Concern About Rangers As A Going-Concern?

Yesterday, one of our regular contributors, Adam, provided news that Rangers may have finally persuaded an auditor to sign-off on their 2011 accounts.  With a raft of legal issues related to holding an Annual General Meeting late (and the need to have audited financial statements released prior to an AGM), it is important for Rangers and its directors that they do not add to their already complex compliance problems. Thus, it would make sense for directors Craig Whyte, Gary Withey, and Phil Betts to want to minimise any further damage.

Adam and I have had some”off-line” correspondence and I see him as someone willing to ‘call it as he sees it’. As one of this blog’s most vocal Rangers-supporting contributors, Adam and I often disagree on how to interpret data.  However, I can vouch for his scrupulous adherence to factual analysis. (Some would argue that we are both selective in the facts we use, but that is a separate issue). Therefore, unless this is an effort to flush out a source of their many leaks, it does seem probable that Rangers will finally release audited accounts shortly.

In reviewing various Rangers’ fan messageboards, it appears that this issue is the subject of a lot confusion and false information. The intolerance of dissenting voices within the online Rangers community has stifled contributions from accountants and the financially literate within their support. To help fill the factual vacuum, this post shall attempt to provide an explanation of an auditor’s role in context with Rangers’ current difficulties and the likely issues behind the delay.

First, we should address the unaudited numbers released by Rangers on 30 November.  The financial statements presented at that time are largely in accordance with accounts leaked to me several months ago.  It is unlikely that any major irregularities or changes to the basic financial statements will be reported. The issue is almost certainly related to the issue of “going-concern”.

The accounts of every company should include a statement from the board of directors indicating whether the accounts have been prepared on the basis of the business being a “going-concern”.  This basically means that the directors must make a statement that “there are no material uncertainties related to events or conditions that may cast significant doubt about the ability of the company to continue as a going concern“.  In plainer English, they have to certify that they do not know of any events which would cause the company to file for insolvency within 12 months of the accounts being issued.  (Asset values would have to be written down to their current liquidation value if it is believed that the business will cease trading in the immediate future).

Obvious question: if it is the directors who certify the going-concern status of a company, why is there a fuss about the auditors signing off the accounts?

The chartered accountants tasked with auditing a company are required to provide an opinion of as to whether they agree with the directors or not.  There are  three basic boilerplate phrases that directors can choose from:

• the use of the going concern basis of accounting is appropriate because there are no material uncertainties related to events or conditions that may cast significant doubt about the ability of the company to continue as a going concern. This is the standard phrasing that accompanies most audits.  Its use- without auditor modification- signifies that the directors and auditors do not see a significant risk of insolvency within 12 months of the opinion.
• the going concern basis is not appropriate. This is used when insolvency is a virtual certainty and that assets will be liquidated.
• the use of the going concern basis is appropriate but there are material uncertainties related to events or conditions that may cast significant doubt about the ability of the company to continue as a going concern.  This is most likely to fit Rangers if the auditors are primarily focused just on the Big Tax Case. The probabilities of Rangers winning or losing the case can be debated and rely upon non-public information to form an opinion. Depending on what facts are available, your view of Rangers’ likelihood of success will vary dramatically. This provides the tissue behind which Grant Thornton (presuming that they are still Rangers’ auditors) can hide and claim that the outcome of the First Tier Tribunal is uncertain.

However, such an opinion would require disclosure of the risks. Rangers have previously only admitted that there is an on-going dispute with HMRC.  The club have not formally admitted that the scale of the tax assessments are unpayable. This blog provided the world with confirmation of the scale of the problem with our identification of where the Bain Papers could be found online [subsequently redacted on legal advice].  The Bain Papers claimed that Rangers faced bills of £49m.  This amount will be found to be high and the actual amounts should Rangers lose the case are more likely to be in the region of £36m.  (The difference is due to a technical argument over whether the EBT contributions should be considered pre- or post-tax).  The penalty would be determined in a separate tribunal and would likely be an additional £12-18m given the strength of evidence related to Rangers’ willfulness that exists.

With the FTT(T) scheduled to conclude (finally!) on 18 January, we can expect their findings to be published sometime in March or April.  (There is no set schedule.  They publish when they are ready.)  If the FTT(T) goes against Rangers, the amounts deemed liable become due and payable immediately.  HMRC can exercise discretion in enforcing payment during an active appeals process when payment would result in bankruptcy.  However, the right to demand payment is in HMRC’s hands and that cannot be ignored by an auditor.  The history of this case- Rangers’ evasiveness and extreme efforts to avoid admitting the truth when questioned may not bode well for HMRC’s patience.  Normally, a new owner would be cut some slack, but when the new owner has a questionable past himself, his involvement may be more hindrance than help.

