The biggest game changer for corporate accountants in the year ahead

Corporate insolvency on the rise

Australian corporate insolvency appointments have almost tripled since the 2021–2022 financial year, with the highest numbers occurring in NSW. The hardest-hit industries have been construction, retail, and hospitality, with the firms most vulnerable to insolvency being small-to-medium-sized enterprises.

What’s driving insolvency rates

• Conclusion of pandemic support: JobKeeper and business support payments obscured companies’ true financial positions, and once these supports were withdrawn, many companies faced financial difficulties.
• Inflationary pressure: Rising inflation has increased business costs and reduced profit margins, pushing many companies into financial distress.
• Consumer spending: Cost-of-living pressures mean consumers are spending less on retail and non-essential services, causing businesses to suffer.
• Tax recovery: During the pandemic, the ATO paused debt recovery. Recovery actions have since resumed as the ATO seeks to retrieve over $50 billion in tax debts, which many companies have been unable to pay, contributing to increased insolvency risk.

Construction under pressure: Rising insolvency risks

The highest rates of insolvency are occurring in the construction industry. Several factors are contributing to this, including:

• Inflationary pressure: Rising supply costs have eroded profits, particularly where fixed-price contracts were signed prior to the increase.
• Supply-chain disruption: The construction industry depends on timely project delivery; supply-chain issues delay projects, increase labour costs, and ultimately erode profit margins.
• Lack of financial literacy: There is no requirement for directors in the construction industry to have financial awareness or knowledge. This educational gap has led some construction firms to poor cash-flow management and failures to account for employee entitlements. Directors of construction companies often seek advice when it is too late for a consensual restructure, leaving a formal insolvency appointment as the only resort.

Accountants on the front line of preventing corporate insolvency

As Australian insolvency rates continue to climb, accountants must be adept at identifying a company’s potential or actual insolvency. Accountants servicing the construction industry should also be aware of the heightened risks faced by that sector. Corporate accountants should take a strategic approach to preventing insolvency, considering the following:

• Regular assessments for insolvency: External and in-house accountants must regularly conduct insolvency assessments for the companies they service.
• Regular contact and education of directors: Accountants can educate directors on insolvency risk indicators such as financial losses, cash-flow difficulties, problems obtaining credit, and overdue tax debts. Accountants and directors should also maintain ongoing communication about the company’s solvency.
• Swift intervention: The earlier the intervention, the higher the chance of survival. Accountants who suspect a company is insolvent should notify executives promptly, as the fewer liabilities incurred, the greater the likelihood of successfully pursuing alternatives such as restructuring or implementing a deed of company arrangement in voluntary administration.
• Avoiding liability: Accountants may face scrutiny when a company becomes insolvent. It is essential to maintain comprehensive records of discussions with directors regarding financial distress, including documenting advice and recommending that the company obtain independent legal advice or a formal insolvency assessment.
• Leverage technology: Balance the use of new technology with careful human review to ensure both efficiency and accuracy.

Whether insolvency issues ultimately prove to be the dominant game changer, they will certainly present significant opportunities for accountants.

Trevor Withane is the managing partner at Ironbridge Legal.