Accountants who step in when business partnerships go sour can inadvertently make matters worse. At the first sign of trouble, call in the mediator.
Business partners fall out for all sorts of reasons: distrust, dislike, disillusionment, tough trading conditions, greed, jealousy and ambition. Similar to when married couples divorce, the dissolution of the partnership can get messy and expensive.
For the most part, cash and assets are the items of biggest concern, and often the first advice partners seek is their accountant’s. While the accountant may have a natural inclination to help, experience shows their involvement can prolong the negotiations. Rather than an amicable break-up, things can end up in court.
Conflict of interest looms large. Section 220 of APES 110 Code of Ethics for Professional Accountants specifically warns public practitioners against acting for two parties whose interests are in conflict, as it threatens the fundamental principle of objectivity.
Every year, CPA Australia’s professional conduct tribunals hear cases where there is a complaint of perceived conflict of interest, says Peter Docherty, general manager of public practice at CPA Australia.
Familiarity can in itself compromise an accountant’s neutrality, says Docherty. “If a practitioner has had a long or close relationship with a client, they may be unfairly sympathetic. The threat can be real or perceived, but either way it risks conflict of interest.”
Fiona McLay, special counsel with Harris Freidman Lawyers, points to another danger. “It’s very hard for accountants to fairly help partners separate their interests, and they may not have the objectivity or dispute resolution skills to help owners quickly extract whatever value can be saved from a business in crisis.”
In these instances, accountants should not be in the business of mediation, says McLay. They are better to step away and refer the dispute to a specialist business mediator who can be more objective, adds Docherty.
Rather than try to reconcile warring parties, the accountant’s role comes in much earlier; they should be making sure that a business partnership is set up properly in the first place, so in the event of a break-up there are already clear procedures in place.
Managing partner conflict within a company
Dr David Gage is a veteran mediator at US-based BMC Associates, which specialises in helping business partners, family businesses and principals of organisations deal with conflict. He says when an accountant’s client is a company with partners who are now at odds with one another, it’s safest to make clear that you will only provide expert advice to the client – that is, the company – and not to individual partners.
“To wade into disputes among partners is unfair to clients,” Gage says. “If the partners are in conflict, they deserve a trained mediator. Further, it’s risky for accountants because they create potential conflict-of-interest situations as soon as they are perceived by any partner to be taking sides in a dispute.”
“If the partners are in conflict, they deserve a trained mediator.” David Gage, BMC Associates
Docherty advises that the best way to manage potential partner conflict is to prepare a shareholders’ agreement when the business is launched. It should cover all the issues that could be expected to arise during the life of a business – determining, in advance, how they will be dealt with.
“However, despite the best planning, from time to time there will be issues that cannot be decided or resolved informally,” he concedes. “Therefore, it is prudent for any agreement to contain alternative dispute resolution [ADR] processes, such as mediation, which can ensure court proceedings are a last resort.”
Referring to a mediator
A professional mediator can resolve a dispute far more quickly and cheaply than going to court. However, if one disputing partner is open to mediation but the other partner is not, it’s a situation for the partners to resolve, not the accountant, Gage says.
He recalls a case in which he acted as mediator: “I gave suggestions [to the partner who contacted him] on how to discuss the issue with his partner, but he called a year later and said the situation had gotten worse. I offered more advice and didn’t hear back for months, but when I did he told me he had hired an attorney, and was about to sue his partner and request that a judge put the company into receivership.”
When Gage asked about what had happened to independent mediation, it turned out both partners had, between themselves, agreed to mediate through their accountant.
“Their accountant was the only person [the other party] would trust,” Gage says.
Unfortunately, it exacerbated the crisis, with the partner who had originally contacted Gage deciding the accountant was – far from being neutral – siding with the other party.
Finally, given the threat of a lawsuit, they went into mediation.
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“That process went well and they restructured the management, ownership and governance of the company,” Gage says. “Two or three years later they sold it for millions of dollars more than it had been worth when they were in conflict.”
The upshot, he says, is that there are inherent risks for all accountants if they put themselves in the middle of client disputes, even when they know their clients well and are trusted.
“Often, some partners are positively disposed to try mediation, but one needs encouragement to take the next step,” he explains. “Hesitant clients will usually accept recommendations for mediation from their accountant.”
If that’s the case, then the accountant involved should suggest mediation and “refer, refer, refer”, adds Docherty.
Litigation should be a last resort
McLay recently handled a case where two directors had been fighting over their business for 12 years. The problem went from bad to worse because the owners wrote their agreement on a napkin in a cafe. After a decade of costly litigation, one of the directors approached Harris Freidman, which McLay says was “still no closer to a line in the sand”.
“Once people get locked into entrenched hatreds where they don’t trust anything ... the only resort is litigation,” she adds. “That is why when an accountant first sees signs of a business in trouble, it is important to help the partners get objective advice – usually from a legal adviser – while there could still be ground to work something out [see “Business divorce red flags” at right]. If it’s left to drift, that ground can be lost.”
“… you never know when something that seems clear-cut will turn into a nightmarish dispute.” Fiona McLay, Harris Freidman Lawyers
McLay also cites a family company dispute that had been running through the courts for six or seven years. “The accountant was criticised in the judgement for acting in a way that wasn’t in the company’s best interests, or that of all shareholders,” she says. “Although I don’t think there has been any formal action taken against that accountant, having a judgement showing you acted in a way that was criticised by a judge is not a good look.”
When to walk away
While accountants can evaluate threats to a business and apply safeguards to reduce them, unless this can be achieved in a timely way, Docherty says you should immediately cease providing advice.
“Failing to act in a timely manner may result in legal action from the parties or other parties, in addition to a complaint as a result of failing to meet the requirements of the Code of Ethics for Professional Accountants,” he says.
Although accountants might still be able to serve as expert advisers on limited, clear-cut, letter-of-the-law financial or tax issues for acrimonious partners, the information still needs to be shared equally with all parties in the shareholder agreement.
However, McLay doubts the merits of any ongoing involvement for the accountant. Like Docherty, she believes that in a business divorce it’s best for accountants to just bite the bullet and refer the dispute to a mediator.
“They do it all the time and we see it all the time,” she says. “You never know when something that seems clear-cut will turn into a nightmarish dispute. [Referring] to somebody who is completely objective can give accountants the protection that they haven’t stepped over the line and been unfair to either party. It’s a much safer place to be.”
Business divorce red flags
There are typical warning signs that a conflict between partners requires a mediator and not an accountant. Dr David Gaze from BMC Associates says these include:
- Disagreements that reveal a considerable gap between the interests and expectations of the different principals, or the parties appear to have conflicting values, which often cause them to see the same picture differently.
- A dispute has been festering for a long time, emotions are running high, and partners oppose one another’s positions before they even hear the other partner’s views.
- Differences among partners involve a complicated mesh of financial, interpersonal and legal issues.
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