The Business Of Sports

Tuesday, January 28, 2014 - 16:34

The Editor interviews Elliott C. Lee, Partner in the Litigation Services Group of EisnerAmper in its New York City office.

Editor: Tell our readers about your background, EisnerAmper and its litigation process.

Lee: EisnerAmper is a full-service accounting, tax and advisory firm. It has 1,200 employees and approximately 180 partners in offices located in New York City, New Jersey, Pennsylvania and California. The firm provides audit and tax services to various sectors including public companies, hedge funds, private equity firms and closely held businesses. We serve industries as diverse as sports and entertainment, financial services, real estate, to name a few. Our litigation practice, consisting of approximately 50 employees, specializes in fraud detection and forensics, not-for-profits, investigations, commercial litigation, matrimonial disputes and valuation services.

As to my background, I graduated from NYU with a double major in finance and accounting. Upon graduation I joined Deloitte & Touche LLP in their audit department, where I spent three years before going to their M&A due diligence practice. From there I joined American Express, where I began my litigation consulting career. After a little over two years at AMEX, I joined EisnerAmper in their Litigation Consulting practice. I was recently promoted to partner. I have a CPA license to practice in New York and am also a certified fraud examiner (CFE).

Editor: I understand your firm does a significant amount of work with various sports leagues.  Please tell me a little about that experience.

Lee: EisnerAmper has developed a very substantial and broad practice within the world of sports. We’ve worked with various different sports leagues, primarily providing them with audit, accounting and consulting services. Many of these leagues share very similar accounting and financial reporting issues. For instance, many hockey teams share an arena with a basketball team. As such, the accounting for the revenues and expenses incurred by the arena are similar even if the two sports have little in common. Additionally, because many of these sports leagues share common issues such as accounting for sponsorship revenues, ticket sales and expense allocations, our accounting and financial reporting expertise can be applicable to each of these different leagues.

One of the things that opened my eyes when I started working in this industry was how much the various aspects of a sports franchise are fundamentally rooted in business and how decisions are driven by bottom-line results. When you go to an arena, the signs that are displayed throughout the arena, the company logos that are displayed on soda cups, right down to the banners that are scrolling along the floorboards are paid for by sponsors – these all translate into revenue dollars for the team. When you see an arena that has a specific sponsor’s name attached to it, underlying it is a legal agreement executed between a team and a sponsor that generates dollars for the team.  How well those contracts are negotiated and structured could impact profits and losses for a team. This realization really changed the way I watch a professional sports game.  

Editor: You mentioned that much of the work that EisnerAmper does is more audit in nature. What was your role as a litigation consultant?  

Lee: That’s correct, my work and experience in the sports industry was different from the typical litigation assignment that I’m accustomed to.  However, with some of these assignments, I was able to leverage my experience as a litigation consultant and use a lot of the skills I apply in a typical litigation assignment, such as a fraud investigation or damage calculation. Specifically, my ability to work through and analyze large volumes of financial data, to gather information from various sources, to review other relevant data such as contracts, to filter this information down into what is most meaningful and relevant and to communicate our conclusions – all skills I use as a litigation consultant –were applicable to the assignments I was given. 

Editor: Revenue recognition is a big issue in some of these cases.

Lee: Absolutely. Revenue recognition issues have been and continue to be a hot topic for many companies.  A sports franchise is no different.  Revenue recognition and accounting for revenue under multiple element arrangements is an area that affects almost every team. As you can imagine, in relation to some of the contracts that are negotiated between a team and its sponsors, each contract can contain numerous deliverables and thus give rise to numerous revenue recognition issues. The expertise I and my firm bring to the table as accountants includes a solid understanding and knowledge in generally accepted accounting principles (GAAP) applied to the sports and entertainment industry.  This paired with the experience we have in analyzing, auditing and reviewing contracts and arrangements specific to a sports franchise allow us to add value to our clients.      

Editor: Do you specialize in professional sports litigation?

