14 November 2005
25 November 2013
25 November 2013
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13 September 2013
9 December 2013
Incorporation of a partnership into a limited-liability partnership (LLP) brings rewards in the form of some liability protection and recruitment advantages, but it also carries costs. One of these is the requirement to prepare and file audited financial statements. However, what may seem an onerous burden for many firms not used to this regime does have some useful by-products.
One of the key requirements for LLPs is an audit of their financial statements by a registered auditor. While a number of law firms have already converted to LLP status, and with many more considering the transition in the near future, relatively few firms have yet had an audit. This is due to the 22-month lag from initial incorporation to the first deadline for filing audited accounts. While accountants typically provide many law firms with some form of report or opinion on their partnership accounts, only a few elect to have their accounts audited fully. As a result, few law firms understand the implications of a full audit and many are at risk of being surprised by the level of rigour required.
Initially, law firms saw the need to have audited accounts as a cost and a 'necessary evil' of becoming an LLP. However, the rigour and challenge being applied as part of the audit and receiving an external opinion provides members of LLPs with added comfort.
An audit should enable the auditor to provide reasonable assurance that the financial statements, taken as a whole, are free from material misstatement. The auditor is required to perform specific work so as to provide an opinion that the financial statements of the LLP give a true and fair view of the state of affairs of the limited-liability partnership at the year-end date and of the profit for the year then ended and have been properly prepared in accordance with the Companies Act 1985 as modified by the Limited Liability Partnerships Regulations.
Points to consider when preparing LLP financial statements are:
- Which periods will need to be covered in the LLP's financial statements? While this might appear straightforward, the matter is not clear-cut. The current Exposure Draft of the Statement of Recommended Practice (SORP) on Accounting by Limited Liability Partnerships, which provides guidance on the application of accounting standards to LLPs, provides provisional guidance in this area. Assuming the proposals are accepted, an LLP's first financial statements may well end up covering the firm's results and cashflows for three different periods, some of which may include amounts predating the actual conversion to an LLP.
- The firm will need to produce financial statements comprising a profit and loss account, a statement of total recognised gains and losses, a cashflow statement, a balance sheet and notes to these statements. Furthermore, within the annual report, the members will be required to confirm that they take responsibility for these financial statements.
- The statements will need to comply with accounting standards, which comprise Financial Reporting Standards (FRSs), Statements of Standard Accounting Practice (SSAPs), UITF Abstracts and the SORP. This body of accounting knowledge runs to in excess of 1,000 pages and it is constantly being changed and updated, particularly at the current time, as standards converge internationally.
Firms will need to ensure that they have sufficient time, resource and technical expertise to prepare the financial statements.
A significant amount of planning and collaboration between the firm and its accountants is required to enable the audit to be performed and to ensure that a clean opinion can be provided.
Many law firms are beginning to see the benefits of the assurance and assistance that the accountants can provide and, as a result, are realising some value from the LLP's audit requirements.
Law firms will need to clarify at an early stage the support and evidence that their auditors will need to enable them to provide a clean opinion on the statements. Some specific areas where auditors may require independent evidence are when the firm has annuities or defined benefit pension scheme arrangements. In such cases the firm may well need to arrange for actuaries to value the assets and liabilities relating to these arrangements.
Other areas likely to require extra effort on the part of the law firm and its auditors relate to the provision for bad debt and the valuation of work that has yet to be billed. In the case of the former, the auditor will need to be satisfied that any provision is of the correct magnitude to leave the debtor balance at its recoverable amount. The adoption of a formulaic provisioning approach is unlikely to be adequate. The auditor will need to form their own assessment on the recoverability of debtors. In the case of unbilled time, the auditor will again need to form their own assessment of the value of this time at the year-end date.
In addition to examining the balances within the financial statements, firms' internal financial controls will also need to be considered. Where deficiencies exist, auditors may be able to provide suggestions for improvements.
In view of the challenges highlighted, many firms are choosing to perform a 'dry run' to ensure that they will be able to produce the required financial statements if or when they become LLPs, and that they will have sufficient evidence to support the financial statements and satisfy the auditors. This in itself will allow early identification of issues and enable a smooth process when the firm has converted.
Jeremy Black is a director in audit at Deloitte