• Dewey Think an Accounting Firm Could Go Bankrupt?

    By | May 30, 2012

    Michael Cohn over at Accounting Today wonders if an accounting firm could suffer the same fate as recently departed global law firm Dewey & Leboeuf. It's a question worth asking since the entity structures for both accounting and law firms are similar and mergers are common in both industries. But really, it's not as likely (although not impossible) for an accounting firm to go down for the dirt nap like D&L for a few reasons:

    1. Most accounting firms are much larger than law firms. Dewey & Leboeuf had 26 offices worldwide with approximately 1,000 attorneys. That's roughly the same size of regional CPA firm Moss Adams. Accordingly, the pay packages that are partially (totally?) responsible for the Dewey debacle would hardly ever be given to accounting firm partners.
     
    2. In that same vein, most CPA firms simply can't demand such ostentatious pay packages for their partners to begin with. They don't have the extensive education as lawyers do and, as a result, the market doesn't bear that type of compensation for CPAs. Bloomberg reported yesterday that some of the D&L partners had total guarantees of $100 million. That's nearly 20% of BDO's revenues for 2011. With the exception of the largest firms, CPA can't demand that kind of dough. 
     
    3. More simply, accountants are business people; lawyers are not. Accountants would look at a transaction like this much differently than lawyers and would almost never agree to something that risky. Granted, some finance and accounting types had to be involved when the Dewey & LeBoeuf deal came together (and the numbers should have made them nervous) but to be fair, unpredictable market conditions definitely helped sink D&L. Still, it's far more plausible for accounting firms to bite the dust because of a huge liability finding or settlement than because the firm can't pay its bills.
     
    Cohn writes that D&L's collapse "appears to be due to overly optimistic financial forecasts and a desire to convince enough partners to agree to the merger by richly rewarding them for their acquiescence." Accountants can surely rival lawyers in terms of greedy bastardness, but their business acumen would more often than not keep them from entering a merger where they're effectively being bribed. Remember that the reason for the dealbreaker of Eide Bailly/Wipfli deal was reportedly the risk of clawbacks from the Tom Petters Ponzi scheme. No amount of money was going to convince those Wipfli partners that the deal was worth it.
     
    Fundamentally, CPA firms businesses run by business people; law firms are businesses run by lawyers. There's a huge difference. Accountants will never have to worry about their janitors chasing them for money. On the other hand, they will always be worried about lawyers chasing them for money; after all, CPAs are some of lawyers' best clients
     

     

    • Guest

      One note, having worked for both a big 4 and a law firm of similar size to Dewey: partner capital commitments are drastically different.  At the big 4, partners had an 80% of budgeted capital requirement; at the law firm, its closer to 25%.  This means law firms, relatively speaking, have almost no equity cushion to weather a storm.  Whether smaller accounting firms require the same capital commitment as the big 4, I cannot say, but that, on it’s face reveals the distinctions in the business models of these organizations.

    • Guest

      Meant to add: accounting firms also have non competes, law firms do not (it is against state ethics rules).  Thus, it is much easier for a partner in a law firm to jump ship to a competitor.  Obviously it is not impossible to do in the Big 4, its just harder.

      • Guest

        You should tell that to KPMG & PwC.

    • Grapefruit Simmons

      Good analysis! I was thinking the Big 4 were just as vulnerable when I was reading the NYT blog article about Dewey & LeBouef.

      Never say never though…I found the below held eerily true as I was leaving EY in 2010:  
             
      “These trends, they say, have destroyed the fabric of a law firm partnership,
      where a shared sense of purpose once created willingness to weather difficult
      times. Many large firms have discarded the traditional notions of partnership —
      loyalty, collegiality, a sense of equality — and instead transformed themselves
      into bottom-line, profit-maximizing businesses.

      “Because the partnership lacks any shared cultural values or history, money
      becomes the core value holding the firm together,” said William Henderson, a
      law professor at Indiana University who studies law firms. “Money is weak glue.”

      • Grapefruit Simmons

        “Money is a weak glue” is almost as good as “desperation is a stinky cologne”.

    • smart lawyer

      This article is wrong on so many levels it is almost funny.

      1) no partner at dewey had a 100m guarantee. It was aggregate of 100m.

      2) corporate lawyers are as much business people as accountants

      3) the real reason this is unlikely to happen to accountants is that it is much harder for pubcos to switch accounting firms then law firms. An accountant cant take disney out the door like mort pierce did at dewey.

