From Ledger to Courtroom: How CPAs and Attorneys Tackle Business Distress

Sufyan: All right. Hello, everyone, and welcome to another episode of the CPA Talk series. Today’s conversation focuses on moments in a business lifecycle that are often uncomfortable, but incredibly important. Financial distress, restructuring, and turnaround situations are where CPAs are often called on, not just as technicians, but as trusted advisors. That’s why I’m excited to welcome Salene, a seasoned attorney and business advisor who works closely with middle market companies and nonprofits during critical inflection points. Salene brings a unique perspective at the intersections of law, finance, and strategy. Salene, welcome to the show. It’s great to have you with us.

Salene: Good morning. Thank you so much for having me. I appreciate it.

Sufyan: Absolutely. Our pleasure. I would love to understand your professional journey because you have built a career that blends law, restructuring and business strategy. What led you to create a practice that operates at the intersections of legal advisory and real world business problem solving?

Salene: Well, so I did an MBA before law school. I really enjoyed math, a very strong math background, and I love the application of math to real-world problems in the business context. I really enjoyed business school. So when I went to law school, I decided to focus on business law, and when I had come out, I actually was doing corporate M&A and securities work at a big firm in Philadelphia. And then just like with businesses, something happens and you don’t expect it to happen and how it impacts your business -that happened to me with my legal career.

In my first year, 9/11 happened. I graduated in 2000 and in 2001, 9/11 happened and it dramatically changed our practice at this firm in Philadelphia, and bankruptcy was booming. And we had a Wilmington, Delaware office, which is a hotbed for business bankruptcy, and their corporate work dried up. So, you know, businesses were failing and all the corporate work dried up, I switched to business bankruptcy at that time. It was not something I had taken in law school, but they told me, we think you’re going to love it, and that was 26 years ago. It is niche practice at the intersection of advisory and consultants, which I really do love. So, it was sort of like business strategy and business consulting from business school that I loved. But also, it’s a hybrid type of legal practice where it’s both transactional and litigation. You can work in deals, but at the same time, there’s contested matters inside of a bankruptcy Chapter 11, so you find yourself in court in that way. So it can be a very collaborative kind of law, which is very unique. It’s not as adversarial as one typically finds in general commercial litigation context, we do commercial litigation outside of bankruptcy, and it can be very adversarial. It’s just very, very, you know, bankruptcy is more like, let’s get this, let’s save this company, let’s save these jobs, let’s get this distressed business owner.

Sufyan: And it’s emotional as well.

Salene: It’s very emotional.

Very emotional. I sent you two articles that were published. And then I developed PowerPoint presentations out of both of these articles so I could share some of the research. And I loved both pieces that I put together, and one of them was the Dark Side of Business Bankruptcy. I wrote it during the pandemic, maybe 2023 or something like that. It was like maybe after the pandemic first hit. And I just saw really ugly things at that time. There were suicide attempts of my clients -in one year, there were three of them. Business owners, professionals that just couldn’t take the weight of the failing of their business. And the fact that they, despite being so highly educated and in business for so long, literally had no money. And the marital stress that comes along with it. It is very stressful, and I realize it’s also why I’m drawn to the work because it’s public service oriented. It’s like you really feel like you’re helping people.

I mean, they’re paying a lot of money and a lot of times there is a disconnect there. It’s someone that’s really stressed out about money, but then they’re paying you a lot for your expertise and they get resentful. I have that in my list. Like you have to kind of walk a fine line there with getting too personal, but yeah, it is a very, very, very stressful kind of work, not just for the lawyers, but for the accountants, for any professional involved. I unfortunately had a client, very distressed situation, and she sent a very distraught e-mail to her mother, her best friends, and it was directed to me and the associate and the accountant. And it was how much you really just didn’t want to be on the earth anymore because of the failure of her business, and I was like, oh my gosh, this is not something you’re prepared for in law school. Nobody talked to me about this soft side of practicing and how do you swoop in here and also maintain your own sanity. It’s very stressful. When people are so distressed around you, it does bleed over into your life and you have to sort of put a wall up. But yeah.

Sufyan: Yeah. I can surely connect the dots because I have seen that situation as well. While we were in the peak of pandemic, someone asked me ‘how are you still selling your services?’ And I was like, people are emotional, but business is logical, s this is how it goes. And in your case, it works the other way around that the business is logical, but people are emotional at the end. So yeah, I can understand where it comes from. So, one thing CPAs often ask is how early problems could have been identified before they escalated. In your work with middle market companies and nonprofits, what early warning signs do you see when organizations are heading towards that financial distress?

