE ROLE OF PROFESSIONALS
PROVIDING SERVICES TO
T
FOOTBALL CLUBS
MAY 2012
BPP BUSINESS SCHOOL OPINION PIECE
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– NICHE WORK! – MAY 2012
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PROFESSIONAL SERVICES AND ELITE SPORT
Do you need special qualities to provide professional services to elite sportsmen and women and
their clubs? We talk to some professionals who work with footballers and football clubs and find out
what they think is special about this niche market for professional services. We also consider some
of the ways in which changes to the governance of football might have a wider impact on the
accounting and auditing profession.
Twenty years ago the idea of specialist professional practitioners to meet the needs of sports men
and women was fairly novel. Now a quick search for a sports doctor, or football insurance
generates details of professional services targeting this niche. What does it take to be one of those
experts, in particular for high-profile sports like football? Dr Tom Marshall is a consultant radiologist
and medical director of Global Diagnostics. He has a specialist interest in sports injuries. When he
looks at a scan of a footballer’s knee he sees standard knee anatomy. An auditor looking at a
football club’s accounts has the same options for modifying its audit report as for any other
company, and is looking at accounts prepared using recognised standards.
So, why is there still a niche for these professional advisors? The main issue is the money at stake
but more significantly, the additional scrutiny because the athletes and clubs are in the public eye.
If that footballer’s knee is being scanned as part of a potential transfer, the money involved and the
risks for the radiologist of making a poor decision can become astronomical. Inherent uncertainties
are magnified. Inherent uncertainty has been a state easily recognised by fans of Norwich City
football club, one of the teams we follow with interest. In recent years, Norwich was promoted to
the Premiership for one season then dropped through the Championship all the way to the bottom
of Division 1, to start the 2011/12 season in the Premiership again. Its professional advisors have
to deal with the uncertainties arising from this nail-biting performance. However, even clubs with a
much more secure Premiership berth are dealing with big changes.
FAIR PLAY AND THE PROFESSIONALS
A House of Commons Select Committee
recently scrutinised football’s governance. The
Football League has persuaded all clubs
outside the Premiership to sign up to financial
fair-play rules, including a cap on players’
wages. Most Premiership clubs, meanwhile,
have signed up to UEFA’s rules on financial fair
play. These include a break-even requirement
aimed at establishing financial discipline in an
industry that produces eye-watering losses
despite its huge revenues.
One of the expectations of this requirement was
that the summer 2011 transfer window would
see some restraint for the first time in the level
of transfer fees paid. However, the Guardian’s sport blog reported high levels of spending that were
expected to dwarf the previous year’s (according to The Transfer League website, the premiership’s
disclosed spending was more than double the reported spending in the 2010 summer transfer
window, at £715 million compared to £330 million in 2010). Possible reasons for this highlight some
of the issues facing professional advisors.
For example, there are the idiosyncrasies of football governance. The Premier League is a
standalone self-governing group of clubs that is not directly regulated by UEFA, although many of its
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member clubs are licensed by UEFA to participate in European competitions. When in the
Championship, clubs need to follow the English FA’s financial fair play rules. But when in the
Premiership, clubs only need comply if they want a UEFA licence to play in Europe.
The first season when clubs wanting a UEFA licence will require monitoring under the new rules runs
from August 2013 to May 2014. For clubs that prepare accounts to 31 May, this means the first
monitoring period will be the year ending 31 May 2013. The break-even test will be an average of
three years’ financial results (except for the first outing of the new rules when it will just be two years)
and that brings us back to 1 June 2011.
If we were advising a football club (which we are not), we would suggest changing its year-end to after
the closure of the summer transfer window. If it was 30 September then the first accounting period
being assessed would be 1 October 2011 to 30 September 2013 – meaning the summer 2011
transfer window will not fall under the new regulations.
IMPACT OF FINANCIAL FAIR PLAY
Many clubs have a May year-end. One advantage of this is that the end of the season makes it much
easier to assess whether the club is a going concern. This brings us to another challenge, this time for
the club’s external auditor.
No-one likes a modified audit report, however, one of the gentlest modifications one can do is the
emphasis of matter paragraph just pointing out that the going concern basis has been used, there are
some inherent uncertainties but, fingers crossed, it will all be OK. Under the new rules, an emphasis of
matter modification will bring down the wrath of UEFA. They will then require budgeted financial
statements.
This shows how there is always just that little bit more to play for when sport is involved. One of
the issues for any auditor about issuing a modified audit report is the impact the report may itself
have on the going-concern status of the company. If a football club gets a going-concern
emphasis of matter modification, it is because even after reviewing budgeted financial statements
the auditor concludes that, on balance, the club is a going concern but it is important to read the
disclosures and assumptions made by the directors. The UEFA rule will pile the pressure on
external auditors to declare that the club is, or is not, a going concern – even though an emphasis
of matter modification is designed to cover precisely the inherent uncertainty that is a fact of life for
sports clubs.
Potential conflicts of interest for medical professionals advising a football club are mitigated by the
very clear split between the provision of information and advice, and the decisions made on the
basis of that advice. Dr Marshall explained that the club’s physiotherapists act as a buffer
between the external advisor and the club’s management. Perhaps audit committees should be
mandatory for clubs, to provide a similar buffer for the external auditors.