      • smarter accountant

        smart lawyer:

        First, the above article did not say any one partner had a 100m guarantee, but that “a some partners”, which could be read to be either in the aggregate or individually, however, us being actual accountants would never have assumed that each, most, or even one partner had a 100m guarantee.  That being said, given the size of the firm, I am sure they had many more than 100 partners.  Let’s just pretend (to be conservative, not that you lawyers understand that meaning), that they did have have only 100 partners.  Doing the math (by your statement) that means that they would have only 1m guarantee, on average, per partner, which is less than half of the their listed debt.  Based on this, I think that the partners had much more than 100m guarantee combined.  

        Second, I don’t disagree, but the corporate lawyers were busy with clients that day.

        Third, you are sorely mistaken here.  Once an engagement letter is expired, a company, any company (we call them either ‘listed’ or ‘registrants’ in our world, not ‘pubcos’), can tell their auditors to hit the fucking road, and they are only an 8-K and possibly an 8-K/A away.  While there can be substantial costs in switching auditors (getting the new guys up to speed), make not mistake, I am sure that when a big company switches their top law firm, there is the same ‘getting to know you’ period. 

    • ???

      Not completely relavent, more food for thought, but I remember hearing that doctors and lawyers default on student loans more than any other profession.

      • guest

         lolwut.

        • Whhhhaatt

           yea… they declare bankruptcy as a newly minted graduate, get their debts erased/significantly reduced, start immediately making lots of moneys

          • Guest

            You can only discharge student loans in bankruptcy if a judge finds “undue hardship”, which is a very strict standard.  Even the people who have $120k in loans from their useless DeVry degree find it impossible to get their loans wiped away.

          • CPAPDX

            Many lawyers and doctors do not make as much money as you would think. Especially if, like my friend’s husband, they go in to a “passion” field. He travels to rural clinics in areas greater than 100 miles from the nearest hospital. Makes, I think, $75K, definitely less than 100.

            My husband is an attorney and started his own practice fresh out of law school, like his dad did. Neither of them have ever made close to what my best friend’s sister made as a first year associate at a white shoe firm.

            That being said, I would suspicious of the “more bankruptcies than any other profession” if they do it’s probably related to malpractice suits not student loans, since student loans generally can’t be discharged.

            • Laj

              I can second your thoughts on lawyer salaries. The only ones that make that much are the sharks at white glove firms which cater to major companies and very rich clients. The range of lawyer salaries is significantly larger than the range of accountant salaries. Big 4 senior partners don’t make more than $3M while elite law firms can pay some of their partners over $10M. 

      • Guest

        I remember hearing that you are a dumbass.

      • Dr. Vegas

         *relevant

    • DownUnderAuditor

      BDO in Australia effectively did go bankrupt recently. 

    • Guest

      As previously noted, ethical restrictions on non-competes for lawyers is a big difference. The mobility of senior partners with large books of business at major law firms is virtually unlimited.   

    • Poo

      Caleb…this article is retarded. If anything, lawyers are probably more astute businesspeople than accountants. Douche lord

      • BarryProfit

        Well, obviosly the folks at Dewey must have been more astute business people, you know b/c they can manage their finances really well and all, dumbass.

      • Ring a ding ding

        troll

      • Dewey, Cheatem & Howe

        You haven’t worked with too may lawyers, have you? Some are astute business people but most are not. Most come into law with undergraduate degrees in philosophy or English literature and not degrees in business or economics. They see big dollars and rosy forecasts and believe in rainbows and bunny farts. In my market, one large, nearly 100 year old from went down and the three largest players in the market are rumored to be in tough financial shape, resulting on one surprise merger already. Good at drafting legal documents – yes. Good at understanding how the business of law actually works – not so much.

      • Dr. Vegas

         Douche Lord? you’ve been reading too many Big4Veteran comments

      • CPAPDX

        I know A LOT of lawyers (ugh). A tiny percentage of them have any business sense at all. Some have a good handle on marketing. Some are real cheapskates which can almost be mistaken for financial acumen if you squint. Only very very few will ever be able to decipher meaning from, say a 10K or S-1 or whatever.

    • Guest

      Extensive education? Have you any idea how many bullshit law schools there are out there? Or what about the massive amount of morons who filter through them and pass the biggest joke of a test called the Bar exam? I’ve heard the NY Bar Exam has close to a 90% pass rate.

      It really amazes me at how effective lawyers are at making people believe they’re important. How many times have you heard the phrase “lawyer or doctor” or “lawyers and doctors”? The inference is always that lawyers are just as important as doctors. What a joke…

      • Yeeaaaahhh

         Your pass rate is a little off…

        http://www.nybarexam.org/Press/ExamStatsJUL11PassRates2005-2011.pdf

        Still better than CPA exam pass rates though. Surprisingly, the first time taken pass rate is significantly higher than all takers.

