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Derby County FFP and the EFL

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  • Smith Cooper had the naming rights of Derby's North Stand and quoted Andrew (Andy) Delve as saying " with all of us based in the Derby office being such huge Rams fans, having the North Stand named after our firm really is a dream come true."

    Source DCFC website.

    I don't know whether they still sponsor a stand.

  • @NiceCarrots said:
    Smith Cooper had the naming rights of Derby's North Stand and quoted Andrew (Andy) Delve as saying " with all of us based in the Derby office being such huge Rams fans, having the North Stand named after our firm really is a dream come true."

    Source DCFC website.

    I don't know whether they still sponsor a stand.

    Smith Cooper advised Mel Morris on the Investor Buy-out of BriefYourMarket Ltd, Derby a developer of marketing and communications
    Smith Cooper Corporate Finance provided deal advice to existing director Mel Morris on the acquisition of Derby County Football Club Ltd
    Restoration Partners, the boutique technology merchant bank, is pleased to announce that one of the world's most successful technology entrepreneurs, Mel Morris, has made a significant investment in Restoration Partners and joined the firm's Advisory Board with immediate effect.
    David Nelson, Advisory Partner at Smith Cooper project managed the investment on behalf of Mel Morris and Andrew Borkowski of Geldards LLP provided legal support.

    That’s five minutes

  • Getting a bit tinfoil hatted here. He’s an auditor. If he wants to cheat the books in favour of the team he supports the consequences are dire. I’m not sure whether any fan would risk their livelihood they have worked so hard for to keep a sinking ship afloat for a few weeks. Derby are (probably) going to go through a takeover in the coming weeks and any potential owner will go through the books with a fine tooth comb and any nonsense will come to light pretty soon.

  • You would expect an auditor to have full understanding of the industry and its accounting conventions. I would be surprised if the auditor hadn't discussed something so pertinent to FFP. Either he has been disingenuous or is feeling rather embarrassed.

  • Haines Watts have been auditors at Wycombe for as long as I can remember. They have a local office and have also been a long-term sponsor. It seems to be one of those classic football club relationships, where there's doubtless a bit of trading off of fees and a genuine spirit of partnership, much as you might have with a caterer or local brewery. A cursory google has Haines Watts talking about their "friends at Wycombe Wanderers". I must admit that I assumed there would be fans in the firm, but maybe not.

    Of course, when it comes to auditing, such closeness can create issues and problems of perception, but I can't remember anybody asking whether Haines Watts' going concern qualifications during the hard years were based on over-generous assessments. We probably assumed that the need to demonstrate professional standards would ensure fair and proper opinions, but maybe fans will be lobbying the Trust directors on the issue of auditor independence now that they are so concerned about the principle.

  • In the 70's a journalist who was a Man Utd fan did a documentary accusing the club of having a slush fund for signing young players (which was illegal). So sometimes the fan may bring up things the club doesn't want publicised.

  • Our Frank has surely missed the point. Wycombe have not been accused of breaking or bending financial rules, nor are we under investigation for such alleged malpractices. Derby have been accused and they are under investigation, hence the unease about auditor independence.

  • so to be clear, independence on the part of auditors is essential, but only after there's been some malpractice?

  • @our_frank said:
    so to be clear, independence on the part of auditors is essential, but only after there's been some malpractice?

    Auditors, accountants, lawyers etc have an obligation beyond their employer to uphold the laws and regulations. If they chose their favourite sports team over their profession then they will not be partaking in their profession any longer.

  • I can’t believe it’s not a league rule now no wonder football and especially the championship is in a shambles

  • @TheAndyGrahamFanClub I agree. And that is what we are relying on in football at present, but it doesn't seem to be enough for some on here, or in the commentariat.

    That's fine, but if instead we are going to look for auditors, accountants and lawyers to be fully independent of clubs, that needs to be of all clubs, including our own, and not just at Derby after they've cooked the books.

  • Apologies for misunderstanding, my error. What I was trying to say is that when a club has been charged in this way the authorities should bring in an auditor who is completely independent, thus removing any possible accusations of bias towards any of the parties involved.

