ACCT 3102 EXTERNAL REPORTING ISSUES CASE STUDY:
SPORTING CLUBS, COMPANIES AND CORPORATE GOVERNANCE
In 2013, the Essendon Football Club was investigated for performance enhancing drugs in their elite sports science programs. News of the initial investigations was met with disbelief by supporters, players, club administrators and the governing body – the Australian Football League (AFL). What followed was a period of intense and rigorous independent investigation by Australian Sports Anti-Doping Authority (ASADA) and the AFL. In August 2013, severe sanctions were handed down to the Essendon Football Club by the AFL. This case study focuses on the events at EFC before and leading up to August 2013. Structure of clubs
In terms of the AFL, seventeen AFL clubs are limited by guarantee (including the Essendon Football Club), while only one AFL club (the West Coast Eagles) is a company limited by shares. For the clubs that are structured as limited by guarantee, the ownership is vested in the hands of its members which provide certain rights (Foreman, 2006). The members of the club are defined in the club’s constitution as individuals who hold membership tickets. The members’ rights are outlined in each club’s constitution, the Corporations Act 2001 and Common Law. The club’s constitution outlines the right of members to vote at annual general meetings and elect directors to the board. The Corporations Act 2001 states guidelines for requisitioning a general meeting and for proposing a resolution to members. However, there are important differences between AFL club members and shareholders of a listed company. Motivations for membership in an AFL club are quite different to the motivations for owning shares in a company. Obviously, the supporter (member) is motivated for entertainment purposes and subscribing as a fan of the club, whereas shareholders are motivated towards financial rewards.
English soccer is a good example of a combination of both members and shareholders. Many clubs are listed in the capital markets (Bell, Brooks et al. 2012) and club shareholders can comprise both conventional investors motivated purely by returns but also club fans who arguably care less about money making as they can be expected to some extent to hold shares for sentimental reasons (Bell, Brooks et al. 2012). Smaller clubs tend to have proportionally more fan shareholders, while larger clubs tend to have more conventional shareholders (Bell, Brooks et al. 2012). However, investment in football clubs, can often be seen as high risk and this highly volatile situation typically yields low dividends and trading volumes, which can keep institutional investors away (Mazanov, Tenero et al. 2012). Investment from fans and speculators can sometimes be made more on personal or emotional reasons (Marotta 2008). Compared to the open market, football clubs also tend to operate under a different set of market assumptions, which include unpredictability of sports results, joint production of the sports event and atypical competitive mechanisms within the sector (Marotta 2008). Unpredictability of results impacts heavily on financial risk, which managers can find difficult to mitigate because financial results are influenced by match events. Although results of football matches are not cash flows, Bell et al. (2012) explain that they are expected to impact the share price of football clubs as winning games is likely to increase the club’s subsequent cash flows and value. For example, this might include larger game attendances (assuming no capacity constraint), higher ticket prices, higher prices for leasing
stadium boxes, increased advertising revenue, greater sponsorship income and merchandise sales, higher revenue from TV deals and radio commentary on games, increased prize money, and increased revenue from associated businesses.
Empirical evidence supports a strong link between on-field results and club revenues. Bernile and...
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