Don’t shoot the messenger – how to handle clients facing financial difficulties

As the trusted advisor, it’s often the accountant who is the one to deliver bad financial news. While the client may suspect ‘something is wrong’, it’s the accountant who undertakes the work in reviewing the businesses performance. Once their diagnosis is complete it falls to them to provide the unwelcome news that the business is in trouble, and to discuss the ramifications this may have on the businesses ability to continue operations and importantly the impact on the directors’ personal lives.

We have put together a few tips to help you (the accountant) manage this discussion with your clients so that the personal impact upon them is lessened:

Things To Do

Brainstorm – Generate some potential restructuring / recovery solutions based upon your findings and assess whether any of these are viable.  By critically assessing the business and its performance drivers you may identify some ‘quick wins’ to turn around business performance.

Seek a second opinion – By making a telephone call to a Registered Liquidator you can readily seek a second opinion on the conclusions you have drawn.  Discuss with the practitioner some potential solutions for presentation to the client.  The practitioner can also confirm your views regarding solvency or perhaps suggest a safe harbour or small business restructuring alternative.

Prepare yourself for the meeting – Collate the solutions identified above for presentation to the client and set aside time to discuss these with them in person (if possible).  If the company has more than one director, it’s preferable that all directors are present.  Make an assessment on the ability of the directors to save the business on their own or whether external help is recommended.  

Holding the meeting –  Ensure the client understands:

• the work you have undertaken to diagnose the financial position
• the financial position
• ramifications if ‘nothing changes’
• possible solutions

by asking in-depth questions that allow you to gauge their comprehension. Use clear language the client can understand and avoid overuse of accounting jargon. 

Provide a summary of the alternatives available – Use the information prepared to explain your conclusions and recommendations.

Let the client make the decision – To protect your role as a professional advisor the ultimate decision about how to resolve financial difficulties must be made by the client. 

If solvency remains of concern, a positive outcome for the meeting would be for the directors to agree to meet with a Registered Liquidator (you will need to consider whether you wish to attend this meeting) to discuss the variety of informal and formal solutions available.  Provide the directors with the details of the practitioner’s website so that they can reference this later. The directors may require time to digest the information provided to them at this meeting – give them this time if the financial position allows it.

 

Things Not To Do

Do not become a defacto director

Be very careful that in your desire to help your client through difficult and challenging times that you do not slip into the role of acting as a director.  Remember you can be deemed to be a director based upon your actions even if you are not registered as a director on the ASIC database.  As professional advisors we have statutory protections under the Corporations Law however if we move from professional advisors to the person controlling the entity and making the decisions that statutory protection will not apply.

Do not engage in illegal Phoenix Activity

Recent changes to the Corporations Act make it easier for those engaged in or seen to be the facilitators of phoenix activity to be prosecuted.  It is easy for accountants who lose their professional objectivity to be drawn into helping clients move assets from one entity to another, ie shut down one day and start the next day in a new company.  There is a very fine line between what is legal and what is illegal.  Prosecution for illegal phoenix activity will have a significant impact on your professional standing, your ability to remain a professional accountant and can jeopardise your own ability to earn an income.  It is for these reasons specialist advice from a qualified insolvency practitioner is recommended to ensure you do not stray into areas that could severely rebound on you.

Do not underestimate the needs of those facing financial difficulties

Consider your ongoing involvement –  helping a client in financial difficulties can be quite demanding.  They will often need work undertaken in order to get a clear understanding of their position and the alternatives available to them.  This work will likely need to be done on an urgent basis, becoming a priority in your workday. 

At the outset, the accountant needs to make the conscious decision as to how much work they are prepared to do in these circumstances.  

It is not unusual for an accountant to want little further involvement with an insolvent client, particularly if they have a large exposure to the client which is unlikely to be paid.  However, others wish to continue to provide assistance regardless of the financial burden to their own practice.  There is no right or wrong way to proceed but it is a decision that you will need to make and make early to avoid being trapped in a situation because you have too much unpaid fees at risk.   

Additionally, clients in financial difficulties will be stressed and may even face some mental health challenges.  Be aware of how these types of stresses will impact your relationship with your client and put strategies in place to protect your own wellbeing too. Please reference our mental health blog for further information regarding the impact of financial difficulties on mental health.

 

As we have always conveyed through our accountant relationships, early intervention provides the best hope of saving a client from financial difficulty.   COVID has had a dramatic impact upon many clients some whose businesses may never be able to recover.  Accordingly, by holding these difficult conversations with clients it is possible to provide closure on this financial pain so that they may move forward. Do get in touch for assistance.