Profiting from the insolvency conundrum

It is an unfortunate irony for accountancy firms but, as fears that the UK economy is set for full-blown recession recede, it is insolvency practices that are suffering most.

Just last week, Accountancy Age revealed that PricewaterhouseCoopers was laying off 80 people from its non-bank insolvency service – some 7% of the unit’s 1,100 staff. This week, there remain major questions to be answered by the practice and industry in general.

The planned reductions will affect offices across the country, including operations in Hull, Leeds, Manchester, Huddersfield, Grimsby and Sheffield.

One internal source predicts the cuts will reach 25% of the unit’s current work force once they are completed.

PwC denies that the redundancies are connected with the merger last summer that created the firm. Indeed, the firm has been anxious to avoid suggestions that employees could go as a result of the marriage of Coopers & Lybrand and Price Waterhouse.

Where the cuts will bite remains to be seen. Many point to the cultural differences between the ex-PW and ex-Coopers insolvency teams, highlighting the philosophical divisions between them.

Coopers is a national group, whereas Price Waterhouse is a global organisation.

PwC insolvency partner Steve Hill says that the number of insolvencies has fallen by more than half since the early 1990s, and that figures from the Insolvency Service show that, while almost 4,000 companies went into receivership in the final quarter of 1995, only 3,346 did so in the same period for 1998.

In the longer term, there has been an even more dramatic reduction from 1992’s peak of 8,427 insolvencies in the last quarter alone. ‘The fall in formal insolvencies can be partly explained by recognising that businesses have found better and smarter ways to deal with problems than by simply appointing an insolvency practitioner,’ says Hill. ‘More is now being done informally, using turnaround skills.’

Competitors question, however, how a 1,100-strong insolvency unit can be viable when business is falling and competition rising all the time.

Turnaround is a growing, but less publicised, area of consultancy. An accountancy firm is called in confidentially, usually by a creditor, to reorganise a business when the problems surface. And as companies try to learn the lessons of the last recession and deal with problems early, turnaround has become a popular way of addressing difficulties before it is too late.

It is also an attractive proposition for companies because it increases their chances of survival. And it is a winner for firms because they are able to earn additional fees over and above the normal audit. Accounting firms, after all, should not act as administrator, liquidator or receiver to a company for whom they already act as auditor. They can, however, act as a turnaround consultant for an audit client. ‘Firms are setting up specialist teams to deal with these areas, and mainly with their own accounts,’ says Wilde Sapte senior partner Mark Andrews, who chairs the CBI’s insolvency panel.

Although there are no concrete figures to support the value of the work, most of the Big Five agree that, while formal insolvency is becoming less important, turnaround consulting has grown significantly over the past few years.

PwC’s Hill acknowledges that turnaround consulting has brought increased opportunities. But he is adamant that there remains enough formal insolvency work around the globe to justify the size of his firm’s unit.

Split into four departments – business regeneration, insurance, lender services and non-banking – PwC’s Business Recovery Services division is three times the size of Ernst & Young’s, and at least twice that of Deloitte & Touche.

As case numbers continue to slide, Ernst & Young insolvency partner Alan Bloom disputes that adapting to the new environment will simply entail transferring people from the formal to the informal side if things get worse. ‘There is some cross-over of skills,’ he explains. ‘But you can’t just convert people easily.’ Hill agrees, saying: ‘There are significantly different skills sets required, and dyed-in-the-wool liquidators will always be that way.’

E&Y recognised the shift in focus within insolvency a few years ago and has restructured accordingly, says Bloom. ‘PwC is certainly behind us,’ he adds. Similarly, KPMG head of corporate recovery Mike Wheeler has found that informal consultancy is in demand, but the firm is also building up its work through global expansion and selective investment in non-bank activity.

Deloittes, on the other hand, aims to buck the trend and build up its non-bank insolvency practice, and recently appointed former Moore Stephens Booth White partner Colin Wiseman as a director. ‘Although we have had some big contracts such as BCCI, we have always had a fairly small market share in non-banking work, and want to increase our presence in the sector,’ acknowledges Deloittes insolvency partner Christopher Morris.

Even after taking the cutbacks into consideration, increasing competition from other firms chasing the more lucrative contracts may force PwC into accepting volume work which is poorly paid.

But, according to Andrews, increased competition is unlikely to force firms currently involved in mergers to undertake similarly drastic measures.

In the Pannell Kerr Foster/Robson Rhodes merger, Pannells runs a decent-sized insolvency department, while Robsons’ is fairly small. Similarly, in the case of the BDO Stoy Hayward/Moores Rowland tie-up, BDO has a large insolvency department, while Moores has a smaller presence, says Andrews.

Other Big Five firms have explored moving domestic insolvency practitioners into other areas. ‘I suspect all the Big Five have moved people out over the last few years through natural wastage,’ says Andrews. Many will have been mopped up by internal corporate recovery units dealing with collapses in Russia, Eastern Europe and the Far East.

All these changes in the insolvency business must be set against the backdrop of a government which has regularly stated its support for policies fostering entrepreneurial culture. The intended changes to insolvency law are likely to cement current insolvency practice, rather than usher in a brave new world.

Trade secretary Stephen Byers is committed to making a distinction between responsible risk-takers and those who deliberately set out to cheat their creditors or abuse limited liability. ‘I believe the law in this area can and should be improved, and I have established a working group to review our insolvency laws,’ says Byers. ‘They will report back to me by the end of April.’

If the shape of the profession itself does not change, we may see market shares altering substantially. With many of the Big Five firms building up their turnaround consulting units, there may be a significant opportunity for smaller firms – and boutique insolvency practices – to flex their insolvency muscles.