My job is to rescue businesses and sometimes to bury them. But many of my cases need never have ended up with me, least of all with my undertaker’s hat on.
The seeds of a company’s destruction will be sown many months before it becomes insolvent: a major customer defects, a key salesman leaves, money is ploughed into an unwise diversification. Turnover stagnates, margins deteriorate and profits shrink.
The balance sheet’s shape changes: an adverse gap develops between current assets and liabilities and then widens. Stock turn slows, debtor days increase and the overdraft rises.
The management won’t admit that the problems exist and the chances are that they won’t have the skills or experience to fix the problems themselves.
Occasionally turnaround experts get called in and put things right with a dose of thinking the unthinkable and suggesting the unsuggestible. Gaps in the management team are plugged, borrowings reorganised and new capital introduced. But too often, the rescue attempt is mounted so late that the shareholders lose their investment, or worst of all, so do the creditors.
But where are the accountants in all of this? Shouldn’t they be pushing management to recognise their problems and to call in specialist help?
Surely it’s a clear case of enlightened self-interest? If their client’s business is rescued, their income stream is preserved. And if nothing can be done, then they have a duty to limit the damage their client suffers.
The key is to recognise that experts must be called early. There is a clear link between how soon a rescue is started and how well it turns out. It’s also vital for accountants not to see any shame in calling in specialists – I couldn’t do an audit or a tax computation to save my life, and I’m happy to admit it. Equally, those of us who specialise in corporate rescue have skills, funding sources and experience that general practitioners cannot have.
- Nick Hood is a partner in Begbies Traynor, a corporate rescue practice
Early bird catches the squirm
By Nick Winters
An audit can achieve much behind the scenes as well as providing an essential assurance statement.
Early dialogue and the development of a strong auditor-client relationship are key to success. This should not affect an auditor’s independence but it will assist an understanding of the business and reduce the risks for all concerned.
For mid-tier firms such as PKF, specialising in growing businesses, the days of calling clients once a year just to provide an assurance statement are long gone.
Depending on the size and complexity of the organisation, client and auditor should meet or get in touch on a quarterly basis – even if it’s just for coffee.
We need to get away from the common perception among management that auditors only come in once a year, are mildly irritating and should be despatched as quickly as possible. As a profession, we should be looking to add value.
For instance when a client in the recruitment industry was experiencing trading difficulties we talked through the problems openly at one of our interim visits.
We had built up a relationship over the years and the level of trust meant we were able to help him take steps to avoid a potential crisis.
By contrast, if a company tells us they are going out of business tomorrow, then, there is not much that can be done.
More often than not, signs of impending trouble are revealed in the numbers. A good-quality and timely analytical review can identify significant issues early in the process. As a result, auditors can plan their work well and carry it out efficiently and have time for insightful discussions with clients.
Auditors need to take a proactive view and be honest and straightforward – even when this will cause them more work or may displease clients. Arguably, this approach will do more to help companies avoid failure and overcome the labyrinth of legislation now being imposed on auditors and their clients.
Auditors who go in to a company with their eyes wide open, raise issues and consult with others should be wholeheartedly welcomed.
- Nick Winters is an audit and advisory partner at PKF.
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