Five ways to improve insolvency proceedings in the EU
In a recent report, Accountancy Europe identified five ways to improve insolvency proceedings. David Menzies summarises the report’s findings.
Accountancy Europe, has issued a report providing an overview of accountants’ and auditors’ current contribution to insolvency proceedings in Europe.
The survey found that (unlike the UK) in most countries the accountancy profession has limited formal involvement in insolvency proceedings.
Where the accountancy profession is involved as an insolvency practitioner (IP) it tends to be in relation to restructuring, rather than preventative measures. The reasons for this include: that entrepreneurs are not seeking help at an early stage, and the country in question has not established proper procedures.
While in most countries, entrepreneurs seek advice from the profession in the context of insolvency, it appears that entrepreneurs may do this at a very late stage in the process.
Accountancy Europe make several recommendations for improving insolvency proceedings in Europe. These include:
1. Involve practitioners with specialised expertise
Measures should be introduced to promote the specialisation of insolvency practitioners, with financial expertise being a pre-requisite of qualification.
The involvement of an IP should not always require court involvement as the accountancy profession offers a high guarantee of competence, objectivity and independence through its Code of Ethics.
2. Reduce the length of insolvency proceedings
Reducing the cost and length of insolvency proceedings can help to be achieved through communicating the expected cost and time of the proceedings from the very beginning.
EU Member States should decide at national level on a maximum duration for insolvency proceedings or establish a relevant mechanism to be able to terminate insolvency proceedings at a reasonable point.
Terminating insolvency, however, brings no added value if an entrepreneur does not have an opportunity for a second chance.
3. Improve access to help
Entrepreneurs in financial distress should be encouraged to seek help as early as possible. Member States need to raise awareness on availability of expert advice. Debt advice should be available to all, on the condition that it is provided by skilled insolvency practitioners.
Cost implications can work as a deterrent especially for small or micro-entities and Member States should also consider incentives or support programmes to make sure that there are viable options for seeking advice available in the market place.
4. Encourage management’s role in financial distress
Directors should be incentivised to take early and appropriate action when there is a warning of financial distress. This, however, should not mean that directors escape liability for earlier actions.
An internal accountant should also contribute to preventing or detecting possible insolvency by providing their objective views to management.
5. Simplify cross-border proceedings
There is a need to simplify cross-border proceedings and introduce further measures at EU level which would eventually lead to a harmonised environment.
International networks of professional accountants and multi-disciplinary practices can also contribute to smoother and more effective cross-border cooperation. Nevertheless, it remains important to make sure national legislation does not create additional bureaucracy and barriers.
The report also highlights the role that a statutory auditor may play through obtaining sufficient appropriate audit evidence to reach conclusions on the appropriateness of management’s use of the “going concern” basis of accounting in the preparation of the financial statements.
Also, auditors must conclude and include in their report whether any material uncertainty exists related to events or conditions possibly casting significant doubt on the entity’s ability to continue as a “going concern”.
The assessment of “going concern” can help give an early warning to management or flag imminent risks of insolvency, depending on the stage of financial distress. The statutory auditor can contribute to the avoidance of triggering insolvency if management takes the right action after the auditors’ warnings.
It is only in a very limited number of countries in Europe that auditors can take further action towards shareholders, or the court, if management does not react to these warnings.
Background to the report
Accountancy Europe represents 50 professional organisations in 37 European countries. Their report, “EU Business Insolvency. A contribution from the Accountancy profession” has been prepared based on the experience of its Member Bodies.
The report is in support of the proposed EC Directive for an effective insolvency framework which signalled the role of insolvency practitioners, including the accountancy profession.
Preventing insolvency or granting second chances to “honest” entrepreneurs who do not make it the first time around improves the business environment and stimulates growth and jobs.