Accountants and the crisis: the outlook – ready for the worst

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

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

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

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

‘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

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

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.

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