Assisting Troubled Midsize-Business Clients: A Dilemma for CPAs
When a midsize business is in financial distress, CPAs are often the most qualified experts to step in and assist with a turnaround.
by William Culbertson/Journal of Accountancy
Often, when a Fortune 500 company gets into trouble and its stock price tanks, an investment banker is hired to "explore strategic alternatives," the CEO is replaced and the rest of the story is on public display. When a mom-and-pop business gets into trouble, the choices are a lot more limited — sophisticated outside help is too expensive, the CEO is the business and the end result usually gets buried in annual statistics about small business failures.
But when a midsize business gets into trouble and fails to take corrective action, its bankers eventually lose confidence in management and often require a turnaround specialist as a condition for credit renewal. Chances are that the company's independent accountants recognized the warning signs of financial distress more than a year earlier and, following the guidelines of Statement on Auditing Standards no. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern, addressed the "substantial doubt" question using the same intrinsic skills and business analysis techniques that are essential to a turnaround.Certain identifiable traits of financial distress are common to every troubled business, regardless of its industry or size. A thorough understanding of those traits is helpful in choosing a course of action. Read on to see why a privately-held midsize company has the best chance of surviving when its outside CPAs actively participate in the solutions to its problems, even if the CPAs need to abandon their independence.
This article has been excerpted from the Journal of Accountancy. Read the full article here.