If the auditors are more concerned about a basic lack of cash to fund Rangers’ immediate obligations, it is possible that they will indicate that a going-concern is not appropriate. This would require a write-down in Rangers’ asset values and would precipitate balance sheet technical insolvency.  Hence, it seems unlikely at this time. I suspect that Whyte will have secured some form of short-term funding prior to any audited statement release.

The impact for Rangers in having “modified in relation to going concern” audited accounts is that they will have to release quarterly financial statements to the public.  This would make it very difficult for Whyte’s ‘below the radar’ style to continue. Number crunchers would be able to discern how Whyte is financing Rangers- questions over whether Whyte has made good on his contractual promises to invest £6.7m would be answered.  Whyte’s record on paying suppliers would become transparent. Using cash saved by failing to remit the correct PAYE, NIC, and VAT amounts to HMRC on time would not only be obvious, but would become a legal hazard under quarterly reporting. In short, Whyte and his fellow directors would lose a lot of flexibility.

There are many mysteries surrounding Whyte  & Co. Their reasons for buying Rangers at an enterprise value at which few others can see them realise a profit is the central issue. Their baffling behaviour in the last seven months has set debate raging as to whether they possess a financial acumen unseen in Scottish business or whether they are incompetents who are in over their heads. A modified opinion from an auditor is unlikely to provide an explicit answer to that question, but we will certainly look for clues within the footnotes.

Rangers’ Negotiations With HMRC: The Truth Is In There

For several months, it must have been difficult for Craig Whyte’s spin doctor to catch his breath.  It seemed as if Whyte, through Rangers or one of his other highly profitable businesses, was in court daily for failing to pay debts to some supplier or an ex-employee, and was having large sums of cash arrested.  The hits kept coming: the BBC broadcast a documentary alleging that Craig Whyte acted as a director while disqualified. The BBC show also made claims that Mr. Whyte was involved in lots of financial fast foot-work.  One scheme seemed to involve pocketing cash that was supposed to be destined for the tax man.  Such were the frequency and magnitude of the accusations against Mr. Whyte that a strange thing happened- it got boring! “Craig Whyte in court over debt” had, by last week, become the least interesting headline you could imagine.  Even the most upstanding Rangers fan developed a tolerance for news that would have shocked had Sir David Murray been in the same position.

When bad news is coming thick and fast, the best PR men would advise to just take cover until the shelling stops.  This week has seen Whyte’s men emerge from their bunker to start the counter-offensive.  A rumour of a negotiated solution to the Big Tax Case emerged on the Follow Follow fanzine website (from a low post count little-known participant).  Darrell King then “confirmed” the story on Radio Clyde last night.  Rangers messageboards have since gone into a frenzy of exaltation.  Salvation is at hand!

As this blog has said a few times, to a drowning man even the smallest straw is worth grasping.  It is with this understanding of the need to have hope that the mendacious arts of the PR firm have been deployed in Rangers’ support once again.  Journalists of low IQ and/or a willingness to prostrate themselves for the cause are very helpful in these exercises.  

The basic subtext being spread is that Mr. Whyte has grown weary of trying to negotiate with the sectarian pygmies in the Scottish offices of HMRC and he is heading to face the main men in London.  A deal that would solve Rangers’ massive tax problems for the paltry sum of £5 million (or some other manageable amount) is on the cards.  “Ha! That will silence that Rangerstaxcase nutter!”

One problem: Mr. Whyte is expressly prohibited from negotiating the Big Tax Case directly with HMRC.  This privilege is reserved for Rangers’ former owner, Murray Holdings Limited- who have their own less serious problems with EBTs and who presumably see a tactical benefit for themselves in keeping the cases together.

Who says Whyte cannot negotiate with HMRC?  Well, Craig Whyte and Michael Scott McGill (representing Murray Holdings Limited) agreed this when they signed the Share Purchase Agreement that delivered Rangers into the hands of Whyte.  Don’t believe me?  Look at this extract from the document below:

Maybe Mr. Whyte arranged for Sir David Murray to join him in London to participate in discussions?  Maybe Mike McGill has some helpful advice that could help include Rangers’ mounting unpaid PAYE, NIC, and VAT remittances in the settlement?  Or maybe Mr. Whyte does not mind having relative strangers sit in on some rather personal discussions?

The big men in London were none too receptive when they were approached by Rangers’ representative in January of this year with an offer to settle for £11 million.  We are supposed to believe that they will now settle for £5 million once Whyte subjects them to the negotiating prowess that saw Rangers land David Goodwillie over the summer for a pittance?