  • @glasshalffull Fair enough, Sir. Thanks.

  • @glasshalffull said:
    Apologies for misunderstanding, my error. What I was trying to say is that when a club has been charged in this way the authorities should bring in an auditor who is completely independent, thus removing any possible accusations of bias towards any of the parties involved.

    To be independent does that auditor need to hate football or just support another team? Either brings different understanding issues. Neither are immune to influence from the client which is actually the main problem here.

    Maybe in the interests of sport Derby's books should be audited by the firms representing Derby, Wycombe and Sheff Wed. Best of three wins

  • Not sure how 'independent' someone can be who has had a 20 year relationship with a fee-generating Derby club chairman, especially if they describe themselves as "being huge Derby fans."

    Once you add in (father and son?) a series of Delves signing off on the accounts and sponsoring a main stand then this must surely raise a flag?

    Well, it would do anywhere else apart from Planet Football...

    Was there nobody else capable/willing to sign off on the accounts?

    What possessed Derby to amortise in a different way to the other 91 clubs in the football league if not to derive a competitive benefit?

    The 80:20 rule whereby 80% of the fees are likely to be generated by 20% of the client base may provide us with the answer.

    People have a tendency to see other peoples' point of view especially when bonuses, and those of their fellow partners, are dependent on a client's goodwill.

    Most clubs, including us previously, operate on a FIFO basis, the perfect Petri dish for self-made, uneducated despots with sociopathic tendencies.

  • Your right @NiceCarrots The price of football podcasts are excellent and are a great place to go if people who want to know where Derby are and how they got there.
    What does seem obvious is that as soon as the EFL brought in FFP some clubs began searching for loopholes like selling the stadium to a company owned by the chairman.
    Derby did that and changed the way player amortisation was calculated they got away with one but not the other.

    People have a tendency to see other peoples' point of view especially when bonuses, and those of their fellow partners, are dependent on a client's goodwill.

    Agreed the amortisation could have been portrayed as a matter of opinion would that it be so simple as a straight cooking of the books.

  • @NiceCarrots said:
    Well, it would do anywhere else apart from Planet Football...

    If you really believe this you’d be shocked if you found out how the big audit firms generate the majority of their income.

    The 80:20 rule whereby 80% of the fees are likely to be generated by 20% of the client base may provide us with the answer.

    There is no suggestion that the fees from Derby are more than 20% of the income of Smith Cooper, who are one of the biggest 50 accountancy firms in the UK.

  • There may be some misunderstandings of what an auditor does in here. Now, I’m not even vaguely familiar with the world of accountancy, but I’m 90% sure an auditor can’t “falsify” anything or “cook the books”. However, I’m also aware of some spectacularly suspicious auditing done by the big firms like PWC etc. Can anyone who works in this field explain exactly what an auditor is able to do beyond simply overlooking irregularities?

  • Some might argue 20% is not an insignificant figure.

  • Well they aren’t 20% either.

  • @drcongo said:
    There may be some misunderstandings of what an auditor does in here. Now, I’m not even vaguely familiar with the world of accountancy, but I’m 90% sure an auditor can’t “falsify” anything or “cook the books”. However, I’m also aware of some spectacularly suspicious auditing done by the big firms like PWC etc. Can anyone who works in this field explain exactly what an auditor is able to do beyond simply overlooking irregularities?

    I was once told 80% of the documentation is bog standard. The main thing they do is sign to say the books have been prepared in the correct way having checked them out and the processes that lead to their creation. They don't produce the books, that's where the independent bit comes in, they sign to say they have checked them and they see nothing wrong with their preparation. If they were found to have knowingly turned a blind eye or actively ignored wrong doing (which has happened in the past as you say) they would be held accountable by the law, and by officials of Derby (ie "it was just a rogue accountant, we paid you to check this") , shareholders, and all of their creditors , HMRC, the lot.

  • FSA for example would also take a very dim view, firm would be fined, potential jail time for those involved, reputation damage etc...

