In the last decades, the importance of sport has been steadily increasing both in social and economic terms. High-quality sport products bring benefits directly from the fans in a form of matchday revenues and souvenirs. Sponsorship, advertisement or broadcasting rights fees are examples of other significant sources of revenues. On the other side, sport events and competitions are often connected with adverse or even illegal behaviour such as betting, money laundering, corruption, etc. (FATF, 2009). Football is probably the most famous sport with the biggest potential to earn money. However, many studies have revealed the relatively poor condition of football clubs across Europe. Except for Germany, all leagues report substantial losses, high indebtedness and a permanently overall weak financial performance. The economic survival of some clubs or even leagues may be endangered, especially in a the current turbulent economic situation. The unsatisfactory financial situation of European football clubs was one of the chief reasons why UEFA approved the new Club Licensing and Financial Fair Play Regulation in 2010. There are two major criteria to achieve Financial Fair Play – football clubs are expected to be transparent and in satisfactory financial condition. This article focuses both on transparency of financial reporting of Czech football clubs and their financial health.
Transparency of Czech professional football clubs
The research sample consists of 36 football clubs which played in the Czech first and/or second football league for at least one of five football seasons in the period from 2005/2006 until 2009/2010 (Procházka 2012). A five-year period was chosen in order to obtain better evidence on trends. The first and the second league are professional competitions; each club has to apply for a professional licence granted by the Football Association of the Czech Republic. The licence sets many prerequisites; such as the legal status of a football club. Only a business company established pursuant to Czech Commercial Code is allowed. Therefore, professional clubs have to comply with all legal requirements on enterprises, including financial reporting. Professional clubs have to keep their accounts in conformity with the Czech accounting legislation governing the accounting and financial reporting of business entities. The annual financial statements have to be submitted to the Business Register, in which all information is publicly available (financial statements are accessible via an internet application). The transparency can be thus evaluated by checking whether football clubs meet their information duties or not. Missing financial statements in the Business Register are an indicator of the increased risk for providers of capital as they lose an access to an independent source of financial information.
Theoretically, 180 sets of financial statements should be available (5 seasons times 36 clubs). However, the sample comprises 97 sets only, which makes difference of 83 missing sets, as 73 clubs do not fulfil their information duty; eight clubs became business entities later than in the season 2005/2006; and two clubs changed the accounting period from a calendar to a fiscal year. Out of 36 clubs, only nine clubs submitted financial reports in all five years under scrutiny; eighteen clubs fulfilled their information duty partly; and nine clubs did not post any set of financial statements at all.
Figure 1 Submitted financial statements in %
Source: Own research based on Business Register survey
An average rate of submission of financial statements oscillates around 60%, despite the fact that submitting financial statements is mandatory for all business entities operating in the Czech Republic and the non-compliance is supposed to be met with a fine pursuant to the Act on accounting. The level and timeliness of mandatory disclosure is therefore considerably low, which damages the transparency of the football business. All parties interested in doing business with entities not fulfilling their informational duties have to obtain financial information in other ways, which elicits additional costs. Creditors are unable to assess the financial health of a company from independent and reliable resources and they may be exposed to a higher risk, as far as repayment of their receivables concerns. However, similar evidence on non-fulfilment of information duty in the football environment can be foundin the case of Spanish clubs (Barajas et al. 2005, p. 5).
Financial position of Czech football clubs
Furthermore, data extracted from financial statements submitted to the Business Register were used to evaluate overall financial position and performance of Czech professional football clubs. Financial figures may help to reveal the specifics influencing the financial health of football clubs. Fundamental data retrieved from financial statements imply that the long-term stability of Czech football clubs has broken down – see Figure 2 showing the percentage of clubs which reported negative EBIT (earnings before interest and taxation). Continued economic survival is thus questionable, which increases the credit risk because long-term losses reduce funds available for the liability pay-offs. The best economic results were attained in the 2007/8 season; the worst figures on performance occurred a season later. The deterioration could have been strongly influenced by the recent economic crisis; however, the situation had been bad already before the crisis began.
Figure 2 Clubs reporting negative EBIT in %
Source: Own research based on financial statements published in Business Register
The preliminary conclusion about a high risk of bankruptcy is based on a relatively simple criterion of negative EBIT. The Index IN05 (Neumaier & Neumaierová, 2005), which is a special version of Altman’s (1968) Z-Score calibrated for the Czech business environment, is therefore employed to detect the risk of default/bankruptcy in more complex way. The results of analysis for each season are shown in Figure 3.
Figure 3 Clubs in financial distress in %
Source: Own research based on financial statements published in Business Register
The comprehensive study using a model predicting financial distress reveals that only 25% of clubs are in an acceptable economic shape concerning their future prospects. Almost two thirds of clubs reported negative earnings; one third of them had negative equity. These clubs are in or very close to a state of virtual bankruptcy. Such a state of affairs boosts rapidly the risk of doing business with football clubs. To make things even worse, remember the findings on non-compliance with information duties. The rate of submission of financial statements into the Business Register by Czech football clubs is only about 60%. Czech professional football clubs are generally in a very poor financial situation. Moreover, it is difficult to accurately determine how bad their financial health is, because clubs do not present financial statements properly. Consequently, capital providers may lose their money as a significant risk of default and/or bankruptcy exists. This scenario is not only hypothetical. Over the five seasons analysed, three clubs went bankrupt. It is symptomatic, indeed, that two of those three clubs did not fulfil their information duty at all.
A more detailed analysis is required to address the cardinal unclear issue arising from the findings of this preliminary survey. How is it possible that a relatively high number of Czech football clubs survives even though they conduct their business with long-term losses? Empirical survey shows that one third of Czech football clubs operates with negative equity. A predictive model provides even worse results. Based on data from financial statements, two thirds of clubs indicate marks of financial distress with a high probability of bankruptcy. Despite these negative results, only three clubs of 36 analysed actually went bankrupt. How is this state of affairs, which is in contradiction with the fundamentals of economic theory, feasible? An answer could be that creditors are unwilling to prosecute the football clubs to meet their liabilities. Football is an important social phenomenon, and a judicial enforcement of receivables fulfilment can impose a negative impression on creditors. Therefore, they mitigate the conditions and terms under which their receivables have to be paid by football clubs (compare with the Morrow’s (2006) remark on the Lazio’s Rome settlement of its huge tax liabilities). However, the empirical evidence of this conjecture has to be found yet.