Insolvency practitioners in Australia are angry and frustrated. Why is that, and why is it important to know?

In article:

Introduction

Why are insolvency practitioners one of the angriest professions in Australia? Like auditors, insolvency practitioners are generally chartered accountants. So why do auditors seem happier than their insolvency practitioner cousins? 

A recent PhD thesis by Queensland law academic, Dr Elizabeth Streten, titled Practitioners’ Perspectives: Experiences Adhering to Legal and Ethical Regulatory Standards (Practitioners’ Perspectives) examines the experiences of insolvency practitioners to determine both why they feel the way they do and what might be done to resolve the situation. 

Two findings worth noting include:

“The existence of under-confidence in practitioners, or at minimum that practitioners perceived the existence of under-confidence in them” (p10). 

and: 

“practitioners’ perception that there was under-confidence in them and their performance caused practitioners to suffer from poor professional identity” (as above).

These observations match this author’s observations, that insolvency practitioners are immature professionals in a state of identity crisis. What is critical to understand is that insolvency practitioners in Australia are both low in confidence in themselves and they also believe that creditors and other stakeholders don’t trust them.

However, unlike Streten, this author sees the problem as almost entirely of the insolvency practitioners’ own making. In short, they advertise themselves as corporate doctors, when they are solely corporate undertakers. At least undertakers know their mission is to put on a solemn funeral where everyone is respected; they don’t promise to resurrect the corpse.   

What do the insolvency statistics show? 

The Australian Securities and Investments Commission (ASIC) supposedly keeps statistics on the causes of insolvency. It might be thought that this could shed light on the mental and emotional state of insolvency practitioners. After all, whatever is causing distress in insolvent businesses can itself cause distress for the liquidators who have to take over from that business. Insolvency practitioners in Australia (in liquidations and voluntary administrations) step into the roles vacated by directors and inherit significant headaches. 

Those statistics suggest that the key causes for insolvency are bad financial management, poor record-keeping and inadequate cash control. However, those are properly construed as symptomsof insolvency, rather than the genuine causes. The horse has already bolted by the time these lagging indicators surface. 

The real causes of corporate insolvency are not properly explored or understood in Australia. Is it because incompetent people are in small business? Is it because the cards are already stacked against small business from the start and they bear a greater risk than bigger companies? 

Probably both, but there has been no systematic empirical research on this in Australia. 

Practitioners’ Perspectives observes that insolvency practitioners think that directors come to them too late. 

But is that a fair observation? Why would directors consult insolvency practitioners when they do not have a reputation for dealing with the root cause of problems for businesses? Or is this part of a deeper problem that there is no accepted professional methodology for addressing small business insolvency in Australia?

Given the lack of informative information from insolvency statistics, below we dig deeper into Streten’s research to see if insolvency practitioners themselves have greater insight. 

What do insolvency practitioners think?

Some of the observations of insolvency practitioners covered in Practitioners’ Perspectives include:

 Reflections on ‘feeling judged’: 

“I dislike when there’s a bias judgment against my values and intentions … I

get that a fair bit where a person with the wrong end of the stick will question

my morals, my intentions, accusations of being conflicted or having a

particular outcome planned when that’s certainly not the case” (p172). 

Reflections on communication: 

“But as soon as you have my mobile number you have my body. Because this

is on your person. So yes, I can choose not to answer a call. But I cannot

choose not to see a message. It’s there. A disgruntled borrower who likes to

text at 11pm at night and your phone is beside you charging. You see it. …” (p169). 

Reflections on compliance and enforcement by the Australian Securities and Investments Commission (ASIC):

“It’s almost like entrapment … there’s so many lodgments and if somebody

misses one they get shot …” (p174). 

While, this author has no doubt that these observations reflect the personal experience of the liquidators, are they fair as complaintsabout their role? As a hardworking lawyer the author can sympathise with overworked professionals but is also skeptical that insolvency practitioners have unfair demands. Some scholars have sought to contrast the stress levels in executives in Australia against manual occupations and have shown that executive-level jobs are significantly less stressful than their manual comparison group. See Bassett and Spilane (1987) and Spillane on occupations including Telecom executives and airline cabin crews regarding cortisol levels.

