An Independent Commission penalized Everton Football Club Company Limited (“Everton F.C.) 10 points in the English Premier League (“EPL) standings for exceeding allowable three-year financial losses.

That decision was the culmination of an 8-month-long process and will likely have significant future impacts; not only does it make qualification for competition in Europe likely impossible, but it places Everton F.C. in a position to be relegated to a lower division (English Football League Championship). The financial difference between participating in the two leagues has been estimated at $212.5 million (GBP: USD at 1:1.25).

There has been plenty of media coverage about this outcome, but less on what precipitated it.

The EPL has detailed financial regulations

At its core, this issue relates to the fundamental rules of the EPL, all of which can be found in a 740-page behemoth of a handbook (I read it so you don’t have to). The financial regulations include ‘profitability and sustainability rules (“PSR PSR )’ designed to stop clubs from overspending and creating cascading problems throughout the football ecosystem.

PSR states that clubs cannot exceed $131.3 million in total losses over a three-year period, though that amount excludes costs borne in a general footballing interest, such as youth development. Everton F.C. also petitioned successfully in August of 2021 for the removal of costs related to the construction of their new stadium incurred prior to initial government approval. Both exclusions are critical to this case for reasons we’ll discuss shortly.

To mitigate the very-real risk of manipulated PSR calculations, the PSR amount must reconcile to financial statements that are required to be audited or reviewed (another form of assurance) and provided yearly to the EPL.

The core of the disagreement

If clubs are in breach of the PSR limits (or any other financial regulations), the Premier League may refer the matter for adjudication to an independent commission made up of lawyers, financial professionals and/or others, which, on March 24^th, 2023, is exactly what they did for this Everton F.C. matter as it relates to the 2019/2020, 2020/2021 and 2021/2022 financial years.

It’s noteworthy that while Everton F.C. eventually agreed with the EPL that they breached the $131.3 million limit, the parties dispute by how much. The EPL ’s final assertion was that Everton F.C.’s PSR calculation for the three fiscal years ending in 2022 was a $155.6 million loss, while Everton F.C.’s final PSR calculation was $143.4 million, a difference of $12.3 million.

Why the difference?

The dispute centers around which of Everton F.C.’s expenses can be classified in the “general interest of football – including stadium financing - and therefore be excluded from the calculation of PSR.

Both parties used experienced forensic accountants - as they should - to support and quantify their positions as part of a series of statements and rebuttals submitted to the Independent Commission, similar to a typical corporate dispute. Though there were some auxiliary matters of disagreement, the difference in PSR calculations of $12.3 million boiled down to two expenses:

Treatment Of Surplus Pension Plan Contributions

Premier League clubs are required to pay a 4% levy on any player transfer fees to the EPL for a player pension plan and any surplus contributions are sent to something called the Professional Game Youth Fund. Everton F.C. argued that their relevant portion of this surplus, $9.5 million, constituted payments made for the general interest of football and should not have been included in PSR, similar to other youth program expenses. The EPL disagreed, arguing that it wasn’t directly attributable to youth programs.

Treatment of Interest Expense on Commercial Loans

In April 2021, Everton F.C. entered into two commercial loan agreements, from which approximately $176 million had been borrowed as of June 2022. The intention of these loans was general use for Everton F.C. itself. However, Everton F.C. in turn lent money interest-free to Everton Stadium Development Ltd (“Everton Stadium), a wholly-owned subsidiary responsible for constructing Everton F.C.’s new stadium in Liverpool’s Bramley-Moore Dock.

Everton argued that this intercompany loan to Everton Stadium necessitated a draw on the commercial loans, and therefore the interest on the commercial loans were related to stadium financing and therefore excludable. The EPL disagreed on the grounds that, according to contemporaneous documents, the loans were intended for Everton F.C. and not Everton Stadium.

As an aside, Everton F.C. initially told the EPL that the named party on the loans was Everton Stadium. It’s a testament to the EPL’s verification process and their examiners that they identified the funds flowed directly to Everton F.C. itself.

The commission sided with the EPL on both disputed items

While being the losing party on a $12.3 million dispute may seem insignificant when losses exceed $131.3 million, consider that it represents 51% of the $24.3 million that Everton F.C. exceeded the limit. In its ‘Quantification of Sanction’, the Independent Commission called the excess “significant, and listed it as a contributing factor in the penalty issued.

So what happens next? Everton has appealed the ruling, as is their right under the aforementioned guidelines. Should the sanction hold, Everton would – as of the date of this article – drop from 14^th in the Premier League to 19^th, one of the bottom-three places in the EPL that would be relegated if the season ended today (it ends in May 2024).

There Are Some Valuable Lessons To Be Learned From This Matter

There is always an allure, especially for new owners, to increase spending to improve team performance, chase participation in European competition and eventually win trophies.

But such a decision must be done in conjunction with smart financial forecasting and – most importantly - include allowances for variances in performance and other key metrics. That’s harder than it looks; Steve Parish, the Chairman of EPL club Crystal Palace Football Club, and someone I consider a football financial compliance savant, explained it this way: “The problem with it is, if you can lose $131.3 million over three years, you can lose $131.3 million in the first year, and then imagine that you’re going to…do things to put it back.

Everton F.C. Isn’t The Only Potential Offender of EPL Regulations

Manchester City, seven times the champion of the EPL, currently has over 100 alleged financial breaches before its own Independent Commission. At London club Chelsea, five times an EPL champion, financial irregularities from 2012 through 2019 are currently in investigation. These were discovered post-acquisition by new owners, another example of the coming tsunami of post-deal integrity issues I predicted we’d see across professional sports earlier this year.

Regardless the circumstances, it’s clear there is a level of rigor and pursuit of financial irregularities in English football that should scare offenders.