This has been done to death earlier in the thread. Maybe we need a FAQ thread on this. This would qualify for a VFAQ. (A sort of Europa league for FAQs. You'll know all about the Europa league, being a Chelsea fan and all.)
Their case is that we have knowingly failed to provide accounts that give a true and fair view of the financial circumstances of the club. So, taking the Etihad sponsorship as an example, their case is (a) HHSM/ADUG provided MCFC with funding that was in reality owner investment, but (b) this was dishonestly presented in the accounts as sponsorship from Etihad in order to circumvent FFP rules.
As a former auditor, albeit many years ago and probably out of touch with modern practice, I'd like to clarify something. Our accounts do have to give a 'true and fair view' of our financial transactions and situation. But there's no definitive answer to, or statutory definition of, what 'true and fair' is.
But generally, for an auditor not to confirm that accounts were true and fair, there would have to be a
material issue, not a few quid here or there. So even if the auditors knew about the alternative Mancini contract and felt that it should have been reported by City, in their accounts, I very much doubt they would qualify the accounts. I doubt they'd even know about it though, because it was a personal contract between Mancini and an unconnected third-party.
For a company like City, or an even bigger one, the auditors won't check every single transaction. They might satisfy themselves as to the adequacy of the financial systems for accurately recording income and expenditure and would examine relevant financial controls. A key one is whether an individual could both initiate, authorise and receive a large payment, without a second or multiple persons checking.
They most likely would (certainly in my day) have checked the larger items and that would include Etihad's sponsorship. So if our accounts showed £50m revenue from Etihad, they'd probably check that £50m was actually received. That might a single payment, or multiple payments. As long as they could track that £50m from the bank statements to the P&L account, I doubt they'd enquire much further.
But if they could only see £10m of that claimed £50m, they'd ask questions. The answer from the CFO might be that we're waiting for the other £40m,which was due shortly. I suspect they'd want to see that £40m come in before they expressed an opinion, or at the very least, have assurances from Etihad that this payment was due, relates to the period under review and a good idea of when it was due to be paid. They'd then have to make a decision as to whether the accounts were 'true and fair' (because £40m would be material) and even if they did sign the accounts off, they'd probably demand evidence of it arriving and maybe make some comment, or insist City made a relevant comment in those accounts.
Another scenario might be Etihad paying us £10m and the other £40m being from ADUG. They would presumably then question whether that was equity funding, and should therefore go into the balance sheet, rather than the P&L account. That would be subject to discussions with City senior management but I'd say the likelihood is that they would insist on it being reclassified, as it's material.
I think someone said earlier in this thread that it wasn't necessarily what was done, but what the intent was that would determine fraud. The valuation of stock affects profit. This has to be valued at the lower of cost or net realisable value, but cost may have a number of different components. It may be a very subjective judgement on what NRV is but it could be that a company is valuing stock, which it knows is completely worthless, at cost. That's likely to be fraudulent. There have been many cases where revenue from contracts signed or meant to be signed with customers has been knowingly overstated.
A high-profile case involves the software company Autonomy, who used to sponsor Spurs.
https://www.bbc.co.uk/news/business-47691083. I think Mike Lynch is still fighting extradition but the UK courts have broadly supported HP's view that he and his CFO were guilty of fraud.
So just because a set of accounts aren't correct to the nearest pound, doesn't mean they aren't showing a true and fair view. And even if they're held not to be a true and fair view, there could be other reasons beyond a deliberate fraud why they might not be.
