The Iconoclast said:
Is that the best you got? It must be as the NHLPA has been running away from this report since it came out. First they tried to discredit the committee, and that went south quickly when Leavitt offered to discuss the findings with the PA. Then they tried to dicredit the numbers, and that was shot down even quicker when the NHLPA was invited to work the numbers with Leavitt. Then the NHLPA substantiate the report itself by aligning the numbers in their offer directly to that of the Leavitt findings. The players better try and laugh it off, because the Leavitt report has been kicking their asses all over the place.
No, I have loads more.
The NHLPA has never agreed with Levitt's figures and for good reason and nor has anyone else who has looked at them closely and evaluated his methodology. Here was the NHLPA reaction to the Levitt Report:
"We have consistently stated that one critical issue of disagreement between the NHLPA and the League on finances is how to define the complete business of owning an NHL franchise, and how to address the significant inconsistencies contained in the NHL's voluntary and unaudited URO reporting process," said Goodenow. "At the outset it is clear the Levitt report, commissioned by the League, is fundamentally flawed when the author "elects" to define hockey revenues on the same basis as used in the NBA and NFL for defining revenues in their salary cap systems.
"We were given access to the UROs (Unified Report of Operations ) for 30 clubs, but were only able to conduct a thorough review of four NHL clubs. On those four clubs alone we found just over $52 million in hockey related revenues and benefits not reported in the League's voluntary and unaudited URO process. If we are given similar access to all of the other individual teams' financial information, presumably used in the Levitt report, we will be in a position to provide further comment."
The NHLPA said fine , we do not believe your figures but we will structure an offer with a 24% rollback which will mimic the claimed losses. Bettman looked like he had been punched in the stomach if you caught the news conference. Shock and awe would be a good description when the NHLPA dropped this bombshell. What employer in its right mind would not have grabbed those concessions and ran. Not to mention the other concessions offered up. But for the NHL it was salary cap or bust.
Levitt is not independent under any reasonable definition of the term. Nor is he an auditor or even an accountant - he is a Wall Street broker. He was head of the US Securities and Exchange Commission charged with watching out for the consumer investor. On his watch there were the Enron and World.com scandals as well as numerous other scandals and accounting irregularities. Looks like just the guy the NHL needed.
His work of fiction is no longer even mentioned by the NHL in its recent PR spins. Bettman quit referring to it after he was roasted over his description of the report as a "super audit" - it was not a regular audit or even a baby audit. Not under any accounting defintion except perhaps that known to Gary Bettman.
Even Levitt allowed this was not an audit but simply a report. A report for which one side hired him and paid him. Actually let's be clear Levitt was not hired by the NHL, he was hired by the NHL's outside legal firm, Proskauer Rose (Bettman's old New York law firm) who supplied the abrasive Bob Batterman to attend the latest meetings with Linden. Why do that you ask??? Well if it comes to determining what precise instructions Mr. Levitt may have been given the NHL can always claim solicitor-client confidentiality and say talk to our lawyers - they retained him. And the lawyers if asked - well solicitor-client confidentiality is pretty much absolute. we do know how to insulate our clients from those uncomfortable questions and future examinations for discovery.
Levitt never provided a team by team breakdown and was not prepared to so it is rather difficult for the lay person to get any real sense of whether it is true.
He offered the NHLPA to review the numbers upon which he based his report - since he did not go beyond the URO's that would not have been useful. Since it was the URO's and the players already knew they were not accurate, why waste the time? The NHL knew the URO's were bogus from their 1999 and 2000 review of the Montreal, Boston, LA and Buffalo. See my quote above when the NHLPA responded to Levitt.
"We've always said it's not an accounting issue of making sure the numbers add up," Ted Saskin said, "but a much more complex task of how one defines the revenues in a business with many related parts and complicated corporate structures. There's no way to tell because they continue to refuse to give you individual team financial information."
That's why the union has little faith in the URO process. The NHLPA doesn't believe it accurately reflects the financial state of the teams.
"Absolutely not" said Saskin. "
The financial reporting you get from the National Hockey League is only as good as the information they get from each team in what is an unaudited and voluntary submission. And the old adage 'Garbage in, garbage out' is unfortunately an apt description of the current system they have in place. We have numerous examples of teams simply putting down 'zero' for luxury suites, concessions and other items. You can't take that kind of reporting seriously."