Salene: Yeah, so you know, I have my own podcast too, where I interview a lot of other business lawyers and I ask the same question, like what advice do you give to the debtor client or the creditor? And it’s always act early, otherwise your options are limited the longer you get into the problem. And you’re right, like CPAs do see the warning signs long before really anybody else does. And if it’s small business, which I do a lot, not even the CPAs know what’s going on, even the bookkeepers, because they’ve run out of cash so much, they don’t even hire bookkeepers, they don’t have their tax returns done, and they just kind of keep it to themselves. By the time they come to me, there are telltale signs of business distress for a very long period of time.

One of them is taxes that are owed, particularly payroll taxes, income taxes, sales taxes. And the payroll taxes and the sales taxes are trust fund taxes, where you can avoid paying the employer portion and skip that piece of it, and the employee never knows. But at the end of the day, you’ve got these trust fund taxes that are due to the Pennsylvania, you know, in my case, with Pennsylvania Department of Revenue, the Internal Revenue Service. And those are taxes for which the owner is personally liable – the owner and any other person that has check signing authority. And so that’s like a last desperate move. If somebody’s done that and they haven’t paid those kinds of taxes, you know, it’s a really distressed situation. And then a lot of times owners will then they’ll pull into their own, they’ll throw, I call it throwing good money after bad. Well, they’ll take money, they’ll borrow from their parents, they’ll borrow from anybody and their brother to save this business that they created. They’ll also take out their 401k money, their retirement funds, which because they have personal guarantees, a lot of the business owners have personal guarantees. They might be personally liable, but the worst thing that you can do is take that money out because if you had to file bankruptcy, that’s bankruptcy exempt money, your retirement accounts. And so like nobody, whether they had a judgment, they could not come after that because that’s the money protected for you, for your retirement. But when a business owner is trying to do anything to infuse cash in, they’ll swipe all their money out of those accounts. Not a good idea, generally.

Sufyan: And when those warning signs that you just mentioned, if those warning signs are missed, the conversations can quickly become tense, you know, for both advisors and clients.

Salene: Yeah. Yeah, because there’s so much pride and shame and humiliation for the failure of the business, regardless of whether they caused it or not. I mean, in my one article, it’s like, what do you watch out for? And I can understand, I mean, and maybe a lot of people are relying upon this person to live. Like they’re funding a lot of different lifestyles and it’s challenging to get, that’s where the finesse comes in though, as an advisor, because I have no emotion. I don’t know any of these people. I’m there objectively looking at the facts and trying to structure a framework that they’re going to be comfortable with in terms of time, in terms of risk. I basically say, you can’t throw good money after bad anymore. You can’t keep doing what you’re doing. We have to change gears. But here are your options, and here’s the time frame that I want you to try it. It’s like saving a relationship. It’s like I did everything I could to save this relationship. I’m going to give myself a year or six months or whatever. That’s what I encourage clients to do. Let’s try this. You can try it for three months. But if you’re starting to pull money from your retirement account, that’s just a no, no. Like we got to switch. We got to go to plan B. So, I try to come in and give that reality check. And a lot of other stakeholders are coming at these people at the same time, the bank, the taxing bodies, the vendors. And it’s very distressing. And I try to be an intermediary in that situation.

There was one other situation I wanted to mention, merchant cash lenders. So I do both debtor work and creditor work where, you know, are you familiar with it, but it’s basically, it could be a loan characterized as a loan or as a purchase of accounts receivables, like in a factor situation at a very, very higher interest rate. And those are usually like a last resort. And once a client has entered into a bunch of those arrangements, they just can’t get out from under it. And then the merchant cash lenders are getting judgments against them, freezing bank accounts. It causes an enormous amount of stress and a shutdown usually, but not always. Yeah.

Sufyan: Got it. Got it. Okay. We are talking about emotions and when restructuring or, you know, bank bankruptcy discussions arise, emotions often run high. So from your experience, how should advisors communicate with clients during these high pressure moments?

Salene: When someone is that distressed, you really do become close to them. I mean, they call me on my cell phone. You become their closest confidant because they trust you that you’re one of few people that know what they’re facing.

