The CPA Journal

December 2001

MDP Update: Recession, MDPs, and the CPA

By Chris Kelleher

The tragic events of September 11 have pushed the country into a recession and simultaneously forced banks to further tighten their credit criteria for businesses. Many businesses that had been doing okay now find themselves facing falling revenues and tighter credit. Many of them are turning to their professionals for help in planning turnarounds, workouts, restructurings, and even bankruptcies. The irony is that bad economic news for businesses is good news for certain specialized professional service firms.

The critical question today for accountants is this: Which professional service firm (law firm, accounting firm, or some type of accountant-lawyer MDP) will be in the best position to serve the growing market for turnaround services brought on by the recession?

On the surface, one might assume that law firms with traditional bankruptcy lawyers would be unbeatable in this market. The bad news for accountants is that this faulty assumption could cost firms potential revenues at a time when consulting and technology revenues will be slumping (and partner profits declining). The good news is that many accounting firms have the ability to penetrate and even dominate the workout-bankruptcy market even when "competing" with law firms.

Law firms that have workout-bankruptcy departments have two competitive weaknesses. First, demand for their services will soon outstrip the supply of experienced bankruptcy lawyers. The economic boom of the 1990s resulted in underemployment of existing bankruptcy lawyers and did not produce many new ones.

Second, businesses are likely to view bankruptcy law firms only as a last resort in the face of collapse. Law firms will often get the call to help when it is too late to do anything other than shut down. Workout specialists say that the earlier they are called in, the more likely it is that they can help the business survive.

In contrast, accountants have a built-in economic early warning system: their routine preparation of financial reports and tax filings allows them to know when companies are headed for trouble. Accountants that are not vigilant for signs of a business's economic weakness during a recession aren't doing anyone a favor.

But how can an accounting firm help a struggling client? Some accounting firms already have business recovery departments that provide a wide range of workout-turnaround services. But a firm that doesn't already have such a department can still be of tremendous help. An accounting firm that already offers business consulting services, valuation services, cash management services, or assistance in finding replacement or additional financing or equity, is well positioned to assist struggling clients.

Which brings us back to MDPs and the recession. If there ever was an area that cried out for close coordination between lawyers and accountants, workout-bankruptcy is it. A sick or dying business typically faces intertwined business, financial, and legal issues and has little time to solve them. Bankruptcy lawyers can be ill equipped to give advice on business and financial issues, and accountants are prohibited from giving legal advice, so a close working relationship between professionals is essential in order to maximize the client's chance of survival.

Because of this need for close coordination, it would be great for companies facing bankruptcy if the ground rules for MDPs were already in place in this country. Until that happens, the following are my own suggestions to prevent turf wars between lawyers and accountants working together: