FINANCIAL FOCUS: The role of advisors in the bankruptcy Chapter 11 process
In this article, I want to present ideas that will help businesses emerge from bankruptcy. This article should naturally be of interest to debtors, but emerging from bankruptcy is also advantageous to investors and creditors.
Business owners often overlook or ignore the underlying causes that led them down the path to bankruptcy. We as accountants try to identify the underlying roots to the problems. Our philosophy is to attack problems aggressively and find creative, practical solutions.
We stress the need for utilizing current financial data in the decision-making process. We analyze monthly, and sometimes weekly, financial statements. We explore each line item and discuss deviation from expected results. We also identify the causes of deviations and help our clients solve these issues.
Fortunately, few of our regular clients have had to file bankruptcy.
More than 99 percent of our bankruptcy clients come to us after filing for bankruptcy protection. That makes the challenge of saving the company even more difficult. Most businesses wait too long to file bankruptcy and address the issues.
A problem in many bankruptcy cases is that management does not truly appreciate financial accountability. We stress to our clients the need for understanding the financial data and the underlying impact of the numbers. Many debtors have abysmal recordkeeping which leads them to make incorrect financial decisions which in turn leads to a variety of financial disasters.
Attorneys play an active role in guiding management on legal issues and helping debtors to understand and implement sound judgment in their business practices. Therefore we recommend that attorneys lead the debtor in the reconstruction of the business, as well as educating management to foresee potential problems.
Regular meetings with accountants and attorneys are worth the dedication of time and effort. The results are often surprising to management that such meetings will have a very positive effect on the business. In this process, often we discover that the debtor becomes fascinated with numbers. The ability to understand financial information helps the debtor make better business decisions.
In some instances management shows resistance toward change in their business practices and to face and resolve conflicting issues. This management resistance requires accountants and attorneys to be even more aggressive and to exert more pressure on management to convert bad habits into good habits.
If the advisors feel management is not going to change its business practices, the advisers should use their professional judgment and advise management to cut the company's losses, instead of prolonging the process and increasing potential personal liability.
Emerging from Chapter 11 requires a certain mindset of three key players (accountants, attorneys and debtors) to be active problem attackers and problem solvers. Only then is a favorable outcome likely. If only two of the three have this mindset, an uphill battle is probably in store. If only one or none has this mindset, then Chapter 7 is my recommendation.
Nistendirk is a partner at Woomer, Nistendirk & Associates PLLC, a CPA firm located in Charleston. Bob has extensive experience in tax accounting, strategic planning and financial/business consulting. He can be contacted at firstname.lastname@example.org.