Firms may have become more transparent in recent years, but that will not stop them massaging the figures in this turbulent market, says Matt Byrne
”If it’s in your gift to produce a financial performance that’s sustainable and keeps your people secure and strong, that’s no bad thing.”
The quote comes from the finance director of a UK top 100 firm that is also an LLP. He and his firm have a reputation for being among the most transparent in the market. This year, as in previous years, his firm provided The Lawyer with all of the requested figures for the table.
Yet even this finance director admits there are legal accounting ‘games’, for want of a better word, that firms can employ to make their figures look better. And in a market such as this, who would blame them for using a few?
As one well-known legal market recruiter put it as reporting season began earlier this year: “I’m not going to comment on any firm in particular, but I know there are all sorts of smoke and mirrors being used to artificially keep profits from falling too much.”
This year The Lawyer has quizzed a number of finance directors and accountants for some pointers on the games firms can play. For LLPs there is a limit on how much wiggle room they have, unlike with old-style professional partnerships, which in terms of slush fund-style reserves, accounting policies and provisions can more or less write their own rules. But we also wanted to address the longstanding criticism that the figures we publish are not particularly accurate. The best way to do this was to compare the results we published last year with the only verifiable source – last year’s LLP accounts.
Spot the difference
In theory the results should be identical. Surely if a firm knows it is going to have to make its accounts public within 10 months it would be bordering on the idiotic to lie about them to The Lawyer?
We took a representative sample of the accounts filed over the past year. We searched for consistency between the key figures we published and that are listed in the accounts – turnover and top of equity (our average PEP excludes fixed-share partners’ remuneration while LLP accounts include it). What we found proves that the majority of firms do report what pen-pushers might call ‘true and fair’ figures.
Most of the headline information we examined fell within an acceptable margin of error. But in the most recent and hugely turbulent financial year, there have been other factors at play. Such as the timing of filing the accounts.
“One of the most innocent and probably sensible reasons for a delay in this market is that finance directors are worrying about how things will or won’t stand up to audit,” says Richard Linsell, an LLP expert and partner at Addleshaw Goddard. “Finance directors always want to be cautious, because if they rush their numbers out and then the auditors tell them to make a provision, they don’t want to have told the partners the PEP is ‘x’ and then find out they’re taking a £3m hit. That’s not career-enhancing.”
So pity the poor finance director struggling against unprecedented economic conditions and the demands of a market that expects results to be published during the reporting season.
The sea change is best illustrated when you compare the speed of filing achieved last year by Allen & Overy (A&O), the firm that many believe has set the gold standard in terms of financial transparency and reporting, with this year.
A&O filed its 2007-08 accounts on 29 July 2008 – a remarkable performance.
“In a stable environment speed of filing is an indication of the degree of polish in a firm’s financial procedures and systems,” says accountancy firm Baker Tilly’s head of professional practices George Bull.
Linsell agrees, pointing to the big four accounting firms, which “behave like public companies by publishing their accounts within three to four months of their year-end and put out a glossy brochure to talk about what their business has achieved.” In other words, they turn the LLP accounts into a marketing opportunity. But in the current market firms are likely to wait a little longer before filing, to avoid negative publicity and to check how their peers have done.
A&O finance director Ian Dinwiddie says his firm expects to file its accounts later this month, still a long way ahead of most of its peers (last year, for example, Linklaters filed on 5 November, while Halliwells left it until 26 February 2009).
“We certainly see the benefits of being open,” he says. “We want our clients to see we’re a business rather like they are.”
Not every firm is A&O, however. And in a year when the market has arguably seen the widest divergence of performance ever among the leading firms, from reasonable increases to potentially catastrophic declines, the temptation to massage the final figures will be strong.
“It’s what firms do in a downturn that positions them for the future, which is why this year’s results are so important,” says Tony Williams, founder of consultancy Jomati, referring to the number of firms that will be looking at the current turbulence as “a fabulous strategic opportunity” to reposition or rebalance themselves.
Arguably, the clues as to which firms are likely to be the hunters and which the prey lie in the results and firms’ appetite for putting out reliable results.
The top LLP ‘games’
- For any international grouping of firms out there with more than one entity, try paying the profit share of your UK lawyers from another part of the firm (ie the US) and see what happens to PEP
- Fudge the booking of the cost of paying off former equity partners across financial periods
- Raid your work in progress to accelerate profit during this tough period
- UK GAAP should not allow leases and delapidations reserves to be dipped into, but you could always change bad debts by lengthening them – if you can get the auditors to agree that the debts are still good even if they are over the GAAP period