Forbes Magazine slashed Levitt's numbers by half and they are not known to be union friendly by any stretch of the imagination. They were only able to use publicly available documents and sources. Who knows how far they would have cut back the losses if they could have got in and dug around. Forbes was very conservative in attacking Levitt's numbers. Forbes credited the Canucks with a $1.7 profit when the team by its own admission made over $25 million that season.
The President of the Flyers told a Philadelphia newspaper that contrary to the claim of Ed Snider the Chairman of the Board the Flyers did not lose money as determined by Levitt. After the Levitt Report came out, Philadelphia Flyers chairman Ed Snider revealed his team was one of the 19 NHL teams the report said lost money in 2002-03. Team president Ron Ryan said the Flyers weren't among the teams whose lost money HUH???????? Must be two Philadelphia Flyer teams, right?
"Where it becomes confusing," Ryan told the Philadelphia Inquirer, "is that it sounds like there are two sets of books. The difference is that the report we make to the league, as directed by the players' association, is different from our own internal audited statement, which we view as the more accurate statement. So we were talking about two different reports."
Interestingly since divulging the two sets of books to the newspaper, Ron Ryan has not made another public statement. Big surprise.
Award winning investigative sports journalist (and Pulitzer prize nominee for his expose of Eagleson), Russ Conway skewered the Levitt Report as well recently having several outside accounting experts look at the report and methodology.
'Superaudit'
Last February, the NHL released what it called an independent report on its finances prepared by Arthur Levitt, the longest-serving chairman of the U.S. Securities and Exchange Commission and a former American Stock Exchange chairman.
Levitt was paid $250,000 by the league, plus expenses. Overall, the report cost $1 million.
"The Levitt Report" confirmed the NHL's claim of a league-wide operating loss of $273 million for 2002-2003. The NHL, which claims it lost another $223 million last season, hired a public relations firm to trumpet the bad news.
Bettman has repeatedly referred to the report as "a superaudit," implying its findings can be taken to the bank.
In fact, it is not an audit.
Levitt himself calls the report an "independent review."
Richard Delgaudio, a professor of accounting and auditing at Merrimack College in North Andover who is a certified public accountant and nationally known lecturer on accounting, explained the difference between an audit and a review.
"An audit implies that you look at documentation and source documentation," he said. "A review is when you just kind of look things over to see if it seems right."
Delgaudio is one of several experts who examined the Levitt report for The Eagle-Tribune. They did not question the work that went into the findings, but said the report was clearly not an audit, let alone a superaudit.
"If anybody calls this a superaudit, you give them my number," said Nelson Blinn, a 36-year certified public accountant from Haverhill and member of the Banknorth auditing committee. "This is absolutely, unconditionally not an audit. To pass it off as one is nonsense."
The Levitt report largely relies on audited financial reports supplied by the NHL teams themselves.
Blinn said that was "another area of concern."
"If you're an accountant working for a team or working for a company related in some way with the team, you're working for the same owner. That's who pays you, so you've got his best interests in mind."
Blinn said if an independent auditor did the work, "dollars to doughnuts, you'd get altogether different numbers."
The Levitt report authors said they verified the team audits independently.
Another problem was that not all the teams reported hockey revenue the same way.
For business and tax purposes, almost every NHL club operates under an "umbrella" of inter-related companies and trusts that control the myriad streams of revenue -- gate receipts, concessions, arena advertising, merchandise, luxury suite rentals, broadcasting rights and more.
For example, money from food concessions at Bruins games doesn't go to the Bruins but to a separate company controlled by team owner Jeremy Jacobs. Rink-board advertising money goes to another Jacobs company.
Twenty-two of the 30 NHL clubs play in arenas that are least 50 percent "owned, operated or controlled" by either the team, an affiliated business or related-party.
When the Levitt report was done, four teams -- the Bruins, New York Rangers, New Jersey Devils and Philadelphia Flyers -- also had an ownership interest in the cable TV companies that broadcast their games.
"Each entity, they include different things in their hockey revenue," Delgaudio said. "They may have subsidiary companies that account for the signage income or the television income and all that.
"You'd have to look at each one individually and make sure they were recognizing the revenues exactly the same as your definition. And if they didn't, you'd have to make adjustments for it."
The authors of the Levitt report say they did make the required adjustments and were able to account for all hockey revenue, no matter how it was generated or which subsidiary it flowed through.
But the benchmark they used to make those adjustments raises questions.
The benchmark was total paid attendance to all events at the team-controlled arenas where most NHL cubs play. That was the method used to separate "hockey" revenue from money generated by other arena events and affiliated businesses. NHL teams, TicketMaster and other sources provided the attendance figures.
