Denial. Delusion. Deceit.
A behavioural framework for reading distressed businesses before the financial statements catch up. Thirty years of restructuring practice, distilled into three stages every advisor needs to recognise.
Brendan Richards
Founder, Rebound Advisory - ex KPMG Partner, ex Ferrier Hodgson Partner
Over a decade ago, Rebound Advisory's founder Brendan Richards delivered a seminar series called People Fail First. The argument was simple, and at the time slightly unfashionable. Businesses do not collapse because the spreadsheets get it wrong. They collapse because the people running them get it wrong long before the spreadsheets catch up. Risk is in the people, not in the numbers. By the time the numbers tell the story, the story has already been written.
The original framework named three character traits that ran through almost every collapse worth studying: ego, greed and complacency. Each was a posture rather than an event. Each shaped how directors made decisions, how they communicated with their lenders, how they dealt with their suppliers, what they told their people, and what they did and did not say at home.
More than ten years on, the thesis still holds. But the application has sharpened. After thirty years of restructuring work across SMEs, listed corporates and lender-side engagements, the pattern now resolves into three states that travel further than the original three traits did. They are not character flaws. They are predictable human responses to a particular kind of pressure, and they are what every advisor needs to be able to read before walking into the next conversation with the bank.
Stage 01
Most common. Most human.
The director cannot yet accept what the numbers are showing. The mind protects the believer from the conclusion before the believer ever makes it consciously.
Stage 02
Internally consistent.
A story about the business has detached from the evidence. The director is not refusing to see the numbers. They are seeing a different reality.
Stage 03
Rarest. Most dangerous.
Assumptions and communications are known to be wrong. The forecast becomes an artefact of the negotiation rather than a planning tool.
The conventional way to assess a distressed business is to look at the financial statements, the cash flow forecast, and the key contracts. The conventional way produces conventional answers. It tells you how stressed the balance sheet is. It tells you how soon the cash will run out. It does not tell you why the business is in this position, what the people running it actually believe about what is happening, or what they are likely to do next.
The 3 D's framework starts from a different place. It treats distress as a psychological and behavioural state that the people running a business move through, often without realising it. The state shapes the decisions they make. The decisions shape the numbers. By the time the numbers are bad enough for the bank to raise a flag, the behavioural state has already been visible for months, sometimes years, to anyone who knew how to look.
"People fail well before the numbers can tell the story. The 3 D's name the way they fail."
| Relationship | Denial | Delusion | Deceit |
|---|---|---|---|
| Financial Forecast | Assumptions have not changed in line with the operating environment. Revenue holds because it has to. | A single revenue line or margin assumption doing disproportionate work. Strip it out and the model falls apart. | Assumptions known to be unsupportable, but included to pass the bank, the auditor or the investment committee. |
| Lender | Business-as-usual communication. No early warnings, because the director does not yet believe there is anything to warn about. | Overconfident communication about a future the historical run-rate does not support. Pipeline becomes commitment. | Material facts withheld. Covenant reporting prepared on bases that obscure the underlying position. |
| Suppliers | Late payments without explanations. The director genuinely expects to catch up next month. | Commitments made on the basis of incoming receipts that are themselves uncertain. | Goods ordered on credit on the basis of cash flow representations the director knows to be false. |
| Employees | Unchanged hiring plans, postponed difficult conversations, leadership tone that says everything is on track. | Restructure announcements framed as growth initiatives. New roles advertised as headcount cuts sit in draft. | Assurances about job security or accrued entitlements made knowing the underlying funding does not exist. |
| At Home | The director comes home tired and avoids the conversation. The spouse hears that things are challenging, but not how challenging. | Stories of the next deal, the next pivot. Family financial decisions made on a forecast nobody else has stress-tested. | Personal guarantees signed without the spouse's knowledge. Mortgage redraws used to fund operating losses without disclosure. |
Denial is the most common of the three D's, and the most human. The director cannot yet accept what the numbers are showing because the alternative is too painful to plan around. This is not a character failing. It is a cognitive protection mechanism that operates below the level of conscious decision-making.
In the financial forecast, denial looks like assumptions that have not changed in line with the operating environment. Revenue holds because it has to. Working capital assumptions are linear extrapolations of conditions that no longer apply. The model is not being manipulated - it is being maintained by someone who genuinely believes the position will recover.
