Recent pronouncements from the SRA have focused attention on the "financial stability" of UK law firms – and in one announcement they said that 20% of the top 150 firms were in financial difficulty.
They have also said that they could not understand why the banks continue to support some firms - so they have circulated 2000 firms asking for more information.
Yet most of the data published on the top firms shows that they are making very healthy profits.
Concerning Management Information
On the other hand, one of the issues that banks have told me is of concern is the quality and reliability of the management information upon which they make their lending decisions.
I spoke at a conference late in 2011, at which most of the speakers and attendees were involved with medium to large firms, and one of the speakers asked for a show of hands as to how many of the firms present produce a full set of accounts - including both profit & loss account AND a balance sheet - every month. The answer was astonishingly low, given the quality of the audience.
Part of the service that we provide to law firms, sometimes at the behest of their bankers, is to review the quality and reliability of the information provided, and it is unusual for us to find a comprehensive and up-to-date balance sheet included in the pack.
Even when we do find a balance sheet of sorts, we often have significant queries about the valuations of assets - in particular the work in progress and, above all, Goodwill.
The liabilities side of the balance sheet is often even sketchier – and a closer investigation often provides an unwanted surprise in the amount of off-balance sheet liabilities (accidental or deliberate). In particular, we find that amounts owing to HMRC can be out of date, or understated, and that liabilities to former partners can be invisible.
Understanding the Position
In the absence of a regularly circulated, full – and reconciled - balance sheet, it is hard to see how partners can truly understand the financial position, indeed the stability, of their firm.
We take the view, perhaps charitably, that much of this in smaller UK firms is simply a lack of thoroughness.
More chillingly, American commentator Ed Reeser has consistently expressed the view that in many firms, the partners do not understand the position because the Management Team does not want them to (please see this article, which makes for uncomfortable reading).
Either way, regular circulation of a full, current balance sheet is becoming more important than ever.