Liquidators are probably the most highly paid private practice accountants in Australia. In the 2010 Senate Inquiry, The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, one submitter, barrister Geoffrey Slater observed: 

“for some of the larger firms in Australia we are talking well over $4 million, or $5 million or $6 million per year for the partners of the insolvency. That is more than any of the partners make at the big firms such as Allens Arthur Robinson or Clayton Utz or anywhere like that.”

Feeling judged by the public, being on call to stakeholders and the keen oversight of regulators are all phenomena experienced by police officers, social workers and teachers, as much as they are by liquidators, professions which earn significantly less than what a liquidator earns. 

One might also wonder whether the lack of diversity in the profession is a partial cause of these reports. Look at the demography of insolvency practitioners — they are predominantly white middle-aged men. Perhaps the complaints more closely reflect the views of that demographic, rather than general complaints applying to the profession. 

Streten suggests that insolvency practitioners have a lot of work to do to ‘adapt’ their practices and to ‘better align’ their ‘professional identity’ (eg. see iii and iv). 

Arguably, however, the identity crisis experienced by insolvency practitioners is a natural result of problems practitioners themselves have created to make a buck (more on this below). The author’s view is that job dissatisfaction is caused by a single-minded focus on fee income at the expense of achieving a higher professional calling. 

There is also a broader philosophical question as to whether insolvency practitioners are really a profession to which an identity should be attached. Traditional professions such as medicine and law have a deeper societal purpose or calling relating to human well-being and human rights, drawing on ethical principles like beneficence, ‘do no harm’ and the right to an advocate. What is at the moral core of insolvency practice? Spurious arguments about economic utility? This puts insolvency practitioners in a difficult position because they must hide from their potential appointors and also stakeholders (ie. creditors) the narrowness of their objectives in their work. 

There is significant skill required by business occupations such as real estate agents and stockbrokers but there is no suggestion that either fit the definition of a ‘profession’. The Australian Council of Professions defines professions as:

“A Profession is a disciplined group of individuals who adhere to ethical standards and who hold themselves out as, and are accepted by the public as possessing special knowledge and skills in a widely recognised body of learning derived from research, education and training at a high level, and who are prepared to apply this knowledge and exercise these skills in the interest of others.”

It appears to the author that because insolvency practitioners don’t exercise their skills in the interests of others, they will be precluded from achieving the status of a profession. The secondary issue is that they aren’t able to demonstrate that they have special knowledge derived from research and education. 

What are the causes of practitioner unhappiness?

So are there any justified grounds for practitioner unhappiness? Let’s consider a few possible candidates: 

• High public scrutiny. The media regularly reports the activities of misbehaving insolvency practitioners. And there have been numerous inquiries over the last couple of decades into their behaviour (such as the Senate inquiry referred to above). In response, we might observe that insolvency practitioners have not come forward to explain and defend their role well. An ongoing issue is billing — there is no easily understood connection between the high rates that insolvency practitioners share and delivery of value.
• ‘Expectation gap’ theory. The idea here is that the public expect too much from liquidators, given what is realistically possible. This might be compared to the unfair expectations people place on auditors (see Brown and Anderson ‘Mind the Insolvency Gap: Lessons to Be Learned from Audit Expectations Gap Theory’). In response, one might point out that the ‘expectation gap’ is largely caused by practitioners themselves. It is within their hands to communicate to creditors better that they are unlikely to get a return (read more about the miserable returns for creditors in The Ultimate Guide to Liquidation Part 2: Preparing for Liquidation).
• Poor relations with ASIC. As evidenced above, many insolvency practitioners perceive ASIC as punishing liquidators for minor infractions, but not going after the rotten eggs (‘quick wins’ for the bureaucrats). There is some merit to this complaint. But this is a systemic issue to do with ASIC, and its lacklustre approach to enforcing major misconduct (compared to the SEC in the US for example). On the other hand, ASIC has increased its regulatory demands upon insolvency practitioners and their frustrations may be in fact caused by their struggle towards professionalism. 
• Job demands have increased. One frustration of younger insolvency practitioners is that they are being called upon to work harder than the older firm partners they are succeeding. No longer can insolvency practitioners delegate most of their work to junior staffers and then spend their time with accountants in city restaurants and bars. The technical demands of voluntary administrations or legal actions require the personal labour of experienced practitioners.
• Talented graduates are harder to come by. The ‘war for talent’ means that graduates no longer queue for accounting and law firms when they finish university. Most insolvency accounting firms are not pleasant places to work – they are stale, require time based billing and afford little opportunity for creativity. The lack of capable junior staff at insolvency accounting firms will increase the workload on principals, particularly in small insolvency firms.    