OPPORTUNITIES AND THREATS
UEFA rules also seem to have made valuing player registrations more problematic. Normal IFRS rules
for intangible non-current assets are that if they are amortised (which player registrations are) they only
need be reviewed for impairment if there is some kind of relevant indicator (like the player being
injured). UEFA rules bring in a requirement to carry out annual impairment reviews, requiring the
comparison of three numbers: the current book value of the player registration (original cost less
amortisation charged so far); the market value of the player registration and a valuation based on
future cash flows generated by that player registration. With the uncertainties surrounding football
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clubs, their future cash over the next five years is hard to predict. Estimating annual market values for
all acquired players is also pretty tricky.
We believe a single firm will come to dominate these player valuations. Multiple sources of
valuation allow too much scope for challenges to the basis and assumptions of the valuations.
Football clubs will want a cheap way of confirming their valuations. Auditors will want an
authoritative valuation source as relatively small fluctuations in the amounts written off could
have serious ramifications. A professional firm could devise a formula to calculate valuations
and use this to produce some sort of ‘Glasses Guide’ for footballers. They obviously face
some risk in that if they undervalue a player there will be complaints and possibly legal action
from the club owning that registration. That is easy to rectify if valuations are generous.
The valuation firm could commission its own due diligence work on players. If that happens, it
will become important for the medical staff involved to establish a good relationship with a
single firm of professional advisors rather than developing links with the club physiotherapists.
Just as a frivolous aside, if we were selling this guide to fans we would have a picture of the
player alongside x-ray images of their feet and knees. With part of the valuation based on the
player’s public image, a table of their extramarital sexual encounters ought, perhaps, to be
included as well.
COLLABORATIVE PRACTICES
Dr Marshall sees annual valuation as an opportunity: “The biggest change over the last five years has
been the increase in the number of scans; annual reviews will increase that further.” He believes that
available technology can be used to create distributed networks of professionals working
collaboratively.
We believe we will also see greater collaboration between a
club’s financial reporting advisors, finance advisors and legal
team. The way different European clubs use different
accounting treatments will inevitably be challenged once clubs
have points docked for breaches or get refused licences. The
variations arise for two reasons: the use of different
accounting standards and the application of judgement in
applying accounting standards. The financial statements, on
which the break-even test is based, allow clubs to use either
their own national standards (local GAAP) or international
financial reporting standards (IFRS). Quoted clubs like
Arsenal have no choice and have to use IFRS. Even
accounts prepared using a common set of standards can
show variation because of legitimate accounting policy
choices and the need for judgement and estimations. One
crucial choice is the decision whether to treat player
registrations as an immediate expense or to capitalise them
and spread the expense over the length of the player’s
contract.
The new rules have already thrown up IFRS controversies. Manchester City has sold the naming
rights for its new stadium to a company owned by the brother of one of the owners. UEFA financial
fair play rules provide for transactions between related parties to be re-stated at market value. UEFA
has to make the tough decision whether this transaction is between related parties and the wider
financial reporting community should be watching with interest. UEFA will need to decide how to
apply the principles of IFRS. If the IFRS are applied literally it will not be treated as a related party
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transaction as siblings are not “close family members”. However the whole basis of IFRS is that the
substance of a transaction is more important than its strict legal form. This is likely to be covered in
the sports sections of the newspapers although technical details of international financial reporting
rarely get much coverage outside professional and academic journals.
Although in the long term clubs will need to break-even, there are some transitional arrangements
that allow up to €50 million leeway, as long as that is funded by equity. One risk faced by UK clubs is
that the cap on exceeding the initial break-even limit of €50 million is in Euros. This creates a Euro
exposure for those clubs that might only have had transactions in sterling. If the exchange rate
fluctuates from an average of £1:€1.25 to £1:€1.11, with the €50 million cap that is a variation of £5
million in what can be spent. Possible solutions include an accounting year end just after the end of
the summer transfer window, so major expenditure occurs at the end of the reporting period when
the average exchange rate prevailing for the year is more certain.
Another solution is to enter into a currency derivative to hedge against the foreign exchange risk.
Counter-intuitively, you would want to avoid adopting hedge accounting for this transaction as it is
important that gains and losses are recorded in the profit or loss for the reporting period.
STAYING OBJECTIVE
Many involved with football, including Professor Chris Brady, author of ‘The Ninety Minute Manager’,
are motivated by a love of the game. Does this matter for professional advisors? Brady’s advice is:
“The only club I would refuse to work with is the one I’ve supported all my life”.
One motivating factor for firms getting involved in providing services to the Premier League
is the international exposure it gives them. As Will Buckley, a barrister and consultant at
solicitors Leathes Prior, with 20 years experience as a football journalist, explained: “The
English Premiership is a global phenomenon. It has a reputation for being a clean bet
because the players’ salaries are so high.” He felt that Fair Financial Play rules would make
little difference to either the game or his professional practice because smaller clubs already
had financial discipline and larger clubs would find a way round the rules.
Objectivity is potentially impaired by the high stakes game that professional advisors to sport, and to
football in particular, are playing. The UEFA Financial Fair Play Rules are not particularly hard to
understand, and you do not need to be a specialist in football auditing to see their significance to
reporting and auditing, but we would not want the pressure of advising football clubs. We mentioned
that for a radiologist looking at an image of a knee, it is just a knee. However if that knee belongs to a
Championship footballer, the radiologist’s professional indemnity insurance is higher than otherwise.
If the player’s team goes up to the Premiership, the radiologist’s first response is going to be a phone
call to their insurance company.
Do you need special qualities to provide professional services to elite sport? Yes, nerves of steel!
AUTHORS
Amanda Williams is a tutor in the BPP Business School, specialising in Corporate Reporting.
Steve Whittenbury is a tutor in the BPP Business School, specialising in Corporate Governance.
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