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Accountants can become collateral damage when a business runs into trouble if they fail to avoid the pitfalls, insolvency specialist warns.
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Tread warily ‘or risk fallout’ with clients in distress
06 November 2023
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10 minute read
Accountants can become collateral damage when dealing with clients in distress and must be alert to multiple pitfalls, according to Adrian Hunter of insolvency specialist Brooke Bird.
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The range of traps included everything from becoming over-involved in the running of a business to inadvertently assisting a phoenix, he said, and took in potential damage to mental as well as financial health.
“Accountants need to be very careful when dealing with clients in distress,” Mr Hunter said on a recent webinar hosted by John Jeffreys. “When businesses fail, they don't pay their accountants so you can suffer a loss as a result of trying to help out your client.”
“You need to be mindful of your mental wellbeing. Clients within stressful situations can be very draining on accountants, take up a lot of your time, use your emotions as much as theirs getting you to help them save the business, save their marriage, those types of things. You also need to manage your own risk.”
Stressed business owners whose companies ultimately failed often bit the hand that tried to help them, he said.
“Invariably whenever I speak to a business owner they're always happy to point the blame at their accountant,” he said. “My accountant didn't tell me my tax returns were overdue, they didn't do my accounts right, they overcharged me for the advice I received – the lies just go on and on.
“But you've got PI and they’re looking for someone to blame and so you need to make sure it's not going to be you.”
It was crucial to document exactly what the client relationship entailed.
“Of course, you should all have engagement letters. Because at the end of the day, that's how you measure your exposure.
“If you have the correct engagement letter to do all these certain things, and that's all you do, that's all you're engaged to do.
“If you start to do additional ad hoc work above and beyond what your engagement letter says, you may find yourself exposed if – and perhaps when – the client starts to run aground because lawyers love it when accountants don't have engagement letters.”
Another pitfall was gradually becoming too involved in the day-to-day running of a business. Stepping in to access accounting software once could become regular and before you knew it, you’re involved and potentially exposed.
“You also want to make sure that you're not a de facto. So don't be running the client’s business on their behalf,” Mr Hunter said. “Be very, very careful when dealing with your clients in financial distress, because you don't want a finger pointed at you.”
Going too far and helping to restructure or build a new company could leave accountants open to charges of assisting in phoenix activity.
“You can be personally liable for any involvement in that regard and I've come across accountants who do it inadvertently. So you just need to be very, very cautious when creating new entities for directors and transferring assets between entities.”
When it came to tax debts, an accountant should satisfy themself that the business was viable before lobbying the ATO.
“It needs to have a cash flow or a profitability analysis done. So it needs to first of all convince you that it's the right pathway for the business to go and then you make that approach to the ATO.
“The ATO looks favourably upon repayment programs less than 12 months, anything 12 to 18 they sometimes go at – anything much more than that they're not interested.”
if it starts to run off the rails, they default upon the pay program or they can't get it, you need to speak to an insolvency person as soon as possible.”
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