Does anything need to be done about insolvency practitioner dissatisfaction?

Streten’s methodology is phenomenogicalempirical research. This means she takes seriously the first-person, lived experiences of her subjects (in this case insolvency practitioners) to arrive at insights. In her words: 

“Understanding the lived experience and practice of practitioners means steps can be taken to address improved practitioner reflection, practice and compliance” (p18). 

One might respond, what about the ‘lived experience’ of creditors and the broader public who take a very dim view of insolvency practitioner complaints? 

Arguably, Streten’s approach represents an ‘ivory tower’ perspective towards the public — it is assumed that they don’t understand insolvency and are therefore partly to blame for insolvency practitioner dissatisfaction. 

In this author’s view, the public and the business community deserve more credit. Just like private health insurers, insolvency practitioners are geared towards obscuring the pricing structure of their business operations and it is the regulator’s job to straighten out the business environment. The public — who have been creditors — are likely to have a very clear view about what they saw and the outcomes achieved.

It might also be observed that, to some extent, unpleasantness comes with the territory of insolvent administration. That’s why practitioners charge so much and have priority for payment. As mentioned earlier, many professions have to deal with high scrutiny and expectation gaps (such as police officers, teachers and social workers) but don’t get the same material rewards. 

But if we take seriously the idea that insolvency practitioners need to strengthen their professional identity, what’s the next step?

It is possible that the new small business restructuring practitioner role might help as liquidators can register as restructuring practitioners and get involved in genuine business turnarounds (perhaps a slightly more fulfilling line of work). 

But overall, it seems as though insolvency practitioners might be best helped by being more authentic about their role. If they are to be undertakers, then they should be clear about that and drop the cognitive dissonance associated with the role. Recent law changes which mean greater scrutiny from regulators and enhanced professional training may help the latest generation of insolvency practitioners to work through this issue better. 

Realistically, whether they want to or not, insolvency practitioners may not even be qualified to transition from ‘corporate undertaker’ to ‘corporate doctor’ — if you’ve spent your entire professional career sitting in the office sending emails and filling in forms, what would you know about turning around a business in chaos? The answer is very little. It is also likely that their professional development has actually been stunted by ‘growing up’ in stale work environments. 

To read more about this author’s views on reforming the insolvency practitioner role, check out What needs to be changed in Australian insolvency law: More carrots and less stick for directors.

Takeaway for creditors and company directors

The best approach that a company director can take is to realistically assess their potential voluntary administrator or liquidator before making the appointment. It is better to appoint ethical, commercial and hard-working insolvency practitioners. It may be that they will not be able to ‘resurrect’ your insolvent business and it will be counter-productive to expect them to do this. The reasonable objective of a company director may be to set up the least painful process possible and be in a position to deal with and negotiate appropriate outcomes with an insolvency practitioner.

Creditors should be realistic in their expectations of liquidators because the empirical research has shown that it is very unlikely that creditors will see a financial return (ie. a dividend from the pool of assets recovered). It would be unrealistic to expect that an insolvency practitioner is the ‘company police’ because they are not. Decent analysis reports and asset recovery are basic expectations that creditors should receive from liquidators.