What exactly is wrong with football accounting? « Untold Arsenal: Arsenal News, supporting the club, the players and the manager
Arsenal on Twitter @UntoldArsenal
Untold Arsenal on Facebook here
Victory Through Harmony
By Phil Gregory
Following on from my last article, looking at the debts of United and Arsenal, we go onwards with this piece where I’m going to have a look at whether football should be treated as a totally unique business. The deadline for report submissions is the middle of next week, so I’m going to try and finish off this series of articles before then.
When you consider the complexity of football when compared to a more traditional business, I have always found it strange that it is subject to our current “one size fits all” model of legislation. Few other businesses pay vast fees to secure employees, nor do they pay their employees in a complex manner that includes basic pay, image rights and performance-related bonuses, and yet no special demands are made of football clubs to disclose this clearly in their annual financial statements.
Naturally, this has big implications for financial transparency within the industry. With outside observers relying on measures such as wages as a percentage of a club’s turnover to gauge a club’s sustainability, the lack of breakdown of the “wage” mean that you struggle to draw any reliable conclusions. A dramatic rise in wages could be because of a heavy outlay on players and the resulting salaries, or it could be because of high bonus payments due to unprecedented success. This confusion between wages and basic salaries arises despite the fact that HMRC knows who earns what, yet this information is not made public. Now, I don’t think that club accounts need to detail exact wages for each and every player (there’d be issues for the clubs in terms of competition for one thing) but more breakdown than we have at the moment is absolutely required.
The lack of transparency goes beyond simply salaries, however. Given the multi-million pound transfer fees paid for many players and the significant percentage of turnover this represents for many clubs, such expenditure has a bearing on the club’s financial situation going forward (just ask Leeds and Portsmouth). Despite this, there is no requirement to detail in club accounts the amount(s) and nature of incoming/outgoing transfer fees for a financial year due to the unsurprising fact that accounting regulations were simply not written with current trends in world football in mind. The sole measure of transfer spending offered in the accounts is the amortisation charge (transfer fee divided by length of contract), which can be used to gauge trends in transfer expenditure but little else
Player/football trading figures are given in club accounts but are unreliable, often including amortisation and other charges to mask the amount spent on transfers. In addition, amortisation offers the club the ability to spread the cost of a player in the profit and loss account over the life of their contract, which doesn’t really reflect when payments are made. Of course, as a cash-cost, such information should be ascertainable by looking at the cash flow statement (which covers actual money coming in and out over the year), but figures are often masked by being grouped with other items, or seemingly not even given. Regardless of these issues in the cash flow statement, it is my belief that the profits or losses of a club for a specific year should reflect much more accurately the transfer expenditure for that year. From all this, it’s pretty clear that the “one size fits all” system of accounting standards is inadequate to accurately account for a club’s two significant outgoings, wages and transfer fees. It is my belief that the suggestions made here would make the finances of clubs much more to transparent, to the benefit of fans, regulators and clubs themselves.
And now we get to the really silly stuff. SSAP25, which covers the reporting of the various segments of a company’s revenue, states that: “…in the opinion of directors, the disclosure of any information required by this accounting standard would be seriously prejudicial to the interests of the reporting entity, the information need not be disclosed”[1] (emphasis mine). So what this is saying is that clubs can decide not to breakdown their turnover into its constituent parts if they choose not to, severely limiting the ability of an outside observer to understand the inner workings of any football club which exercised this right. Notable clubs exercising this right recently include Hull City and Chelsea, which probably isn’t all that surprising.
In the wider business world, directors need to have the ability and freedom to act in the interests of their company and there are arguments that forced disclosure would at times be a hindrance in this regard. What we have to remember here is that football clubs are unique entities with responsibilities to their supporters, and the flexibility that directors possess in other lines of business should not be granted to football with this in mind
How then would I fix these issues? Basically, what we need are extra accounting standards that build on the foundations of those already in place. It has to be a requirement that clubs offer a full breakdown of their figures, despite what is said in SSAP25 and in addition to suggestions made during the article, I would also introduce reforms that would standardise the categorisation of match day, commercial and broadcasting revenue. While this doesn’t sound like a big deal, it makes it possible to compare two club’s revenues (you could feasibly put executive box sales under match day or commercial revenue for example) and unless all clubs go by the same rulebook, inter-club comparisons are tricky.
There are also numerous minor adjustments to accounts that I won’t bore you with here, but put together they would make football accounts standardised, to the benefit of all. On the whole, these reforms would herald a new era for football finances in England, and would allow clear and accurate assessment and comparison between clubs by both authorities and fans.
[1] http://www.frc.org.uk/images/uploaded/documents/SSAP%2025.pdf Quote taken from paragraph number six, found on page 3 of the document itself.
Elsewhere in the empire…
Arsenal and Man U: a comparison in debt
The Commons Inquiry into Football Governance
George Allison was our manager – and a successful one at that. He was also the first person to do a radio commentary on a football match. And a journalist. And yet, as we have exclusively revealed, he re-wrote Arsenal’s history in way that is, shall we say, not quite right. Why did he do it? There’s some background and a suggestion in this article from the new George Allison season on the Arsenal History site.