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September 21, 2023

Dewey Think an Accounting Firm Could Go Bankrupt?

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


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