Rick Telberg
Rick Telberg

Company in Distress: Don't Wait Until It's Too Late

Troubled companies can leave collateral damage in their wake. Don't let your firm be one of the victims. Here's what you need to do today to be a hero, not a chump.

May 10, 2010
by Rick Telberg/At Large

The economy may, indeed, be at fault for many of the latest business failures. But blaming the economy won't turn around a company in trouble; recognizing the problems and taking swift action could. That's where CPAs can help.

With over 40,000 business bankruptcies in 2008 and 2009 and little improvement expected this year, the message of turnaround specialist Katie S. Goodman couldn't come at a better time.

One of the key opportunities facing CPAs today, according to Goodman, is to "truly recognize that certain clients are in financial distress and will not make it through the economic cycle."

Goodman is preparing to share her message at the newly combined AICPA Practitioners Symposium and TECH+ Information Technology Conference, June 7-9, in Las Vegas. Goodman is managing partner of Atlanta-based Grisanti, Galef & Goldress, one of the oldest turnaround consulting firms in the United States. She is often called in to assume the role of the director of reorganization or the chief restructuring officer for companies with private equity funding, and she serves as an adviser to boards of directors and management teams.

She says CPAs are in a unique position to aid the troubled businesses, sometimes even before it becomes too late to save it. "Stepping back," she says, "CPAs can see the issues in a business," such as uncollectible accounts receivable, bloated inventories, stretched accounts payable and breaches in lending covenants.

"It's an opportunity," she says, "to truly add value." CPAs can "talk to the business owners, find out what's going on and offer advice and solutions."

It's especially important for the CPA to dig behind the numbers of financially distressed clients for two reasons in particular, she cites:

  1. Owners of financially distressed companies can be more likely to be producing fraudulent financial statements. To be sure, Goodman will be telling AICPA members, "as an industry we try to avoid the word 'fraud' -- but the level of fabricated statements is high." Goodman recalls several cases in which she's been called in to untangle problems caused by audited companies seeking to defraud creditors. Of course, "an audit is not designed to detect fraud," she says, "but the CPA should be aware of the heightened possibility of fraud in a distressed situation."
  2. CPAs have another reason to get involved early. "If a CPA has a client who is in financial distress, or insolvent, it is unlikely that they will ever be paid for their work," she says. "CPAs need to evaluate credit risk just like any other firm: Clients who do not pay are not good clients. It is astounding to see so many accountants on lists of unpaid creditors. They see the numbers, should be able to assess the situation and frequently don't."

So what should CPAs be doing about it? "As always," Goodman says, "they should be stepping back from the data and be good advisers to companies and company owners. In a 'trusted adviser' role CPAs are invaluable in guiding companies to success. Who else has regular access to financial data and can make that objective assessment?"

The economic situation could get worse before it gets better, according to Goodman. "We have a long way to go," she says. The level of debt maturities from 2012 to 2014, which spring from the 2005 – 2007 financing spree, will cause "large, continued" financial problems for companies. "And this will be combined with maturities of CDOs [Collateralized debt obligations], a weak commercial real estate market and a residential real estate market that will take five or more years to recover," she says.

But if advisers such as CPAs can give good advice, clients will, with a little luck, make it through the recession.

"Smart advisers," she says, "look at the big picture."

YOUR OUTLOOK: What are your books telling you about the economic forecast? Is your A/R line recovering? Are you writing down less? How are clients rebuilding their balance sheets? What signs do you see? E-mail your comments with your observations to Rick Telberg.

Copyright © 2010 CPA Trendlines/BSG LLC. All Rights Reserved. Used by Permission. First published by the AICPA.

About Rick Telberg

Rick Telberg is editor at large/director of online content.

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Disclaimer: Any views expressed in this article do not necessarily reflect the views of the AICPA or CPA2Biz. Official AICPA positions are determined through certain specific committee procedures, due process and deliberation.