        With that said, putting down lawyers isn’t going to make your CPA more valuable than them. Accept what you are.

        • Laj

          I’m actually surprised the Bar exam pass rates are that high. The CPA pass rates are literally half of that — and it requires 4 tests. No wonder there is such a glut of lawyers. 

        • Guest

          I said close to 90% pass rate. Look at the ABA Graduates line, which includes law students from any ABA school. The last three years were 86.1%, 85.6%, and 90.5%. Thats not close to 90%?

          Even so, if you want to include foreign educated, the pass rate has been constant at 80%. If ten people walk into a test and eight pass, how hard can it be?

        • Guest

          Bottom line: Difficulty of CPA Exam > Difficulty of Bar Exam

          By a very wide margin. Accept that.

          • Guest

            I hate this argument.  The only person who can truly attest to the difficulty of both exams is one who has taken both.  Did you ever think that law school might better prepare people to sit for the bar exam?  Or those who sit for the bar exam are smarter than those who sit for the CPA?

            • BarryProfit

              The only evidence you need are the pass rates for both. Law students are somehow smarter than accounting students? What evidence do you have to support this asinine statement? In fact, I would argue the opposite considering the majority of law students major in poli sci/philosphy/history/(insert other easy major) with the same gpa’s (on average) as accounting students.

              “Blow it off. Remember poli sci?”

            • Guest

              I have not taken both. However I have heard a number of people who have taken both exams argue that that the CPA exam is much harder.

              Your last two sentences are retarded and I will not dignify them with a response.

      • J.D. from I.T.T.

        I mean, hell, this guy passed the bar…how hard can it be?

    • Guest

      Oh come on! Not you guys too with the “witty” Dewey headline puns….I get enough of this out of Lat and Ellie at Above The Law…..come here for some actual intelligent conversation…and Big4Vet’s comments of course.

    • Guest

      Does anyone know if Dewey’s financials were recently audited (12/31?) – if so, by which firm?

    • Guest

      The bar exam and CPA exam aren’t directly comparable for a number of reasons, so the argument that first-time pass rates illustrate the relative difficulty of each is misleading.

      First, law students already have a bachelor’s degree and have taken the LSAT.  These are barriers to entry, and as a result, the typical first-time taker of a state bar exam is at least 25 or 26 years old.  The average first-time CPA exam-taker is what, 22? 23?  That’s a significant gap in terms of maturity, study skills, and general life experience.

      Second, virtually every law student plunks down around $3,300 for a comprehensive BarBri review course.  I understand that the leading CPA exam review course (Becker) costs about the same, yet first time pass rates are 50% or less.  Maybe CPA candidates aren’t smart enough to spot a bad bargain.

      Third, six-figure student loan debt coupled with a job offer which is contingent on being licensed as of the start date is a powerful motivator to study and pass.  Law firms have no use for attorneys without a license to practice-that’s what paralegals and summer clerks are for.  Law firms don’t give 5-6 years (i.e. until one is ready to be promoted to Manager) to pass the bar like the Big 4 do for the CPA exam.

      So, while the average law student might not be “smarter” than the average accounting student in the literal sense, they generally do have a lot more vested in their education by the time they sit for a bar exam, and are generally older and more mature. 

      Finally, don’t forget that most state’s bar exams take two full days, so the fact that the bar is “only one exam” doesn’t make it any easier or harder than 4 exams lasting a few hours each, spread out over as long as 18 months.

      • Guest

        I am a CPA and an Attorney, passed all four parts to CPA on first attempt (all 4 scores above 90) and passed Florida Bar exam on first attempt (scored in the top 5% in the state).  In my opinion, the bar exam was substantially more difficult.  First, it required three years of school (90 credits) to learn how to think (to even stand a chance on the bar exam) in addition to the 1,000s of substantive laws learned throughout law school.  I passed the CPA after taking merely 8 accounting courses (24 credits), and got to break the test up into 4 different parts for the nominal amount of material.  

        Further, the CPA exam required 95% of pure memorization where the bar exam required a great deal of synthesis of facts, consideration of all applicable laws (pooling from the 1,000s learned within both state and federal law), analysis of all potential issues, application of the law to the facts, a far greater level of overall logic and analysis.  Additionally, in many cases on the multiple choice questions on the bar exam, there were no correct answers.  In other words, sometimes, when it said select the best answer, one had to choose the answer that was least incorrect.  This was the type of critical thinking taught in law school. 

        • CurvatureOfTheEarth

          And yet, you had to get a CPA to make a living anyways. All the prestige in the world can’t put food on the table. Have fun with your $120,000 in debt and worthless JD.