Half of partners do not fully understand the potentially “catastrophic” personal consequences of their firm getting into financial difficulty, new research has warned.
Accountants and law firm advisers Baker Tilly said individual partners in firms “can no longer expect that being a good lawyer is good enough”.
A steady stream of news has indicated the problems of financial stability in the solicitors’ profession, with thousands of firms under threat and the Solicitors Regulation Authority (SRA) saying that “financial difficulty is a widespread current risk”.
The Baker Tilly report said: “With the rise of firm failures and the recent transition to entity-based regulation, all partners must have a full understanding of the financial affairs of their firm. If a law firm fails the consequences for the individual partners, both financially and professionally, can be catastrophic.”
The survey found that only 43% of partners were fully aware of what is involved in a Solicitors Regulation Authority (SRA) intervention, rising to 50% who understood the effect of the insolvency of their firm on the partners.
The Baker Tilly report pointed out that the SRA has powers to recover the cost of intervention from the firm’s partners, which can be “a very significant cost indeed”.
It continued: “Any appointed insolvency practitioner will also review drawings taken by partners and request repayment of overdrawn current accounts. Any creditors who have been granted personal guarantees will be requesting repayment proposals. At the same time, the providers of equity loans will be seeking repayment and the partners looking for new roles.”
George Bull, head of professional practice at Baker Tilly, said the obligations on partners under entity-based regulation reflect sound financial practices.
“They encourage partners to take an active interest in, and to raise questions about, the whole firm not just their specific area of work. Partners in firms of all sizes would do well to recognise entity-based regulation as providing the opportunity to ensure the stability firms need, not as a threat to their independence.”
He added: “With high-profile law firm failures running at unprecedented levels, certain common features are beginning to emerge. Property liabilities taken on in the good times have proved unsupportable in an economic downturn. Excessive distributions to partners have left firms weakened to the point of collapse. Tax arrears where the cash to fund these – VAT collected on client bills, for example – has been spent elsewhere.
“Excessive reliance on secondary lenders may leave firms feeling they can survive, only to discover that they cannot. And, worst of all, a lack of awareness on the part of both fixed and non-fixed share equity partners as to what exactly is going on in their business.”
Click here for the full report, which includes advice on how to improve your firm’s financial position.