Should accountancy firms be investigator and receiver?
Is it right and proper that an accountancy firm which carries out a corporate investigation on behalf of a bank should subsequently be appointed receiver of the same company? The issue is one which arouses extreme passions. All the big accountancy firms have their insolvency arms, and it is normal procedure for banks to use both - if necessary - when a debtor company runs into trouble. The pro-separation lobby, which opposes the practice, sees an inevitable conflict of interest. How, ask the separationists, can investigating accountants be impartial when - should they report unfavourably - the same firm can expect to win the receivership business?
The professional bodies are on the same side here. The rules of both the Institute of Chartered Accountants and the Society of Insolvency Practitioners place no bar on the same firm performing both functions as long as a few basic safeguards are observed. For example, the company being investigated must realise that the investigator's principal relationship is with the bank. The investigators should be in a position to discuss the financial affairs of the company with its directors.
This is not good enough for Michael Snyder, senior partner of Kingston Smith, a medium-sized accountancy firm in the City. Snyder explains the pro-separation view thus: 'When you go in to investigate a company it's to see if there's life there, a future. If you decide there is no life you are bound to be correct, because the bank will then pull the plug. If you say there may be life you could be wrong, so there is a natural inclination to be cautious. If you add to that the prospect of a fee, you are weighted overwhelmingly in favour of receivership - whatever anyone says about morality and integrity.' Snyder argues, in summary, that the brief of the investigators is to find 'the best time for the bank to come out cleanest'. This, he says, is 'outrageous both in the micro situation of a company trying to make ends meet, and in a macro sense. It's not in the national interest to wind-up companies.' The banks and the big accountants insist that the conflict of interest is perceived rather than real. Brian Clare, head of loan management at Midland Bank is affronted both at the suggestion that banks follow blindly what accountants tell them and that they would appoint people who were unprofessional enough to be influenced by the prospect of future fees. 'Do you doubt a dentist who says you need four fillings, and start asking "Who's going to do the fillings for me?",' he enquires. Indeed, Clare is very much in favour of using the same firm for both services. It saves time, a valuable commodity for a company in receivership, he says, and so saves money. If extra time and money had to be spent on getting a new firm up to speed with the affairs of a company, everyone would lose.
One bank that does not share his views is the Royal Bank of Scotland, which has operated a policy of separation since October 1992. In 1993, receiverships involving the Royal Bank were 63% down, year on year, against a fall in the national average of 36%. A special loans unit ensures that the bank holds all the information needed to allow a newly appointed receiver to move with appropriate haste, explains a spokesperson. Although a number of factors contributed to the fall in receiverships, the bank believes that its policy of separation was one of them.
On the face of it, a potential for conflict of interest must arise even if no harm is done in practice. Further, even if the Royal Bank of Scotland hasn't gained from separating roles, it certainly doesn't seem to have lost from it. In these circumstances, would it not be wise for banks to err on the side of caution, and follow the Royal Bank's lead?