Football finance study shows ‘inadequacies’

Manchester City's Etihad stadium. The club were fined for falling foul of financial fair play rules. Picture: Getty

Evidence gathered for the research suggested that the current financial statements produced by clubs were seen as being of little or no use, amounting to a legally-necessary box-ticking exercise which offered “little meaningful disclosure on key performance indicators like salary costs”.

Overall, researchers recorded “considerable support” for Uefa’s financial fair play (FFP) regulations, although a number of specific concerns about the rules were highlighted.

Fears were raised over the capacity of Uefa to enforce the rules in the face of wealthy clubs and the irony of using financial penalties for those who break financial rules.

The study was conducted for the Institute of Chartered Accountants of Scotland (Icas) by sports finance expert Stephen Morrow, a senior lecturer on the subject at the University of Stirling.

It acknowledges that major European football leagues and clubs have seen “remarkable” revenue growth, fuelled by domestic and overseas media rights in recent years.

But too often that growth has not led to profit, with many clubs reporting substantial losses, escalating debts and even insolvency proceedings.

‘Clubs must match football-related outgoings with football-related income’

It was against this “seemingly paradoxical” background that Uefa (the Union of European Football Associations) introduced its financial fair play regulations, effective from 2013/14, to encourage clubs to adopt a sustainable approach to their business activities.

One key requirement is that clubs report a break-even position over a rolling three-year period. Put simply, they must match football-related expenditure with football-related income.

The Icas study was based on anonymous interviews carried out with finance directors of clubs in England and Scotland, representatives of clubs’ auditors, finance experts and representatives of governing bodies and leagues.

It recorded “considerable support” for the FFP approach adopted by Uefa and for the break-even performance measure. But a number of concerns about the regulations were also raised.

The “primary concern” centred on Uefa’s willingness to enforce its regulations, although Mr Morrow said recent action against clubs like Manchester City may demonstrate its readiness to do so.

Questions were also raised about the logic of imposing financial penalties on clubs who break rules which are supposed to improve club financial management.

The potential for “double jeopardy”, where a club which has been fined once might find it harder to break-even again and thus risk further sanctions, was also raised.

Mr Morrow has made a series of recommendations, including that FFP sanctions should not be financial in nature and that Uefa reviews the regulations to ensure clubs in breach do not fall foul of “double jeopardy”.

The study concluded that the distinct nature of the football industry and its clubs mean there is disproportionate interest in the finances of professional football clubs, compared with other firms.

But it questioned the usefulness of the financial statements which clubs are legally required to produce.

‘Accounts are a box we have to tick’

One club told the study: “(From a) limited company point of view, we’re just doing the accounts because we have to do them... it’s a box we have to tick.”

Some interviewees questioned whether the type of information they contain and the way in which it is presented satisfies the needs of those who follow clubs’ finances.

One adviser said of financial statements: “(Those are) a legal requirement, different by country and it’s not really addressing any of the questions I believe that your typical shareholder would have or that Uefa is trying to get greater transparency on. They’re just two parallel things which are not joined-up in any way.”

Another said: “I think clubs... could do a lot more to explain their financial position to their fans.

“I think sometimes they just shy away from it because they don’t want to admit... we can’t afford (to do certain things).”

In particular, those questioned drew attention to “the lack of quantity and quality of disclosure on player wages, despite its overriding importance to financial performance”.

The author concluded: “In business terms, the majority of football clubs are relatively simple and relatively small business organisations, and for the most part accounting for and reporting on their activities is uncomplicated.

“But FFP has shone a light not only on weaknesses of the business behaviour of some clubs, but also on inadequacies in their financial reporting.

“Evidence from this study suggests that financial reporting in football clubs is compliance driven; a statutory necessity providing some limited assurance to users like suppliers, lenders and governing bodies/leagues, but offering little meaningful disclosure on key performance indicators like salary costs and little evident benefit in terms of decision-making and wider accountability.

“Interestingly, some interviewees did not see this as problematic, suggesting that football club financial reporting is no more or less useful than financial reporting in other sectors of the economy.

“However, an alternative interpretation is that presently financial reporting and by extension the accounting profession is complicit in failing to enhance meaningful understanding of the behaviour, performance and value of these unusual organisations.”

Mr Morrow said later: “The introduction of Uefa’s FFP regulations provides an opportunity not only to improve the financial management of football clubs but also, indirectly, to focus attention on how best to enhance financial communication in an industry with such distinct and engaged stakeholders.”