If you want a line by line criticism of the Levitt Report, check this out by New York economist Dubi Silverstein who publishes the Blue Shirt Bulletin:
In a recent issue of The Hockey News, Bill Daly defended the Arthur Levitt report by asking all critics to read it first. Perhaps Daly should've asked his boss Gary Bettman to read it first -- Bettman, in the news conference introducing the report, said, "Actually, we thought the percentage of gross revenue taken up by player salaries was 76%, he [Levitt] said 75%."
Actually, he said no such thing. Levitt said 75% of net revenue, not gross revenue, goes toward total player costs, not just salaries. These are significant differences. What the NHL calls net revenue (a measure it invented all for itself that comes closest to what everyone calls gross profit) is gross revenue net of direct costs -- except for player salaries, as direct a cost as there is for a hockey operation. Other costs, such as travel expenses, insurance, social security, and the like, make up part of the 75% Bettman incorrectly called "player salaries" -- Levitt even includes minor league salaries, which would be fine if minor league revenues were included, but they were not.
...............
The truth is, the NHL doesn't want anyone to read the report, and doesn't expect anyone to. The whole world parrots their net revenue of $1.996 billion, player costs of $1.494 billion, and the 75% ratio between the two without understanding of what those terms mean. The NHL even created its own web site for CBA issues that quotes Daly's letter to THN challenging critics to read Levitt's report, the transcript of Bettman's introductory press conference with its misstatement about player cost ratio, the transcript of Levitt's introductory press conference with its misstatement about gross revenues, and the full report itself.
.................
Look at any financial report for any company in the world, and you will not see anything resembling what the NHL calls net revenue (you'll find reports that show net revenue in the sense of net sales). Every other company in the world wants to maximize revenue, and then account for cost, not understate revenues and overstate a single expense category, as the NHL does for public consumption (their actual books have still not been scrutinized in full by anyone, including Levitt).
No surprise, despite his so-called independence, that Levitt came within $12 million of the league's own loss declaration and within 1% of its player cost ratio. But me, I'm a diehard skeptic, especially when nearly a hundred owners each worth hundreds of millions or billions of dollars cry poverty over less than $300 million -- less than the total amount they kicked in to help themselves weather a lockout. So I read the report, in detail (even before Daly exhorted me to -- my article originally started with the sixth paragraph, the others prepended in response to Daly). And I read other documents the report refers to, such as the NBA and NFL Collective Bargaining Agreements (CBAs).
And I hate to say it, but I come away believing Levitt has performed a conscious, if completely legitimate, sleight of hand, designed first, last, and always to support the NHL's claims, not test them.
And here is Silverstein on the issue of Levitt's so-called independence:
That takes us directly to the pivotal issue of independence. "The Commissioner requested that I perform an independent review of the NHL's combined Unified Report of Operations (URO) for 2002-03," writes Levitt early in his report, "[and] to advise the Commissioner and the Board of Governors whether the URO results reflect a comprehensive and accurate statement of the financial results for that season." Requested and paid for by the NHL to prepare a report for the NHL -- in one sense, that precludes by definition any claim of independence, but it may not be a material violation of the essense of independence (to use one of Levitt's favorite words, "material") if the NHL asked him for a truly honest audit that it would not attempt to influence or otherwise interfere with.
As if to demonstrate how truly independent he was in a way a lay person could understand, Levitt emphasized that he was paid his full fee of $250,000 up front, so payment could not possibly be contingent on his results. OK, sounds good. On the other hand, Levitt never questioned his assignment, never used his independence to go beyond the scope of his assignment -- payment was after all contractually tied to completing his assignment, regardless of when it was tendered. And one could argue (as some have -- including Levitt himself) that an auditor's continued employment depends on delivering the results his employer wants.
"My assignment," Levitt dutifully reported right up front, "was to make findings and reach conclusions as to whether the [URO] instructions account for relevant revenues and expenses associated with operating a professional hockey franchise in the NHL [and] whether member clubs accurately reported information requested by the UROs; whether related company income is reasonable for a professional hockey franchise [and] similar to treatment in Basketball Related Income [and] Defined Gross Revenue, as defined in the NBA and NFL collective bargaining agreement; whether player costs and revenues [are] consistent with reasonable and sound business practices in this industry."
His conclusions: "It is my opinion that the instructions governing the URO adequately and appropriately account for all revenues and expenses associated with operating a professional hockey franchise in the NHL and that teams accurately reported information requested by UROs; treatment of related-party income reasonably measures revenues and expenses and is similar to measures used in the NBA in calculating related-party revenues it shares with players; player costs and revenues [are] inconsistent with reasonable and sound business practices (player costs of $1.494 billion or 75% of revenues substantially exceed the NBA and NFL as set forth in their collective bargaining agreements)."
