Law firm finances is not a joke

Posted on March 14, 2007 by Ed Poll
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Larry Bodine quotes Patrick Lamb about Mayer Brown, "PPP is a joke.  And what's more of a joke, lawyers either are so stupid that they can't see behind the manipulation or they know how meaningless the statistic is, in which case law firm managers are fools for running their firms based on a bogey everyone knows is so malleable.  Seriously, senior firm managers really have to ask themselves, if a prospective partner is attracted to them because of their PPP and doesn't know how the firm's "stock price" is so easily manipulated, do they really want such a fool as a partner?" My question to Patrick, and everyone else who has a semblance of accounting knowledge, is:  Why should law firms be immune from the games that accounting theory allows? In manufacturing, one can "manipulate" profit and loss, and therefore price-earnings ratios, merely by valuing inventory differently from year to year ... Likewise, profits per share can be altered merely by changing the number of shares outstanding.  These and other accounting "tricks" allow managers to play at the earnings alter and require careful stock purchasers and lenders to these corporations to be careful. Caveat emptor governs. By the way, we're not talking about fraud here; we're not talking about back-dating stock options. We're talking about legitimate rearrangement of organization structures done to impact accounting metrics.

Why should law firms, now playing in the big leagues with revenues approaching $1 billion, be exempt? Are lawyers more foolish than their corporate counterparts? While the reasons given may be a ruse, the reality remains that increasing all the firm metrics benefits those in power ... and those not in power suffer the consequences.

I suspect that the impact on institutional loyalty mentioned by Patrick will not be so great as imagined. I'm not sure any lawyer currently believes that being a member of a large law firm is anything but "big business," just in the professional arena rather than the manufacturing arena. The days of "professionalism" and "collegiality" are in the past. Whether that's a good thing or bad thing is a different discussion. Law firms, both large and small, are seeking not only to report higher PPP, but also to take more money home. Is this wrong?
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Patrick Lamb - March 14, 2007 12:04 PM

To be clear, my point was not that big business law firms should not have usable accounting metrics in place, but rather that the ones they use should have some meaning and not be as easily manipulated as PEP. De-equitize 10% of your partners and presto!--PEP goes up. How, pray tell, has the firm changed? Your reference to manipulations in the manufacturing area, in my view, miss the mark. There are accounting conventions--GAAP--that govern most decisions and those conventions mandate disclosure of the kinds of changes you offer as examples, thereby avoiding the value of the chicanary. Moreover, financial statements are routinely audited. I only wish that the accounting process for law firms was akin to that of public companies. Having been on the inside, and knowing something of accounting, I know how meaningless the PEP number is when evaluating the financial health of firms. One example suffices--two firms with identical PEP, but one with unfunded retirement liabilities, the other fully funded. Think their financial health is the same?

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