I want to go through this list of ‘10 Things for Advisors’. I’m a small firm and I have several other people working with me and I’m responsible for making sure they’re paid. Sometimes the clients are not the kind of people you want to even be around because they’re in a bad business situation. Not all the time. They’re certainly really good people that have gotten into a distress situation, but oftentimes they’re unsavory characters that have screwed over many, many people. There’s addiction involved. They’re just dishonest people at times, and now they’re your client. I had one client, literally, he was trying to hire me through a Chapter 11 to get rid of a hundred claims, let’s say a million dollars of claims. And he legitimately owed the money though. And like almost every single case, there might be some commercial disputes about the amount and blah, blah, blah. So, you have to really watch your back. So can I go into this list?

I’m not sure when I wrote this, but I hated to start, open with that story that I mentioned, but it’s a very true story about clients’ suicide attempts. And I rattled off this list of things that I’d seen in my practice. It was addiction, suicide, bad checks written, murder. I haven’t seen murder though. Divorce, sickness, mental illness, sleep deprivation, death threats, frozen bank accounts, depleted retirement accounts, locked premises, seizure of home and car, a lot of envy around them of other colleagues and everybody else making money. And then switching loyalties, greed, fear, and imprisonment, which I’ve seen all of it with my clients.

These are the top 10 things that I say to professionals, my advice. My law clerk and I put this together, and here’s the 10.

One is filter out bad actors in the initial client interview. I will never do a Chapter 11 unless I’ve had a face-to-face call like this and a Google search of the individual. You don’t want to be working with somebody that’s of criminal nature. Unless some lawyers do that but definitely filter out a bad actor. And then set the tone regarding payment. As I mentioned, there’s a very high risk of non-payment. Explicitly say that if they refuse to refund your retainer, that you will stop work at X amount of time to reduce the risk of non-payment.

Number three, diversify your client base. Obviously, don’t get a client that’s so big that’s sucking up all of your time, and then all of a sudden, you’re stiff for a very large amount of money.

Avoid substance abuse, find outlets. For the attorneys, the rate of substance abuse is very high compared to the general population. I want to say it’s, I’ve got it here, it said, lawyers are 3.6 times as likely to be depressed. And I think the rate of addiction for alcoholism – it’s like one out of every three lawyers. That’s staggering and sad. And but you can see, it can be very adversarial type of work. And so I encourage attorneys to find outlets. I do all kinds of things to manage the stress. I do triathlons and I love portrait photography and in my kids’ activities and stuff like that, and making sure you just have some kind of outlet for your own mental health.

Number five, be very clear about fiduciary duties, conflicts of interest, and honest disclosures. Keep a paper trail of anything that they may tell you and know what your obligations are as a professional. If they tell you something that you have to, you’re compelled to disclose.

Number six, explore in a bankruptcy context, if there’s some real shenanigans and fraud going behind the scenes by the principals, there can be the appointment of a Chapter 11 trustee or a conversion of a Chapter 11 organization to a Chapter 7 liquidation where a chapter seven trustee is appointed and basically the debtors ousted out of management. So that is a very real possibility. And clients need to know that could happen or the case can be entirely dismissed by the US trustee or the judge as well. Number seven, be mindful of ethical canons regarding the duty to disclose. I mentioned that.

Number eight, be prepared to withdraw at any given moment. So you have to make sure that you’ve got like your, your CYA letters, you’ve got an ability to transfer the file to someone else and the ability like financially, you don’t have a huge accounts receivable. Number nine, don’t get too personal with clients until after the engagement is over. I’ve had clients, they’re just, there’s so much emotion and distress and envy and anger about how they’ve gotten in this situation. I’ve had them Facebook friend me during an engagement and they’re seeing like, well, you know, if I’m taking a trip to Europe or whatever with my kids, which we love to do, they get mad at me. I’m like, I didn’t create this mess. You did.

Sufyan: Yeah.

Salene: One client mentioned it. I’m like why did I even Facebook friend this guy?

The number 10 is remembering that I, as the lawyer, did not create these facts. My client created these facts, and you can’t personalize the situation. You have to be like, I’m the messenger here. I’m trying to help you. I’m not your adversary because clients in the distress situation, they will, oftentimes, like if they don’t like the result and they owe you money, they’re just not going to pay you. They don’t care if it’s not my fault, it’s the law or it’s the facts. You’ll just, so you have to be careful and just not take it closely. Yeah.