Lee: As a litigation consultant, my experience and knowledge has covered a wide range of matters in many different industries. Although the industries may differ, the skills, forensic investigative procedures, and damage calculation methodologies that we apply are generally the same. My work over the past years has run the broad spectrum of areas including sports, private equity, insurance, real estate development, not-for-profits and even wine distribution. It makes for a very challenging and interesting career. The core of my practice includes forensic investigations and commercial damages. As I mentioned before, it’s really a skill set in relation to analyzing financial documents, interpreting those documents and effectively communicating results.   

Editor: I assume you draw upon your partners’ expertise in many of these areas such as hedge funds and private equity, areas requiring specialized skills.

Lee: Yes, it makes a world of difference and sets us apart from our competitors. I think one of the benefits of being in a litigation group at a firm like EisnerAmper, which has a breadth of experience in different industries, is that I can reach out to a partner who has specific expertise in almost every industry that I may come across. Take, for example, private equity. I recently worked on a matter in which the issues centered around typical expense allocation practices at a private equity firm. EisnerAmper does a significant amount of work in the PE world; as such, I was able to tap into a wealth of industry knowledge from the partners around me.

Within litigation consulting, so often the methodologies and the theories that we apply are the same, regardless of the industry. Where we can really add value is having a firm understanding of the industry specifically if there are aspects of that industry that are unique. That’s why having talent within the firm that has a depth of experience in a given industry is critical to helping attorneys on specific litigation matters and in their calculation of damages.

Editor: Do you have extensive documentation on all these cases that you draw upon?

Lee: The documents, conversations and interviews with management and other information we analyze serve as the basis for our conclusions. An effective litigation consultant will be able to sift through thousands of documents to identify those that are critical to our case.    

The amount of documents that are presented in these litigation matters is very often voluminous and in some cases chaotic, many times on purpose. It is our firm’s practice to maintain all relevant supporting documentation that was considered in arriving at the conclusions within our reports. Certainly, with any federal matter it is an absolute requirement of the courts that all our documents considered are maintained and produced to the other side. We also like to emphasize to attorneys that it’s always to our advantage if we are retained early in the discovery process.  If we are, we have the opportunity to request critical documents that are needed in order for us to effectively form the basis of our conclusions. 

Editor: In calculating damages, I would suppose you need ironclad evidence?

Lee: When we are retained as an expert in damages, we must defend our opinion. If your opinion isn’t independent and founded on facts, the process of testifying can be very unpleasant. As with any litigation, both sides are attempting to push the results to the opposite ends of the spectrum. Either your clients are trying to maximize their damages or minimize their losses. In either situation, our results must be reasonable and void of any speculation. That means if a business is presenting revenue projections that show astronomical growth rates, it is our professional duty to review the basis of those projections by looking at historical results or trends within the market or other data that may either support or refute their estimates. 

Editor: Where do you see potential litigation issues arising in a sports franchise?

Lee: There are two main issues that a sports franchise might have to deal with: first, a sports franchise negotiates a number of contracts, including sponsorship agreements, cable rights deals and licensing rights. Each one of these agreements takes the form of a legal contract that is negotiated and drafted by an attorney, and in the case of a dispute it requires interpretation. And as with any contract, breaches occur, disputes regarding interpretation of the agreement may arise and the two parties can go into litigation. In my career as a litigation consultant, many of the cases I have been involved in stemmed from an alleged breach of contract, and certainly a sport franchise is not exempt from similar situations.    

Second, the number of transactions involving the sale of teams seems to be increasing.  Again, these types of transactions are no different from any other merger or acquisition, especially in the many instances where post-closing adjustments or disputes regarding working capital adjustments may arise.   

Editor: What would surprise us to learn about you?

Lee: My work in the world of sports is by no means based on my ability to actually play these sports. However, in my spare time I enjoy running, and I have been fortunate enough to complete 26 marathons and an ultra-marathon. Currently, I am actually training for my first half-Ironman. It’s a great way for me to get out of the office and stay active. 

 

Please email the interviewee at elliott.lee@eisneramper.com with questions about this interview.