  • Not strictly true Strongest.

    The clubs statutory accounts are prepared by the clubs accountants.
    The auditor checks that they are reasonably accurate and comply with accepted accounting principles set down by accountancy bodies
    The auditor owes a duty solely to the shareholders of the company. He owes no duty to anyone else - eg HMRC or in this case the Football League unless the Football league has specificially commissioned them to do some work on their behalf.

    The auditing firm will undoubtedly have an internal professional standards department which keeps an eye on its partners to ensure their work is up to an acceptable standard. It is likely to have kept a closer eye on high profile clients especially loss making ones like Derby.

    The accountant himself and the firm are ultimately liable to the Institute of Chartered Accountants. If their work is found to be materially sub standard it can have severe consequences for the partner and whole firm

    In this particular case, I understand it revolves around write down of players transfer fees.

    If a company buys say a machine for £1m that it expects to last five years and then be scrap, it would charge £200k per year to its profit and loss account each year. If however it could reasonably estimate that after five years it could sell it for £500k, then only 1/5 of the expected loss (1m -500k) - £100k would be charged to P+L each year.
    (Of course it is possible in the first instance that the machine may blow up after 1 year while still valued at £800k in the books in which case the full £800k would need to be charged to P+L in that year. )

    The same principle applies to player registrations as I understand it. Sign a player for £1m on a five year contract and assuming the player remains on the books and not permanently injured, normally £200k would be charged to P+L each year.

    Derby accounting seems to have been that their policy would be to sell the player no later than the end of his fourth year on his contract at which time they reasonably expect to earn £500k on the sale. Therefore loss of value to be charged to P+L is (£1m - 500k)/4 years = £125k per year.

    From a pure accounting point of view, as long as assumed resale values are reasonable, I can see the logic of the accounting treatment adopted and after checking the numbers, I can see the logic of the auditor signing the accounts as fair and within accounting standards.

    The EFL may have accounting rules that require a specific accounting treatment for player registrations. In which case it is the responsibility of Derby County to either prepare its statutory accounts on that basis OR prepare different figures for the EFL to the ones used for statutory accounts purposes.

    Either way unless the EFL requests and pays for a report from the auditor that the figures have been prepared in compliance with their rules, then the auditor has no responsibility in that respect.

    hope that helps @drcongo .

  • edited June 2021

    While there may be a logic behind Derby’s approach to amortisation I don’t think it is in line with the accounting standards, hence all the fuss.

  • @DevC however a player, unlike the machine, has a say in whether he agrees to a transfer. He could simply wait for his contract to expire and then leave on a Bosman for no fee. Hence the norm to write down the total registration costs (transfer fee paid, agent fees etc) over the contract period.

    This I believe is the crux of matter - can you assign a realistic 4th year value when you have no guarantee of being able to offer the “asset” for sale? And if you can’t guarantee to offer for sale, whether realised or not, then the practise of straight line amoritisation as used by all other clubs, and Derby up until their change of method, would be that expected by the EFL to ensure a common method of establishing FPP principles.

  • I am not sure this forum wants to go down the road of a technical accounting argument. I'll respond once more and then leave it to the EFL experts to unravel. I certainly dont know what EFL rules are in this respect.

    To make the point though again. The auditor needs to make a reasonable judgement that the statutory accounts in his opinion have been prepared in accordance with accounting principles. His opinion is solely given to the shareholders of Derby County and he is accountable purely to them and to his regulating accountancy body for that opinion. I can see how that opinion was fairly reached.

    Just to quickly answer Carrick's point. He is right about the uncertainty of being able to sell a player in year four but then there is always uncertainty about assessing the future. In the machine example , while I may expect to sell the machine in five years time for £500k, when five years actually comes the market may have changed, technology moved on and the machine now valueless. Did that make the accounting treatment adopted in year one wrong?

    Worth perhaps looking at each years accounts if the player was indeed sold for £500k in year four with each accounting treatment.