In a week where the head of HMRC has been excoriated by the parliamentary public accounts committee for doing sweetheart deals with tax delinquents, what seems more likely: that a deal is at hand or that a PR charm offensive with the goal of raising the flagging morale of Rangers fans is underway?

The Sensational Sun

Following on from the previous blog post- which illustrated the willingness of a Rangers supporting journalist to subject himself to ridicule and to pass blatant disinformation off as fact- today we head into the sewers to take a look at how The Sun does it.

Our national tabloids have never been taken too seriously.  However, at their best, the red-tops have used sensationalism to attract large audiences to stories involving fraud and hypocrisy among the famous and the powerful.  How strange then to read this morning’s article “Whyte’s putting off AGM”.  When has a down-market trash-tabloid like The Sun ever worked so hard at de-sensationalising a story?  I would not argue for any paper to do anything other than print the facts, but this is The Sun.  Making stories sexier than they really are has been their stock in trade for generations.

Taxes?  No worries.  “…Whyte has been in detailed negotiations with HMRC to sort out the problems he inherited at Ibrox”

No audit?  No problem.  Rangers are just waiting on a wee letter from their busy lawyer who must just be swamped with other, more serious, issues.

Losing the tax case?  Relax.  Andrew Thornhill QC “expected the ruling to go in Gers’ favour and the club have had no suggestion that has changed“.

Rather odd to see a tabloid working so hard to take the heat out of a scandal!

Regular readers of this blog will know that this article in The Sun is riddled with disinformation and outright fabrications.  The especially astute would  wonder if a Sun hack had even penned a single word of this article.  It is smeared with the fingerprints and DNA of the professional PR rep.  (If Rangers’ PR gurus were any good at their trade, it would be a little less obvious).  This article looks like it is a straight copy & paste from an email sent by the likes of Jack Irvine.

Negotiations with HMRC?  Over which of the three cases is “The Sun” article referring?  The Big Case?  No- Whyte did try to engage in some discussions recently but those fell flat.  The Wee Case which Whyte has recently opened an application for a belated appeal (despite the bill having been previously agreed).  No.  I don’t think so either.  Or maybe most of Whyte’s recent discussions with HMRC have been “negotiating” the fact that Rangers have not been remitting the tax which they have been withholding from players’ salaries?  Yes- that could be it.

Or Andrew Thornhill’s letter from last year?  Is it this one mentioned by Rangers’ board of directors internal management communications from the middle of May? (Whyte was already in charge when this internal report was prepared).

Not exactly what “The Sun” 😉 has reported. Is it?  This opinion amounts to “you are up for sale, and you need me to use my lawyerly skill to provide an empty and meaningless statement that sounds promising at first blush“.  It looks like for the second time in a week, Rangers’ PR reps have been feeding untruths and disinformation to their friends in the media.  In the case of The Telegraph’s Roddy Forsyth and The Sun’s Iain King, both have well known loyalties to Rangers.

Whether it is lack of intelligence, an absence of professional pride, or both that makes these journalists serve as willing channels for PR-guff does not really matter.  The sad part is that even with the exposure of the failure of so many hacks to defend their beloved club from fraudsters and charlatans, they are still willing to wag their tails and wait for some scraps of succulent lamb to be thrown from their master’s table.  Have they learned nothing?

If anyone was ever in any doubt as to how serious the crisis is within Scottish sports journalism, they need look no further than today’s The Sun.  Not only are they hosing water on the seriousness of Rangers’ myriad legal and financial problems, but we are treated to a headline pumping the notion that Kenny Dalglish’s Liverpool are ready to make their move for Rangers’ prime sellable asset, Nikica Jelavic.  Let us hope that Whyte does not fluff the negotiations like he did in the summer.  Contrary to the comical hype of the time, it is well accepted within Ibrox that not a single formal offer was received for Jelavic.  A telephone enquiry was made by Leicester and a price of about £6m was discussed.  However, Leicester did not follow through with an actual binding offer.  At the time, it seemed that if Rangers FC were content to inflame the rage of HMRC staff with talk of being in a position to reject such princely sums, then it was not my job to intervene!

Whether Dalglish has any interest in Jelavic or not, I have no idea.  What is clear is that Rangers are pulling in their markers in a big way to generate favourable press just now.  Any sensible observer would be entitled to wonder why it is so important now.

“Sources close to Whyte” in economical with truth shocker!

Yesterday’s blog post revealed for the first time in any media outlet (mainstream or otherwise) that Rangers had prepared an appeal of the “wee tax case” and seems to have ruffled a few feathers in the process.

