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Advising accounting clients through bankruptcy

Will Hill, MBA  Product Manager — Tax Professionals Advisory, Thomson Reuters

Will Hill, MBA  Product Manager — Tax Professionals Advisory, Thomson Reuters

Due to the unfortunate circumstances revolving around COVID-19, firms are now dealing with the need to advise accounting clients through bankruptcy. There have been regulation changes around bankruptcy, and as small to medium size businesses face shutdowns and various other factors, indebtedness is a real issue that several businesses are facing.

In this episode of Pulse of Practice “Let’s talk bankruptcy” Paul Miller, CPA from Business by Design, and I are joined by Steve Nickles, Law Professor at Wake Forest, specializing in commercial transactions and bankruptcy. Together we explore the key issues accountants in relationships with struggling businesses must face as the COVID-19 pandemic continues.

The current state of bankruptcy and COVID-19

In beginning to think about advising your accounting clients through bankruptcy, Steve Nickles brings up a piece from The New York Times. In North Carolina, a small town of about 4,000 people, there is a department store that has been in business or 117 years. It weathered the Great Depression, wars, recessions, etc. Times have not always been great, but the owner, who kept this store in the family business, along with his accountants were determined to survive. Until the virus hit, and it did him in.

“What we’re seeing around the country is a lot of small businesses who have been successful, have never thought about bankruptcy, and had good accountants who never really had to deal with bankruptcy now faced with almost the inevitable,” says Steve. “We have a lot of newcomers to bankruptcy, and I believe the key for a small business that now has to contemplate bankruptcy is to know their first line of defense is typically their accountant.”

The New York Times pieces quotes Jennifer Pendegrass, who is the Director of the Center for Family Enterprises at Northwestern University. The business does not want to consider closing shop, but they must look at the numbers. If the math doesn’t work and the business isn’t viable, there is no point to keeping it alive. Bankruptcy offers some relief and a chance for those small businesses in trouble.

Congress just last year enacted a new form of bankruptcy designed especially for small business debtors with debt less than 10 million dollars. It can be sole proprietors, and it can be any kind of legal entity. It became effective just in February, and now we’re beginning to see filings under this new chapter to reorganize.

“It’s a real possibility, but the key is whether or not the math works,” adds Steve. “The people who know that math are the accountants who get involved with the small business. They can put those numbers in context, and it’s the numbers coupled with their narrative that will make the argument whether it’s feasible to keep going.”

When advising accounting clients through bankruptcy, don’t pass the responsibility

We talk a lot about the struggle accounting firms have with being busy, trying to chase the deadlines, and not being in front of clients enough with advisory. When issues they are not regularly accustomed to handling come their way, their first reaction tends to be to punt it to someone who does. If their client is thinking about bankruptcy, the first reaction may be to turn it to a lawyer. However, the best move may be for the accountants and legal professionals to work together.

“Accountants have a special value they bring, and you can serve your client best by not solely passing the case off to a lawyer,” says Steve. “I think you can do well for your client, help them to stay a going entity, and increase their odds by having an accountant and lawyer work together.”

It’s good for the client’s business, it’s good for the accountant’s business, and it’s good for everybody. Accountants can bring such incredible value from all the things they are experts on, and lawyers may not be. The lawyer can take their financial history, take that context, and put it into a legal wrapper to push it through the process. But after that fact, almost like the wrapping paper to the present, the real value is what the accountant can bring to the table.

“I think rather than just pushing it off to a lawyer, developing working relationships with lawyers is where the client will be best served,” adds Steve. “Bankruptcy is not just law. It’s much more about business than law. It’s about the numbers, feasibility. It’s about property valuation. It’s about developing a story on how the business can survive and prosper. That is based upon the history of the business, market trends, all different types of factors to be considered. But the key to that is the accountant.”

Don’t undervalue your importance

The value of the advisory accountant is not only about numbers, but it’s about the story and the factors around us. It’s being able to look forward and say, what are the moves we need to make now to impact the future of where you want to go?

“Just because as an accountant you might be assigned to work on the books or the taxes, somebody needs to help lead and run that business,” says Paul. “These issues are business decisions, and that’s where I see accountants bringing their gut instinct and experience to the table to help people with something that is new for them. For most clients, they’ve never gone through these issues, and they need a type of emotional support as much as anything else.”

“I think accountants, in this respect, really undervalue their importance,” says Steve. “The lawyer is there to get you in front of the judge, but when it comes down to the person who’s going to take the stand in from of the judge, those are going to be the accountants. Accountants create that narrative. They can explain the history and convince the judge. The client will testify before the judge, but it’s going to be the accountants telling a story. The more history, the more the accountant is involved, the more credibility the case will have, and the more likely it is the client can survive with a lot less debt.”

Listen to the “Let’s Talk Bankruptcy” episode of the Pulse of the Practice podcast on your preferred platform (Apple, Spotify, Stitcher) or here.

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