What to do (as an accountant) when you lose clients to insolvency

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What to do (as an accountant) when you lose clients to insolvency

As an accountant, it’s particularly concerning if one of your clients becomes insolvent. While it’s never good to lose a client because they go out of business, there may be broader implications for you and your business. Whether you were just involved in lodging their tax returns, audited and prepared all of your client’s financial accounts or gave them business advice, there may be some insolvency obligations for accountants.

In this article, we address the major questions you might have about your obligations and how you may be affected if your client becomes insolvent.

Do I have to hand over my client’s books and any advice I have given them?

When a business goes into administration, either voluntarily or involuntarily, one of the first things the insolvency administrator will do is look at their financial records and books. If you have prepared or maintained any part of their bookkeeping, financial statements or tax records, the administrator will most probably ask you for access to them.

As an accountant, you may also have given advice to your client about how they could structure their business or manage their financial affairs. The insolvency administrator may want to know more about the advice you have given, especially if it was quite recent. This will help them understand what was going on in the business at the time and your rationale for the advice.

Most often, the administrator will just send you a letter and ask you to give them your records and files. Generally, you should hand over this information to the administrator.

The administrator is now effectively your client. They represent their interests and are acting on their behalf. This means, there is unlikely to be an issue of client confidentiality, even if there is information in your files that is about other people or businesses. If you would hand this information to your client without worrying about breaching their confidentiality, then you can also give it to the administrator.

If you don’t want to give the information to the administrator they can serve you with a formal notice under either the Bankruptcy Act 1966 or the Corporations Act 2001. Both of these Commonwealth laws give an insolvency administrator the right to have the books of account and any papers you have about your client.

Should I help my client fill out their reports to the Australian Securities and Investments Commission (ASIC)?

The directors of an insolvent company must complete a Report as to Affairs (RATA) and lodge this with ASIC. This report is then reviewed by the administrator, who also reports to ASIC about the information in it and how it compares to what they have found in their review of the company.

The RATA includes a lot of financial information about the company, including its assets, liabilities, property interests, debtors, creditors and other liabilities. As their accountant, you may have some or all of this information, so it’s understandable if the directors ask you to help them complete the report. You can help them fill out the RATA, and in fact, you can also ask the liquidator to pay you for your time.

The Corporations Act 2001 says that you can be paid for your costs and expenses preparing, making and verifying the report. The amount you can be paid must be reasonable to the liquidator. So, once you have finished completing the RATA, send an invoice to the director. They can then ask the liquidator to pay your invoice. As long as your invoice is reasonable, it should be paid.

Do I have to speak to the administrator?

Insolvency administrators must investigate an insolvent company and its financial affairs. This may include things that it did before it became insolvent – like company restructures or changes to its business model. As part of their investigation, it’s common for an administrator to speak to any accountants who were helping the business. This may be done as a private interview or as a public examination.

A public examination means that you are summoned as a witness. This means you will give evidence under oath and possibly in front of a judge. This may happen if you haven’t given the information that the administrator has asked for. It may also be because you were involved in something that is under investigation and the insolvency administrator wants your interview to be part of the public record. It can then be used as evidence later, which means you may not need to be called again as a witness.

If the administrator wants to speak to you, either in a private interview or in a public examination, there’s no need to be concerned. It’s just part of the investigation process. In the interview or examination, it’s important that you answer honestly and openly. While you have a duty to maintain your client’s confidentiality, as the liquidator is now acting on behalf of your client, that confidentiality doesn’t apply to them. Lawyers have what’s called Legal Professional Privilege, which means they can’t reveal things that their client has told them, but there isn’t anything similar for accountants.

Is there anything else I should do?

As long as you do what the insolvency administrator asks, you’re unlikely to have any issues. Occasionally,  accountants are found to be involved in insolvencies and this can lead to penalties or other issues. But this is really the exception rather than the rule. If there are some unusual things in the accounts that you prepared or the advice that you have given your client, you’ll be asked to explain them as part of the investigation, but that’s likely to be all.

If you have a client who is unfortunately now insolvent, the best thing you can do is to cooperate with the administrator. Give them the information they need and help them with their inquiries. This may help your client resolve their issues quickly and will cause you less stress and effort in the long run.

If you need advice about insolvency obligations for accountants, get in touch with CCASA. We specialise in company compliance and will be able to advise you on the best approach for your situation or recommend an appropriate lawyer to help.

This information is general in nature and we recommend that you seek legal and/or accounting advice to make the best decisions for your business.