[I've telescoped some excerpts to save space, but I haven't created any "material" differences in what Levitt wrote -- read the report for the full text.]
Levitt did not say up front (though he did later) that in getting from his assignment ("whether the instructions governing the URO account for relevant revenues and expenses") to his conclusions ("the instructions governing the URO adequately and appropriately account for all revenues and expenses") he took the 2001-02 URO and corrected deficiencies before allowing the NHL to send it out! He was not actually being deceitful in omitting the statement, "and they are in fact adequate only because I corrected inadequacies from the prior year," but he did skip a material stepping stone.
Further, even when in revealing that he made modifications ("the NHL at our request clarified and modified the 2002-03 URO instructions prior to their issuance to the teams"), he failed to provide material revelations or qualitative judgements about the 2001-02 instructions or results -- after all, that was not part of his assignment.
It was not part of his assignment -- that is ultimately the failing of this report, one that undermines any credibility one can place in his results, even if they are accurate. If he was truly independent, why stick so meticulously to his assignment? Oh, wait a minute -- I take it back. He did go beyond the scope of his assignment in correcting the deficiencies of the prior year's URO in order to make sure he would reach the desired conclusion of said assignment. But he did not go beyond its scope and share the results of those highly relevant deficiencies. Curious!
But wait! He didn't just correct deficiencies in the 2001-02 UROs for 2002-03, he also corrected inadequacies in team reports for 2002-03. "During the course of our review, modifications were made to the teams' treatment of certain revenues and expenses. These modifications are included in the $273 million operating loss reported in the combined URO." He never spelled out those modifications. And yet, despite having to modify team reports, he still concluded that teams complied with the URO instructions. In this case, he can't even make a semantic case to support his self-fulfilling prophecy, that the reports were in compliance after his modifications, as the assignment was to evaluate compliance, not to correct non-compliance.
In the final analysis, there is no escaping this, as fully disclosed in the report: the URO instructions given to him were NOT adequate, so he corrected them before sending them out, and teams did NOT comply with the instructions, so he corrected their reports. And yet he stated unequivocably right on page two, "It is my opinion that the instructions governing the URO adequately and appropriately account for all revenues and expenses associated with operating a professional hockey franchise in the NHL and that teams accurately reported information requested by UROs."
And he repeated these conclusions in his, uh, Conclusions: "The instructions governing the reporting of the financial information by the teams through the URO adequately and effectively direct the team to report all revenues and expenses associated with operating a professional hockey franchise in the NHL. The teams have, in all material respects, accurately reported the financial information requested by the UROs."
This is what the NHL holds forth as the ultimate in credibility in support of their case. This is what the NHL tells us to make sure we read before we dare criticize their case. Am I missing something, or would George Orwell and Ayn Rand have a field day with this?
And his conclusion:
Levitt tells us at least twice, with no equivocation, per his assignment, that the URO instructions for 2002-03 were adequate and the teams complied with them, but tells us too that he corrected inadequacies in the 2001-02 URO before sending the 2002-03 URO out to the teams, and that he corrected results reported by the teams. Levitt tells us that he "would neither underwrite as a banker any of these ventures nor invest a dollar of [his] own personal money in a business which appears to be heading south."
And yet, five teams have changed hands during or since the doom and gloom season his report covers, five others have been bought since 2000 (salary escalation already well under way by then), and an eleventh team (Toronto) has had significant changes to its capital structure and controlling interest due to a major equity transaction. Daly tries to explain that away by saying, "Recent investors in NHL clubs have invested at significantly discounted (even depressed) values." In other words, they have done what smart investors always do -- buy low, hoping to one day sell high. But the former SEC chairman, stockbroker, and economic development chief, who should know about the concept of buying undervalued assets, wouldn't "invest a dollar" in this business.
It's like watching clothes spin endlessly in a dryer -- as long as no one actually stops the spin to take a cold hard look at the laundry in the harsh glare of the public eye, the truth remains safely hidden and the spinmeisters have done their job.
http://ordinaryleastsquare.typepad.com/dubi/2004/03/reading_compreh.html
Now do you understand why when the claim of Levitt's independence was made my response was " "?
Stick a fork in Arthur Levitt and his report, they are done like dinner. (to borrow a phrase from the immortal Dave "Tiger: Williams)