With lenders, denial produces business-as-usual communication. There are no early warnings because the director does not yet believe there is anything to warn about. The relationship stays polite and professional. The lender, reading the absence of concern as a signal, does not push.
At home, denial often looks like tiredness rather than evasion. The director comes home exhausted and avoids the conversation. The spouse hears that things are challenging, but not how challenging. The decisions that depend on the family's financial position get made on information that is incomplete without anyone intending to deceive.
The appropriate response to denial is structured help accepting what the numbers already show - not confrontation. Confrontation at this stage usually produces defensiveness and entrenches the position. The advisor's job is to create a safe enough space for the director to move from denial to acceptance without losing face.
Delusion is the second stage, and the most difficult to work with. The director is not refusing to see the numbers. They are seeing a different reality. A story about the business has detached from the evidence, and that story is internally consistent enough to be persuasive - to the director, to their team, and sometimes to their advisors.
In the financial forecast, delusion is visible as a single load-bearing piece of the story doing disproportionate work. Strip out the one revenue line, the one margin assumption, the one contract pipeline, and the model collapses. The director can explain why that piece is reliable. The explanation is coherent. It is just not supported by the historical run-rate.
With lenders, delusion produces overconfident communication. Pipeline becomes commitment. The language describing future contracts is more confident than the historical track record supports. The lender, who has heard optimistic forecasts before, starts to discount what they are being told.
Case - Delusion
Inventory-driven retail collapse, 2016
$1.3b
Revenue at peak
$260m
Creditor shortfall
$180m
Inventory flagged inactive
The Dick Smith collapse illustrates the pattern. The working narrative in the years before collapse was that growth, store expansion and supplier rebates would carry the company through a softening retail market. McGrathNicol's report documented that purchasing decisions had increasingly been made based on rebates rather than customer demand, and that the resulting inventory build was being modelled forward as if it would clear at full margin. The gap between the operating reality on the warehouse floor and the assumptions feeding the financial forecast is the structural feature of the case.
Case - Delusion
Solar contracting cost-overrun collapse, 2018
$300m
Project Gretel value
$57m
Cost overrun
$100m
Capital raised post-overrun
The RCR Tomlinson collapse in 2018 sits in similar territory. Project Gretel, the contract to build the Hayman and Daydream solar farms, was originally expected to deliver a $28.5 million margin. Cost blowouts turned that into a $28.5 million loss. By October 2018 the board was being told of overruns across multiple solar projects. The forecast assumptions supporting a subsequent $100 million capital raising were anchored to a view of solar contracting economics that the project data being reported through the year was no longer supporting.
Deceit is the rarest of the three D's, and the most dangerous. The assumptions are known to be wrong, and the forecasts, communications and decisions are being constructed to mislead a specific audience. Most often that audience is a bank, an auditor, an investor or a buyer. The director or management team is aware of the gap between the model and reality, and is making a conscious decision to maintain the position anyway.
Deceit carries legal exposure that the other two D's do not, particularly around insolvent trading, breaches of director duties, and misleading conduct. When an advisor identifies that a client has moved from delusion into deceit, the nature of the advisor's obligations and personal exposure changes immediately. The conversation that needs to happen is no longer about restructuring options. It is about director duties, safe harbour, potential disclosures, and the protection of the advisor's own position.
"When the posture is deceit, the advisor's job is no longer to help the director find a way through. It is to ensure the director understands what they are doing and what it means."
In the financial forecast, deceit looks like assumptions the director knows to be unsupportable, included to pass the bank, the auditor or the investment committee. In lender communications, material facts are withheld and covenant reporting is prepared on bases that obscure the underlying position. At home, personal guarantees may be signed without the spouse's knowledge, and mortgage redraws used to fund operating losses without disclosure.
The 3 D's are not just a typology. They are a progression. Denial slips into delusion as the gap between belief and reality widens. Delusion slips into deceit when those running the business become aware of the gap and choose to maintain the position anyway. The further along the progression a business has slipped, the narrower the available options become.
Misdiagnosing which D is in play fails the client. Treating delusion like denial means the conversation never reaches the load-bearing assumption that needs to be confronted. Treating denial like delusion comes across as confrontational when the business just needs structured help accepting what the numbers already show. Missing deceit when it is present is professionally dangerous for any advisor and legally dangerous for any director.
