30/12/2011 2,050 Comments
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.