Sufyan: Yeah, that really resonates. I would say emphasis on clarity and empathy under pressure. I’ve seen that when advisors slow the conversation down, acknowledge the emotion in the room, and focus on options rather than outcomes, it helps clients regain a sense of control. I’m not sure if you agree to it, but even in restructuring or bankruptcy scenarios, the advisor’s role isn’t just technical. It’s also to be a steady, credible voice when things feel uncertain. And that balance often makes the difference between panic and productive discussion making. Yeah, absolutely. Am I understanding it right?

Salene: 100%. 100%. Okay.

Sufyan: And I think this leads to into a broader, you know, reality many professional firms are facing today. That is nothing but capacity and complexity. And CPA firms are expected to do more, advise more and respond faster often with the same internal resources. So my question to you, Salene, would be that how should firm leaders think about what needs to stay in-house versus when it makes sense to bring in external expertise during turnaround or, you know, growth situations?

Salene: A lot of times with the clients that I’m working with, they’re small business. And they desperately need someone, a business consultant, like a turnaround person, which I did do turnaround work for two years. I jumped out of the law and I was able to do that, which I did love. And they need somebody like that, but they can’t afford them. They can hardly afford anybody. And so you end up having to be that business consultant for them if you can. But certainly with certain subject matters, you don’t want to touch in terms of like tax advice. Advice with what happens if you shut the company down and there’s employer, like a duty to warn employees and what happens from a regulatory standpoint. If it’s a healthcare company, there’s healthcare regulations that you have to comply with. These are areas I’m not going to try to figure out. We’re not going to research it. This is something that we would insist that the client get expertise, expert advice that they need. And one of my favorite quotes in law school from my torts professor was ‘know what you don’t know and stick to that’ and as their advisor, get the right team on board.

Sufyan: Okay, okay. And when firms do decide to bring in external specialists or outsource teams, the execution has to be right. And you know that we predominantly work with CPAs and accounting companies, we kind of become the helping hand on the deck for their back office needs. So when CPAs collaborate with external advisors or an outsourced team like us, what practices help ensure accountability, quality and client confidence, especially during these sensitive engagements?

Salene: In a Chapter 11 distress situation, the accountants are, they’re just indispensable parties to the transaction. They’ve seen things, they know the history of the client, and we need them going forward, particularly in an open public bankruptcy proceeding. There are reports every month that are due, monthly operating reports. The bookkeeper and the accountant have to provide those. And I find, you know, working hand in hand with the CPA, is very helpful to talk some sense into this emotional high chart situation that the principal’s now in – as a reality check of what happened and what’s the likelihood? What are the numbers saying? What are the sales figures saying? And really, we need someone to crunch numbers.

In Chapter 11 case, you have to attach and convince the court of the likelihood of reorganization and the feasibility of a plan of reorganization. And you have to attach a projection as an exhibit to the plan. And it has to be sound and likely. And you have to show creditors and stakeholders like this is what we anticipate our revenue is going to be and our income and our expenses. And there has to be somebody that has to figure that out. And it’s going to be an accountant if it’s not the principal; it’s an accountant. So yeah, just sort of responsiveness. And you know, yeah, they’re just an integral part of any kind of restructuring situation.

Sufyan: Makes sense. And we already have heard a lot from you and thank you for the golden words. My last question to you today would be, Salene, if you could give CPAs one piece of advice when working with clients at financial inflection points, what would that be?

Salene: I would say to have the consultation. I mean, it’s a plug for my own kind of work, but it’s true. You need to have a consultation with a restructuring professional together with the accountant early to know what the options are at the stage where that distressed company is. It can’t hurt to do a one-hour consult to just sort of get the lay of the land of what the options can be at that particular moment. That would be my best piece of advice.

Sufyan: OK. Well, thank you so much. And thank you, Salene, once again for sharing such practical and thoughtful insights. Your perspective on how legal strategy, financial advisory, and clear communication intersect is incredibly valuable for CPAs navigating complex client situations.

Salene: Yeah.

Sufyan: So, for our listener, we will include Salene’s detail in the show note so you can explore her work further. And thank you once again for turning into the CPA Talk series. If you find the episode helpful, please subscribe, share it with your peers, and we’ll see you in the next episode. Thank you.