The Diagnostic Reality
"Denial does not feel like denial from inside the business. Delusion does not feel like delusion. This is precisely why an external read is the only reliable way to spot which D is in play before a lender or administrator does."
The people inside the business almost never know which D they are in. The story that has detached from the evidence feels, to the people inside it, like the truest version of what the business is doing. The professional advisors closest to the business are also usually too close to see it clearly. Long-standing accountants, auditors and lawyers can drift into the same denial or delusion as their clients, particularly in firms with a single key relationship.
The diagnostic capability to read the behavioural state across multiple touchpoints has historically been confined to specialist restructuring firms. Most general practice accountants and advisors do not have access to the integrated frameworks that surface which D is in play, and the cost of engaging a specialist firm for an early-stage diagnostic is often prohibitive for the size of business involved. That has been the gap the SME advisory market has lived with for decades.
A structured assessment of the 3 D's asks four kinds of questions, each across multiple touchpoints rather than just the financial statements.
Financial Behaviour
Have the assumptions kept pace with reality?
Have the assumptions in the model changed in line with the operating environment? Is there a single load-bearing piece of the story that, if removed, causes the forecast to collapse? Are working capital, debt service and contingency assumptions stress-tested against changed conditions, or are they linear extrapolations of conditions that no longer apply?
Lender Communication
Has the rhythm of the conversation shifted?
Has the timing of covenant reports changed? Are responses to questions matching the questions, or are they matching the questions the borrower wishes had been asked? Is the language describing future contracts and pipeline more confident than the historical track record supports?
Supplier & Customer Patterns
Are commitments being honoured, or quietly extended?
How has the days-payable position drifted? Are payment commitments being honoured, partially honoured, or quietly extended? On the customer side, are renewals slipping, or are pipeline conversion rates being reported on bases that the historical data does not validate?
Leadership & Personal Signals
What is the position at home?
Are there decisions about personal financial exposure - additional guarantees, redrawn mortgages, deferred drawings - that suggest the position at home is also under strain? In our experience, the personal signals are the least often examined and the most reliable.
Read together, the answers to these four sets of questions usually point clearly to one of the three D's. The structured assessment surfaces what the unstructured conversation alone often misses.
The 3 D's of distress are not character failings. They are predictable human responses to a specific kind of pressure. Naming them gives advisors a vocabulary to manage them, lenders a frame for understanding what they are seeing, and directors a chance to recognise the posture before it shapes them further than they meant to allow.
The People Fail First thesis from a decade ago has held. People do fail before the numbers can tell the story. The contribution of the 3 D's is not to replace that observation but to make it actionable. The framework gives advisors a structured way to read the behavioural state behind a distressed financial forecast, across the full set of relationships that the state is shaping. It does this before the bank issues the notice, before the supplier writ lands, before the conversation at home becomes the one that should have happened a year earlier.
If you are an accountant, advisor, lawyer or lender currently looking at a business where one of the three D's feels familiar, the first step is the structured read. The harder conversations come after, but they are easier to have once the posture has been named.
The Tooling
ReboundIQ is the free diagnostic tool built around the framework in this article. It runs in around fifteen minutes and produces a structured read on which D is most likely in play, where the financial pressure is sitting, and what kind of conversation with a lender is realistic. It does not replace the judgement and advocacy that come with senior restructuring experience. But it gives every advisor working with a stressed SME a starting point that, until now, has not existed outside specialist firms.
About this article
The 3 D's of Distress is the first issue in Rebound Advisory's perspectives series, published May 2026. Rebound Advisory provides specialist turnaround and restructuring services to small and medium enterprises across Australia, New Zealand and the Asia-Pacific region. The firm advises directors, management teams and lenders on cash flow forecasting, debt restructuring, lender negotiation and viability assessment.
Rebound's founder, Brendan Richards, spent six years as a Partner at KPMG Melbourne, where he led the restructuring team, and nine years as a Partner at Ferrier Hodgson before that. The People Fail First seminar series referenced in this article was first delivered through Ferrier Hodgson over a decade ago, and the thinking behind it has informed Rebound's approach since.
To discuss any of the themes in this article, contact [email protected] or visit reboundadvisory.com.au.