Accountants are not immune to finding themselves in serious financial difficulty and experiencing some form of personal bankruptcy or practice insolvency.

Members therefore need to understand what their obligations are when suffering from insolvency, either personally or within their practice entity.

Rebecca Stickney and Kate Dixon, leaders of the Chartered Accountants Australia and New Zealand professional conduct teams in New Zealand and Australia respectively, say members in such circumstances must adhere to the CA ANZ by-laws and New Zealand Institute of Chartered Accountants (NZICA) rules. They also need to be aware of their obligations under the relevant ethical standards.

“If your practice becomes insolvent, or if you’re made bankrupt or enter into some sort of arrangement with your creditors, you are obliged to disclose that in writing within seven days to the Professional Conduct Committee (via the conduct and discipline team),” says Stickney.

What does insolvency mean?

The definition of an insolvency event under the by-laws and rules is quite broad. For individual members it captures bankruptcy, service of a creditor’s petition, presenting a debtor’s petition, making an arrangement with creditors and, additionally in New Zealand, no asset procedures. For practice entities, it includes where the practice is unable to pay its debts as and when they fall due, the making of a winding up order, the appointment of a liquidator, administrator, receiver, receiver and manager or statutory manager, and making an arrangement with creditors.

If a member or a practice entity becomes insolvent in accordance with the definitions in the by-laws and rules, the Professional Conduct Committee will open a complaint and seek further details from the member about their own circumstances or that of their practice entity. Because of the seriousness of insolvency, the committee may ultimately refer a member to the Disciplinary Tribunal for hearing. The tribunal will consider if the member has breached the by-laws or rules and, if so, the appropriate sanction. In instances of personal bankruptcy, this typically involves suspension of membership for the duration of the bankruptcy. Other sanctions may be applied in circumstances of other types of practice insolvency, such as suspension of membership and/or cancellation or suspension of certificates of public practice.

Maintaining the integrity of the profession

The purpose of these types of sanctions is about protection of the public including current and future clients, and employers, and maintaining the integrity of the profession. “The disciplinary bodies expect members to be able to manage their own financial affairs and consider that a failure to do so reflects on a member’s ability to provide advice and services to clients and employers,” notes Stickney.

“The disciplinary bodies expect members to be able to manage their own financial affairs.”

Dixon says the disciplinary team appreciates the distress people face.

“We understand it’s incredibly stressful when members are going through these sorts of challenges. Particularly in times of economic volatility, these things can happen. The most important thing is to communicate early and not to ignore the issue.”

She urges members to seek advice early as to how they are going to approach an insolvency situation, ideally before matters get to a worst-case scenario. It can be useful to take some professional advice about potential options.

“Members can contact the CA Advisory Group (CAAG) or member support to act as a sounding board and get some guidance, including about the ramifications of insolvency from CA ANZ’s perspective.”

Communication is key

Says Dixon: “Given that it is imperative for members to try and minimise costs when experiencing insolvency, members should engage with the disciplinary process and provide the information sought by the committee and tribunal. If they don’t this, it can exacerbate costs.”

Stickney explains the Disciplinary Tribunal has considered several cases recently involving members in public practice who have been found to be in a state of insolvency arising from inability to meet their debts as they fall due. In these types of cases, the practices have not been put into a formal insolvency such as receivership or liquidation but are significantly behind in practice debts.

“These practices had substantial tax debts, which were not under arrangement with Inland Revenue, and a history of failing to meet earlier arrangements to pay the tax arrears. In one case, civil proceedings had commenced to recover the debt. The debts were not disputed.”

She adds: “The Disciplinary Tribunal has found the rule requiring disclosure in this scenario is not designed to require disclosure where members or practices who, in the ordinary course of business, are temporarily or fleetingly unable to meet their debts as they fall due. Rather, it means arriving at some form of event, step or stage which clearly illustrates the member’s inability to meet debts as they fall due for more than a transient period.”

Practice entities with debt of monies held on trust can also be a serious matter, says Stickney. “For instance, if a member has failed to pay New Zealand PAYE [pay as you earn] or Australian PAYG [pay as you go], the disciplinary bodies will also consider whether integrity issues arise, as members have a fiduciary obligation to render that to the revenue departments.”

Dixon stresses the obligation to notify insolvency situations aligns with all other CA ANZ self-reporting requirements, including tax offences, misappropriation of funds, or adverse findings by other bodies. “We need to be informed of anything that constitutes a fundamental breach of an ethical obligation or the by-laws and rules.”

“We need to be informed of anything that constitutes a fundamental breach of an ethical obligation or the by-laws and rules.”

Dixon says once the period of a member’s suspension has ended, the member is eligible to apply for readmission into CA ANZ.