Jones Partner

Professional Scepticism and Insolvency? More is needed for better outcomes for creditors.

07/10/2014 by Bruce Gleeson

Professional scepticism is typically raised by ASIC and bodies in the context of auditors. In short, it is used in the context that auditors should “challenge” key assumptions or seek out further evidence, rather than over relying on explanations from management. Indeed it was raised recently by ASIC in its latest findings from inspections of audit firms.

I would argue that the same concept holds for Insolvency Practitioners, be it in either corporate or personal insolvencies. Whether the cause of the financial position or the transaction(s) be deliberate, reckless or more along the lines of an error of judgement, it is important for the Insolvency Practitioner to sufficiently test the claims of management / the individual so that stakeholders have confidence in the formal insolvency process, be it liquidation or bankruptcy. Of course this can come at a cost [depending on the level of testing that may need to be undertaken], but this is quite often a by-product of getting a recovery for creditors.

Certainly when advising management and individuals in financial difficulty, I think it is important to talk to them about this aspect upfront – as it is quite often better able to be dealt with when the “cards are on the table”! Otherwise you are likely to embark on a significant reconstruction exercise because there has been a deliberate attempt to avoid or circumvent what the documents actually reveal. Given the level of investigative powers available to Insolvency Practitioners, any undisclosed issues will invariably surface during the course of the insolvency process. The “cards on the table” discussion generally enables issues to be more readily resolved [but not always], and generally within a shorter timeframe and less of a cost to creditors – thus a better outcome for them, particularly where the recovery is material.

Unfortunately with the voluminous amount of information on the net, the mate at the pub (that seems to be more persuasive than someone that actually knows what they are talking about!!) or those that operate and advice these people in a completely unregulated manner, the outcome quite typically ends up a car crash. There is misunderstanding of what might have been said or indeed promised!! As such when professional scepticism is applied, all the problems generally surface.

Like many Insolvency Practitioners, there are no shortage of “war” stories to tell here – that is not the purpose of this blog.

In these days when many things are becoming commoditised and indeed there is more and more focus on the costs charged by professionals for their services, it is important to understand that whether it is in the audit or insolvency context, that if professional scepticism is appropriately applied, it will come at a cost. Yes it is important for the auditor / insolvency practitioner to get the balance right on a case by case basis, but it is paramount so management / the individual are held to account where needed.

Having the right Firm culture, expertise, supervision and accountability all go to the concept of professional scepticism. With the pace of technology, the rise of social media platforms and the way information is captured, Insolvency Practitioners importantly need to continue to be adaptive to utilising such sources of information to challenge where appropriate representations of management and / or the individual.

If you have a view on this, please let me know what you think.