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The COVID-19 crisis - a high risk time for accountants

18 November 2020

A singular irony of the COVID-19 crisis is that accounting firms, in many instances doing all they can to help businesses survive, are themselves more highly exposed to trade credit debt than many of their clients.

According to the Australian Financial Security Authority (AFSA), accountants’ businesses are now one of the six most common to be put at risk by such debt that has risen to a level closely comparable with bank debt.

Lawyers were also on the list followed by transport businesses, those involved with equipment leasing, commercial leases and real estate, the internet, communication and marketing.

However, banks’ debts tend to be secured whereas those of most businesses are not, which is why it’s important for business owners who provide goods or services on credit to do everything possible to protect themselves and their interests – for example by the Personal Property Securities Register (PPSR).

The plight of accountants and other businesses on AFSA’s at-risk list is illustrated by statistics showing at the end of the September quarter that people in businesses entering personal insolvency owed 32% of their debts to another business, sole trader or individual, compared with 35% to banks.

Danger by association

Institute of Public Accountants general manager of technical policy Tony Greco says it’s unsurprising that accountants are on the high risk list because many of them are linked to the success or failure of SME clients.

According to a Reserve Bank of Australia (RBA) Review, Australia can expect 5,200 more businesses to fail this year than in a “normal” year - even with the benefit of government support.  (According to the RBA, 15,000 to 20,000 Australian businesses fail in a “normal” year.)

And the RBA’s estimate of failures could be exacerbated by a weaker-than-expected economic recovery – stemming for example from further setbacks with the battle against COVID-19 and increasing international political tensions.

Many small business owners have homes linked to their business’s finances, so that as mortgage deferrals and government support for workers and companies ends, defaults are likely to rise.

As a result, there will be detrimental flow-on effects of this for all the business owners’ creditors, financial institutions, other businesses and their employees with whom they’re associated and ultimately the accountants who have them as clients.

But on a brighter note

However, according to what the RBA refers to as “stress tests”, banks will remain above their minimal capital requirements even if the economy retracts substantially more than anticipated; they have strong balance sheets and are well placed to continue lending and so support economic recovery.

Defaults in the wake of withdrawal of government fiscal stimulus payments, loan repayment deferrals, the early release of funds from superannuation, and tax benefits, will be to some extent lessened by the widespread inclination of individuals and businesses to save rather than spend.

Indeed the RBA notes that some companies are now better off financially than they were pe-COVID-19, and household income is surging.

While it concedes in a recent report that some households are “struggling” as unemployment increases, it also maintains “the finances of most households are faring well to date and demand for housing has held up”.

According to the latest Economic Briefing Report prepared by University of Adelaide, economists from the SA Centre for Economic Studies (SACES), the State’s mining activity is generally resilient and the farm sector’s winter crop this year is better than last year’s.

In short, while many accountants will be adversely affected by the difficulties of small business clients whose financial reserves have been depleted by the COVID-19 crisis, there are accountants doing well running digitally updated firms and servicing clients in resilient sectors of the economy.

The road ahead for SA

SACES’s deputy director Steve Whetton says not to expect a “V” shaped recovery, that short term it has “deteriorated significantly” because of Victoria’s on-going COVID-19 problems likely to depress demand and supply still further.

SA’s economy, on a slow growth trajectory before COVID-19, is expected to fall back 4% in 2020-21 while the unemployment rate - one of the last aspects of an economy to recover in a recession - is expected to have climbed to 10% by next June and have subsided only half a percent by June 2022.

Mr Whetton doesn’t expect the sharp contraction in output and incomes at the June quarter to be reversed “for several quarters at least”, which means “that some parts of the community will have to adjust to lower incomes for an extended period, and governments will need to ensure that the burden is shared as equitably as possible.”

Macks Advisory has no doubt that’s on the wish list of all business owners, particularly those running types of businesses in the first six of AFSA’s most-at-risk list – and most especially accountancy firms whose financial stability is closely linked to that of their clients.

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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