In the late 1980s, Ed and Mike started a small business specialising in the removal of asbestos. From little acorns big oaks started to grow. The business expanded. It became the main contractor for the local authority. It also generated overseas business and was highly profitable. By the third year, the business 40 people. It had a full order book and was on track to generate a turnover of a million pounds. The business had a good relationship with its bank and continued to expand its overdraft facilities in line with its trading growth. Then one day, out of the blue, the bank manager phoned. He wanted an accountant from a major accountancy firm to look over the company’s financial position. Within one hour of the telephone call, the accountant phoned saying that he wanted to come immediately. A visit from the neighbourhood beancounter was just the beginning of Ed and Mike’s troubles .
The accountant visited the premises two days later. He spent just six hours on the job. Despite a full order book, healthy profits, no history of bad debts and no overdue creditors, he painted a very gloomy picture of the financial position. He drastically reduced the value of all assets and inventory. He reduced the debtors figure by 75%. Within a few days of his report, the bank appointed an administrative receiver. The accountant who acted as the investigating accountant for the bank now returned as a receiver. Were there any conflicts of interests?
Rather than receiving a one-off fee for acting as an
investigating accountant, he now stood to receive fees for the whole period
of the receivership. Within a few weeks the receiver/accountant sold assets,
contracts, goodwill, fixtures and stock at knockdown prices. The result
was shortfall in the amounts due to creditors. As Ed and Mike had provided
personal guarantees for their business, their homes and personal belongings
also went under the hammer.