In this morning’s Daily Telegraph, Roddy Forsyth reports: “A source close to Craig Whyte, the Rangers owner, told The Daily Telegraph that an appeal had been lodged several months ago against the liability – incurred under the previous regime of Sir David Murray and not to be confused with the much larger potential debt to HMRC… … The source added emphatically that the existing appeal was not intended to be a defence against Uefa sanctions.”

First, Forsyth is confused or has been misled.  This appeal absolutely and categorically was not filed “several months ago“.  Assuming that Forsyth is not confused, his source is either a shameless liar whose opinions on any of these matters should be treated on a par with asking Joseph Goebbels how the defence of Berlin is going- or his source does not know what is going on.

Next, why did it require “a source close to Craig Whyte“?  Why not an on-the-record statement from the club or one of its executives?  Why have Rangers not made any reference to an appeal of the “wee tax case” assessment prior to my post yesterday?

The phrase “a source close to Craig Whyte” is reminiscent of all of those fabulous promises made in the run-up to the takeover.  Googling this phrase is instructive.  “A source close to Craig Whyte” has been responsible for the following gems being quoted in our mainstream media without critical analysis or qualification:

• “For a start, the deal Craig Whyte is putting forward is worth £52.5m, more than double the amount apparently to be raised by this unnamed Rangers director.  Further, the Craig Whyte investment in the club would begin on day one of a deal being completed.”
• “…the businessman had decided to make available “significantly more” than the average sum of £5m-a-season to Ally McCoist when he succeeds current manager Walter Smith at the start of next term.”
• “Ally knows he will have significant funds to spend on players”

With the track record of such “sources close to Whyte” one has to wonder why any member of the press would take them seriously?  Roddy Forsyth is one of the better journalists among a very poor bunch.  However, to repeat the words of someone who will undoubtedly be one of Whyte’s handsomely rewarded PR goons without getting objective proof is symptomatic of the malaise affecting Scottish football journalism.  The lazily and cheaply acquired quote is favoured over truth.  To repeat the words of someone who misleads others for a living without obtaining objective confirmation is just comically stupid or willfully negligent.    I must assume that the subject of Rangers’ accumulating unpaid PAYE & national insurance money just did not come up in conversation?

I do not claim to know with any certainty the motivation behind the appeal.  So I cannot swear that it is related to the mounting pressure for Rangers to make an official and unequivocal statement on the status of this liability to HMRC as of 31 March 2011.  However, the timing of the appeal does look convenient.  I must acknowledge that it is also very possible that it is simply driven by financial necessity i.e. it is an attempt to reverse the arrestment of the £2.3m which is currently frozen prior to it disappearing forever within the next couple of weeks. However, I can confidently state that the launching of this appeal is very recent indeed.

Of course, this can all be cleared up easily.  Mr. Whyte can tell us when the appeal was submitted.  He can produce the appeal documents and show the dates to members of the press.  Even members of his own trusted cadre of tame hacks would suffice.  The central facts of the case are not in dispute and have been a matter of public record since Rangers’ interim accounts were released on 1st April. There will not be many real confidentiality concerns. We know the amount and to what it is related.  All we need to know is the date of the appeal.  This could debunk both my post from yesterday and the theory (expounded by others) that the SFA improperly granted Rangers a UEFA license for the 2011/2012 season.

Go ahead Mr. Whyte.  Prove me wrong.  And Mr Forsyth, you could apply a bit more critical thinking in your work.  If you are interested in the question of Rangers’ UEFA license, you can ask your contacts at Ibrox and at Hampden to show you the evidence.  It would be a good bit of journalism and could lay this issue to rest once and for all.

UEFA License: Rangers to appeal “wee bill”

In the current storm over whether the SFA should have granted Rangers a UEFA license for this season (and possibly denied Celtic a chance at qualifying for the Champions’ League), sources within Ibrox have confirmed that Rangers are planning to file a late appeal of the “wee tax case” bill related to the Discounted Options Plan.

This bill and the related interest- amounting to £2.8m- had been agreed by the club. Rangers had even paid £500k previously to prevent court action. (The bill for penalties related to this scam had not been agreed and can be seen as a separate matter for now).

Normally a company has 30 days to appeal a tax assessment. We know that that any appeal now is very late. The question is: why appeal now?

It would certainly serve to provide a tissue for their friends in the media to hide behind. Stories can be planted with the usual suspects that “the bill is being appealed so it does not count”.

However, the point at issue here is the status of this bill on 31 March. I do not know the answer, but it should be a simple question with a simple answer: was this bill overdue on that date?