Rangers 2011 Financial Results: What Mr. Whyte has not told you

I have been sitting on Rangers 2011 financial results for several weeks.  The decision to not post them on here was partially in the hope that Mr. Whyte would grasp the opportunity to have a massive creative accounting party with the numbers.  Releasing my figures after the fact could help expose any slipperiness.  Alas, the numbers in both documents are pretty closely aligned.  The few numbers which are not in complete agreement are only off by margins that are consistent with the polishing and refinement process that will take place during the preparation of financial statements for any company. The biggest difference is the charge for the “wee tax case” (Discounted Options Scheme) in the official Rangers data.

You can read and compare the data for yourself here.  One benefit of using my copy of the accounts is that you get to read the numbers against the traditional Rangers’ graphic layout. I am sure that we will all agree that this presentation is much more dignified than the tawdry Times New Roman affair available on the club’s website.

The differences in this file and the unaudited numbers released by Rangers can be discussed in more depth in the blog replies, but I do not see anything materially amiss. Curses! Foiled again.  The meaning behind the numbers is more important.

    • Plus ça change

It is seven months since Whyte completed his purchase of Rangers. Yet reading the Chairman’s Statement accompanying the unaudited numbers was like a trip down memory lane. You could be mistaken for hearing the mellifluous voice of Sir David Murray as you read. No financial disaster was too great to be spun as a period of great opportunity and success. Data is cherry-picked to emphasise any good news that can be found and a jaunty, upbeat tone is always appropriate. For example, the weight placed on heralding that the club is now free of the yoke of bank debt and interference. Overlooked is the fact that Rangers still owe this money to their parent company and that far from delighting in being ‘bank-free’, Rangers’ board spent a lot of effort after the takeover to try to find a bank that would lend to them. (I have the documentary evidence to prove it too). Of course, Whyte is hardly unique among corporate Chairmen in this regard, but he has, yet again, missed a golden opportunity to level with the very people whose support he will need in the coming months if he is to see Rangers safe.

    • What was missing

The superficial good news for Rangers was the reduction in net debt and the impressive cash balance reported at 30 June 2011. However, Mr. Whyte appears to have embraced a technique long favoured in the east end of the city for generating soothing headlines and low net debt figures. As we have discussed in the replies section of this blog many times, net debt is a meaningless number- especially for a football club. It is simply “bank debt minus cash” on just one day in time. However, it does not include money owed to other creditors. If you stop paying your bills before the end of the season, you will end up with more cash. The bank debt will stay the same and the increased cash will result in this “net debt” figure dropping. The day after your reporting date, you can pay your bills and watch your cash pile evaporate, but you do not have to report those numbers to the public. It is like skipping a lease payment on your car. You will have more cash in the bank. Your personal “net debt” will have dropped, but you are deluding yourself if you think that you have achieved anything.

To get an accurate picture of Rangers’ real debt, we need to include negative working capital (the difference between what others owe you and you owe others in the short-term).
The following information was not included in yesterday’s announcement and is needed to understand the real debt picture:

The meaningful debt (click here for a calculation) is actually about £22.7m and not the £14m claimed.

More interesting is the verification of what this blog has been telling you in recent weeks.  Once the increases in trade creditors and social security/ taxes (i.e. bills that they had chosen to not pay to allow the cash balance to rise) are  accounted for, Rangers actually had only £644k more cash at 30 June 2011 than they had on the same day in 2010.

We have been telling you about this: Rangers have not been paying their trading partners nor HMRC as a matter of deliberate policy.

    • The big picture

Other than for those who enjoy financial navel-gazing, these accounts do not tell much about Rangers’ future. Until the FTT(T) returns with its findings, Whyte has to sustain the club by whatever means he can muster. Had the club been paying its bills as they fell due, they would have exhausted the cash from normal operations about now. By delaying every bill, Whyte gets to extend the life of the club incorporated in 1873 a bit longer. To survive until a “death with dignity” can be arranged following the crystalising of the Big Case bill Whyte will have to access external funds. Perhaps he is a man of fathomless wealth and can do so with his spare change. If Whyte cannot arrange external financing, he is going to have to sell off a lot of family silver between now and May just to avoid the blame for any insolvency.

With Whyte’s financial results appearing as a reasonably credible representation of Rangers financial performance last season, we are left to ponder the question: why are they unaudited?

The Glasgow rumour mill has been rattling away for a couple of weeks about discord in the relationship between Whyte and Grant Thornton.  I cannot say more than that, but I think that Rangers’ accountants will have finally ran out of patience with the risks associated with the Rangers audit.  (Whyte does not have the ability to dangle the MIH work in front of them either).  There will be one issue that is causing more trouble than any other: the inclusion of a going-concern warning.

It is the client management / board of directors’ duty to provide a statement on the validity of the assumption that the business is a going-concern i.e. it is not expected to fail anytime soon.  The auditor is expected to review that statement and if he has material concerns, to provide a qualified or modified audit opinion.  If the client and the auditor cannot agree?  In the old pre-Arthur Andersen / Enron days it was much like a protection racket (or an insurance policy if you like).  The fee could be increased to compensate the auditor for his increased risk for signing off on the accounts without raising the alarm.  In recent years, conflicts like this are more common and chartered accountants are less likely to yield to client pressure.  There is no obligation on Whyte to use Grant Thornton.  He could just as easily get a “single shingle” chartered accountant to sign off.  To be frank, I am surprised that he has not already done this.

One of the practical problems of a qualified or modified audit opinion is that Rangers would have to move to quarterly reporting i.e. producing financial statements every three months.  For a man with a less than stellar record of filing corporate documents on schedule, Whyte is unlikely to want to provide such frequent insight into his affairs.