With economic doom around the corner, the accountancy profession stands braced. Business confidence is plummeting and every day brings news of another major concern being put in the hands of the recovery professionals.

From the highest rungs of global finance, where liquidators, auditors and standards setters are struggling to put right the liquidity crisis, to the high street where the profession is negotiating breathing space for cash-strapped clients, accountants stand ready to be the saviours, enforcers and sometimes undertakers of British businesses.

What will you do in the next eighteen months? Will the credit crunch become a recession? And will the profession help in an economic recovery or be helpless in the face of forces beyond its control?

Changing attitudes

‘I do think attitudes have begun to change. People’s perceptions are that we are in for a recession,’ says Mark Harwood, an auditor at Baker Tilly. And for business recovery experts work is ‘picking up’, says business recovery expert Simon Longfield of Grant Thornton, after a ‘quietish couple of years’.

On all sides and from all business professionals the outlook is the same. The credit crunch has soured into general economic fears with retailers and housebuilders feeling the pinch in particular.

‘The housing market is effectively crashing, reducing wealth and consumer confidence,’ says John Hawksworth, head of macroeconomics at PricewaterhouseCoopers.

On top of that, high oil and commodity prices mean people are having to pay more for their electricity and gas.

There is, he says, ‘a demand crunch and a supply shock.’ This means the simple view that if the liquidity crisis resolves itself everything will return to normal, now seems naïve.

Those fears are feeding through into British business. A recent survey for the British Chambers of Commerce showed confidence is plummeting across key sectors of the economy, with the body warning of a ‘serious risk of recession’ and a correction period that is ‘likely to be longer and worse than anticipated.’

Talk to economists, and they remain only mildly more upbeat. ‘Our main scenario is for a pretty sharp slowdown,’ says Hawksworth, adding that PwC anticipate a 30% chance of a recession.

Trevor Williams, chief economist of Lloyds TSB corporate markets, is predicting the economy will ‘skirt’ recession. Either way, businesses are facing some daunting challenges.

The view from the top

At the highest level, some in the profession are dealing with the credit crunch at the sharp end. The role played by Neville Kahn, the administrator at Deloitte who has cornered the market in the administration of off-balance sheet vehicles, or SIVs, has been well covered.

Kahn’s deal, hammered out with Goldman Sachs, is thought likely to stabilise the position of some $18bn (£9bn) worth of assets held off banks’ balance sheets, and stave off crisis fire sales.

The moves are thought to have been as key to resolving banks liquidity issues as the fresh injections of capital have been, whether from sovereign wealth funds or from rights issues closer to home.

Economists believe that resolving those issues is the first step in any recovery but will not wholly resolve the crisis. ‘Some of the short-term funding problems will ease. But in terms of credit availability [to companies and individuals] then I think there’s an ongoing problem. Banks lent too much money at too cheap a rate for quite a few years. It will take them a long time to clean up their balance sheets,’ says Hawksworth.

The role of auditors in signing off the numbers at the big banks is just as crucial.

Paul Sater, financial services partner at Ernst & Young, has compared the valuations issues to the worst problems of the Russian default and the dot-com crisis.

‘In times like this the audit of valuations requires significant application of auditors’ judgment. ‘There is no silver bullet,’ he says.

The moves are likely to see a major overhaul of the standards applied to all companies but particularly banks and insurers. Taking its cue from the G8’s Financial Stability Forum, the International Accounting Standards Board is likely to recommend new ‘parallel balance sheets’ to deal with the off-balance sheet issues, the modification of fair value accounting and greater disclosures on valuation methods for complex derivatives.

The crisis has already seen a furious debate over fair value accounting, but some believe it might help.

Williams is one. ‘The quicker banks realise what their writedowns are the quicker the market can restart. The quicker the writedowns occur the quicker the overall situation will improve,’ he says.

Recovery position

It goes without saying that with bank financing tightening up, consumer confidence plummeting and commodity prices rising, business recovery professionals will be busy.

‘There has been so much liquidity in the market [up to now], it has been a quietish couple of years,’ says Longfield of Grant Thornton.

The struggle for finance has changed, he says. Now deals are being done on a club basis, by combining banks rather than any one taking on the risk alone.

One area that is the subject of frantic activity is on working capital, where businesses are trying to stretch what they have further.

‘Unless [businesses] have been in a stressed situation or acquired by private equity, they don’t tend to have strong visibility over cashflows,’ says Roger Bayly, a partner and working capital expert at KPMG.

Sharpening up their financial analysis, extending payment terms with suppliers and trying to get cash from customers sooner are all key elements businesses are looking at in their finance functions.

If companies have been paying their tax bills early, they may also be looking to put them off until they are due in an attempt to avoid breaching covenants.

‘We are getting calls from all sectors at the moment asking about working capital improvements,’ says Bayly.

Longfield says he is seeing a lot of activity in sectors associated with consumer spending, where the problems are particularly acute, and also in healthcare, which is under stress at the moment as a result of nursing home changes.

More broadly, housebuilders and retailers are proving to be the first victims but problems could spread.

Audit crunch

Auditors may seem like an unusual group to be intimately involved with the downturn, but they will probably be the first to know as things go wrong.

Harwood says the focus now is on the issue of whether companies can continue as a ‘going concern’.

‘What are the financing facilities like? We have to make sure the audit committee and board have thought about that and that their projections have got enough rigour in them. Do they take enough account of the risks of the various numbers as we move into what may be a deeper recession than people think,’ Harwood says.

Some companies may feel they are unaffected, but their suppliers or customers may be, he adds.

CFOs in the spotlight

It is a truism that business leaders are tested not when things are going well, but in a downturn. CFOs are now finding themselves in the spotlight as the problems bite.

A recent survey from Deloitte highlighted that finance chiefs are seeing a sharp decline in credit. They also fear their profits will be hit, but are at least modestly optimistic about M&A activity.

Though M&A has dropped off recently, many are saying corporate financiers could be in more demand before long.

Geoff Booth, a management consultant from Parsons Consulting, thinks things might improve for M&A in the second half of 2008.

Companies with strong balance sheets and cashflows will be able to take advantage of rock-bottom prices. Santander’s agreed deal to take over Alliance & Leicester is a good example of what may be to come.

But that chink of light is a rare one. According to management consultancy Hay Group, 51% of business leaders feel they have the wrong strategy for a downturn, and trying to correct that is an urgent problem at present.

Uncertain outlook

Booth says that the situation is moving rapidly. ‘Even the financial services sector has been considerably caught out by the speed of change [in the economy]’.

More than that, there is considerable uncertainty about where the economy is heading and whether new shocks will push the economy into recession or whether there will be only a slowdown in UK growth.

Whatever happens, auditors will be on their toes, corporate financiers will be eager for unexpected scavenging opportunities, recovery experts will be doing their best to restructure stressed businesses and CFOs will be frantically looking to stave off anxious creditors as they feel the pinch.

It can hardly be an exaggeration to say that it is important that they all get it right. Without them the liquidators, the real pall-bearers to British business, may start to move in.