Damien Grant: Directors must confront reality before it's too late

Photo / APN

The naked emperor is an enduring fairy tale image because it contains a timeless truth.

The original Hans Christian Anderson tale has duplicitous tailors prepare a garment for their emperor, one that is invisible to the incompetent.

The emperor is horrified to realise that he cannot see the outfit so parades gallantly in his birthday suit until the fateful cry from one of his urchin subjects.

One of the joys of modern economic life is that any of us can be emperors in our own little companies. Credit is easy in New Zealand, registering a company even easier and small businesses can grow to medium-sized enterprises much quicker than the skill-set of the director can catch up.

I see many directors, post-liquidation, who were aware that the business slipped from their control some time ago but who kept trading because they did not know what else to do.

Like the emperor, they and everyone else around them knew they weren't up to the task but no one wanted to take on the role of the little boy.

I recently attended the Accountants' Big Day Out in Wellington. While the highlight of the event was after-dinner speaker Eric Rush describing a fraught encounter between Marc Ellis and Diana, Princess of Wales, more relevant to this column was event organiser Viv Brownrigg's presentation.

Brownrigg championed a move by accountants away from what she termed "transactional" accounting and towards "relationship" accounting, in which external accountants got to know their clients and understood their businesses as opposed to simply churning out compliance accounts.

Such a transition places the accountant in a position to play the role of the small boy in the naked emperor tale and force the day of reckoning for a director in serious trouble.

Of course, the director must be open to such a relationship. I have been in the room when professional accountants spell out the consequences to a director of not addressing the insolvency of their business, only to see the director refuse to acknowledge the problems or show any desire to address the impending crisis. In many cases it is simply not practical for the accountant to be in touch with all of their clients.

The decision to shut the company's doors is one of the hardest a business owner must make. Their identity is meshed with the enterprise and the closing of their company can be the effective end of their working life. If these directors were to address the problems they might be surprised by their options.

The common view of insolvency practitioners is that of corporate morticians. We see ourselves more as oncologists, able to achieve good results if we are consulted early enough.

Damien Grant is principal of Waterstone Insolvency, damien@waterstone.co.nz