Crossing the great divide
21 May 1996
The accounting profession has already had to tackle many of the issues which are now reaching the legal agenda. And some of the most pressing are the risks inherent in expansion as a result of internal growth, mergers and alliances, particularly those with overseas firms.
As is the case with the major accounting practices, the size and complexity of large law firms mean they can no longer operate effectively as owner-managed businesses - the scale of operation distances the majority of partners from the day-to-day running of the practice.
It is essential, therefore, that partners, as stakeholders, have complete confidence in operational procedures and in the integrity and depth of key financial information.
Because error or fraud at any location or within any department could have a major impact on the firm's reputation and financial health, large accounting firms have moved towards managing affairs as a publicly listed company should. And as a result partner expectations should be comparable with those of external shareholders.
Being cut off from day-to-day management means partners have the right to expect best practice in the management group's government. This means fair elections, non-executive partners elected from the partners at large, and an independent auditors' report on financial statements.
But as well as learning from accountants, law firms would do well to review their use of accountants. Most firms only use accountants to confirm compliance with the Solicitors Accounts Rules and undertake a limited review of financial statements. A more rigorous approach should include:
analysing thoroughly the key internal controls at all locations and recommending improvements where necessary;
benchmarking both internal controls and financial performance between locations and against similar businesses - including auditing - to ensure best practice exists throughout the firm;
analysing IT systems to ensure they reflect current requirements, and upgrading where appropriate;
supporting management in enhancing the post-tax returns to partners, through reviews of specific areas such as organisational structure, profit sharing arrangements and expatriate remuneration policies;
assisting in the continuing development of corporate governance procedures that compare with the best practice in commerce at large.
Another area in which accountants' experience may be valuable to law firms is mergers. These are normally dressed up as a marriage of equals, which is fine, provided the parties do not believe their own hype. Before the merger, an honest assessment is needed to determine the winners and losers, likely stresses and strains, and the impact on partners' pockets. This is no different from two companies merging; full due diligence - not just legal due diligence on the partnership agreements and property leases - is essential.
Lawyers should bring the same rigour to managing the process as they would to advis- ing clients, ensuring, for example, that investigating accountants have the skills and understanding of the legal profession to add value to the due diligence process.
An issue of growing importance to law firms is the risk of a catastrophic claim of professional negligence and the impact it could have on the partnership. It is a fact of professional life that advisers get sued for negligence and the value of advice given often dramatically exceeds the fees earned, so that damages claimed can often be disproportionate to partner income.
While law firms are largely able to obtain professional indemnity cover in the market, it is increasingly likely that a claim could exceed the cover, leading to calls on partners' personal assets. KPMG led its profession by incorporating part of its practice and many law firms are now contemplating similar solutions to the issue of unlimited liability.
It should also be possible for accountants and lawyers to benefit from each other's experience to improve the services both parties offer. This could include joint seminars targeting a particular market, exchanging ideas in areas such as recruitment and marketing, or working together on corporate recovery, corporate finance and forensic accounting assignments.
The opportunities are there for the taking and the firm that grasps them will obtain the best value from its accountants.