How to protect your practice when a client’s business collapses

Now that COVID-19 government support measures have ended, many businesses are unfortunately (yet inevitably) going into insolvency and facing liquidation. Judging by the recent collapse of several prominent organisations – including Probuild, one of Australia’s largest commercial construction companies – it’s not just small entities that are vulnerable to pandemic-induced closure.

Amidst such uncertainty, public practitioners not only have a duty to look after the financial health of their clients, but also to watch out for warning signs that they’re heading down the path of liquidation, warns Drew Fenton CPA at Fenton Green.

“If the financial health of your client goes down severely, or they go silent on you, that should ring alarm bells,” he says, explaining that these are often the first indications that a client’s circumstances are about to change, to the potential detriment of their advisory team.

“When a liquidator or receiver manager is looking to wind up a business, they will pursue anybody who they believe has given bad advice to the company. An accountant is the obvious target.”

Heightened exposure for accounting professionals

Throughout the pandemic, the risk profile for accounting professionals has increased exponentially.

Under pressure to navigate legislation changes and a range of new government schemes, practitioners may have made errors, or given incorrect advice, which may yet come back to haunt them.

Likewise, practitioners may have seen a rise – and even been caught up – in dishonest or fraudulent client behaviour. “In desperate times, people do desperate things,” Fenton says. “Are people prepared to lie or manipulate to salvage their position; to go to a bank and maybe alter a document that you’ve given them?”

In this environment, professional indemnity claims have become “a fact of life”, Fenton says. “Circumstances change with your clients; they get into financial difficulty and they do things that may not be straight up and down.

“From a risk perspective, the firm’s risk profile goes up when dealing with clients who are experiencing financial stress.”

Mitigate risk to avoid claims

While professional indemnity insurance will cover any legal costs, client damages and third-party costs that arise if a claim is made against your practice (always subject to the policy’s terms and conditions), Fenton says it should be viewed as a last line of defence – one that is best supported by a series of risk-mitigation strategies.

First, he recommends maintaining a professional distance from clients. If you’ve attended board meetings, or are tight with the owner or directors of a corporation, you may be dragged into insolvency cases as a member, rather than an arm’s-length adviser. “As a shadow director or a director of a company, you're certainly not covered under your professional indemnity policy,” Fenton says.

Second, be diligent with record-keeping processes. If a receiver manager or liquidator has been appointed to go through a client’s books, they have the right to demand information about any advice or services provided by your practice. In the absence of file notes and correspondence records, you’ll have no evidence to defend your actions, should a claim arise. “In times like these, if your client is struggling financially, make sure everything is documented as best as it can be,” Fenton urges.

To ensure your practice’s defences are fortified, Fenton suggests practitioners regularly assess the extent of their professional indemnity cover, as well as any exclusions or restrictions that may apply – giving you peace of mind that you’ll be protected from the financial fallout of a claim, regardless of the outcome.

Find out more at fentongreen.com.au/