    In conventional accounting

    year one loss 200k
    year two loss 200k
    year three loss 200k
    year four profit 100k

    in Derby treatment

    year one loss 125k
    year two loss 125k
    year three loss 125k
    year four loss 125k

    Hindsight would show Derby accounting was the fairer of the two

    On the othe rhand if the player actually saw out his contract and left for zero in year five

    conventional accounting

    year one loss 200k
    year two loss 200k
    year three loss 200k
    year four loss 200k
    year five loss 200k

    derby

    year one loss 125k
    year two loss 125k
    year three loss 125k
    year four loss 125k
    year five loss 500k

    in that scenario "conventional accounting" was the fairer of the two

    No dount, Derby accounting is a more aggressive policy but although Its a grey area I can see why the auditor signed the accounts. Just shows what a fascinating world auditing must be - I can see why you would give up liontaming if a vacancy came up.....

  • Luckily the EFL have set out the problems with Derby’s approach clearly and concisely in the document @nicecarrots linked to above.

    1. The requirements of 18.21 and 18.22 are picked up in EFL’s Notice of Appeal (“NOA”). EFL contends that the DC erred in its rejection of the Charge on four grounds (see 3-6 of the NOA):

      a. The “future economic benefits” ground: The DC was wrong to find that the Club’s amortisation method, which alters the shape of amortisation charges to reflect a hoped-for transfer fee at some point during the life of the playing contract, “reflects the pattern in which it expects to consume the asset’s future economic benefits”, particularly in view of the precise nature of the asset under consideration, i.e. a time- limited exclusive playing contract with the Club
      b. The “reliability” ground: The DC’s finding that the Club could avoid straight line amortisation because the Club could reliably determine the pattern of consumption of the future economic benefits involved a fundamental misunderstanding of the Draft Audit Findings Reports upon which it relied and was not otherwise justified by the evidence, which consisted materially of uncorroborated oral evidence about the website “Transfermarkt”, unevidenced discussions with unnamed agents and the “Club’s own view”.
      c. The “systematic” ground: The DC adopted the wrong approach to, and reached the wrong conclusion in respect of, the “systematic” requirement, particularly given (a) the subjectivity of the exercise inherent in the approach that the Club states it adopted and (b) the absence of any contemporaneous documentary record of what the policy was or how it was applied, still less what “system” was created.

  • I am not clear whether the charge was specifically whether Derby's compliance with FFP did not follow specific EFL rules or whether simply that the accounts did not follow general accounting principles.

    If the latter I bow to their judgement. They are the ultimate relevant body as far as far as EFL FFP compliance is concerned.

    Either way it doesn't mean the auditor was wrong to sign the accounts. The first DC who looked at this concurred with the accounting treatment adopted. This was over-turned on appeal. This suggests its a close call. Remember the auditor was only stating (and only stating to the shareholders of Derby) that IN HIS OPINION the accounts were in compliance with accounting standards. His opinion doesnt seem an unreasonable one to form even if other accountants form a contrary opinion.

    Don't get me wrong. It is entirely the EFL and their independent appeal bodies to conclude whether rules have been broken and they have concluded they have been. That is the end of that part of the story.

    I think though blaming and attacking the auditor is misdirected.

  • Derby decided to use a different accounting method than the norm. Why? In all probability to allow them to have more money to spend and “stay within the FPP”. Was this an auditors decision? Probably not but an auditor might reasonably have been expected to call out the change in practise rather than confirm the accounts as honest and true. But as @DevC says blaming the auditor is misdirected unless that auditor advised the method should be employed before the accounts were prepared.

    If the Derby choice was made in order to exceed the FPP principles, as my reading of the various reports, seem to indicate the EFL believe it to be then an appropriate sanction is due. By all accounts the EFL seem to believe a points deduction rather than a fine is appropriate.

    What is needed now is
    (1) a swift resolution to any points deduction applied this year so both Wycombe and Derby know what is happening and can prepare accordingly
    (2) a clear statement from the EFL as to what player amortisation is acceptable from ALL clubs.
    (3) decisions as to future sanctions for clubs who do not/have not followed this amortisation method to be fair, consistent and timely.

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