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We Learned Some Interesting Things From This Interview with a Former Accounting Firm CFO

CFO published a couple of Q&As with Michael Barton, the CFO of global law firm Goodwin Procter this week and they provide an insider perspective on professional services firms that most of us never hear about.

Prior to joining Goodwin, Barton was the CFO of Rothstein Kass for about two years; he turned down an offer to join KPMG after the acquisition. And prior to RK, he spent 15 years at Grant Thornton, topping out as the firm's Executive Director of Finance according to his LinkedIn profile.

The interview falls well short of a tell-all; there are no lurid tales of partner politics, nightmare contingent liabilities or unhinged greed but it's insightful nonetheless. I recommend both parts of the interview: part one focuses on his career and the differences between law firms and accounting firm as businesses; the second installment is where Barton goes into everything from the management and ownership structure to financial reporting to, yes, compensation at accounting firms.

I think the best thing about Barton being interviewed is that despite his time within accounting firms, he's not accountant and hasn't provided any kind of accounting services. He is speaking as a professional who has experience overseeing the financial function of a professional services firm. If he had been a client-focused CPA, I don't think he would have granted the interview at all or been as matter-of-fact. For example, here he is discussing the management structure:

The ironic part about the partnership board is that it’s made up of people who serve on a rotational basis. The managing partner of the firm would on some level report to, and be evaluated by, the partnership board at the end of the year. In many cases, you would have a line partner from the Carolinas practice, for example, be on the partnership board. And the CEO or managing partner was the line partner’s boss’s boss. But when it came to compensation, such line partners sat over the CEO. 

Huh. Anyone else wondering if that "CEO" is former Grant Thornton CEO Stephen Chipman and that "line partner from the Carolinas" is current Grant Thornton CEO Mike McGuire? It's not that much of a stretch. Funny how something like that might stick out in your mind and come out as an anecdote.

Anyway, here he is, quite matter-of-factly, discussing firms financial reporting and audit:

[O]n an annual basis, the partnership board had a finance subcommittee that would review the budget each year. They also elected a rotating group of partners that would do an internal audit, because most accounting firms do not want to invite another accounting firm in to audit their books. Sometimes the group might recommend changes, but in most cases, they would not make any notes.
Then there would be an annual close process that produced internally audited financials. If the firm determined, for instance, that we made $100 a unit, the books weren’t officially closed until that partner review team analyzed the firm financials and said the firm did make $100 a unit. Then we were good to go, and we closed the books, and everyone was paid out.
No external audit of any kind?
No. But we would provide financials externally to our banks. If we had a revolving line of credit we would release financials to our banks and to other interested parties, depending on what relationships we had with them. I was also involved with the release and management of the external financials. I was talking primarily about Grant Thornton, but when I was at Rothstein Kass we did not have outside auditors come in and audit the books at year end. 
So no external audit. I wonder if GT had an external audit, they might have discovered ex-partner Craig Haber making off with $4 million of the firm's money from 2004-2012. Maybe? 
Finally, here's his description of partners anxious about their earnings for the year:
About two months before year end, I would start getting emails from all the partners that I was friends with — and even more from the ones that I was not friends with. They were asking, “What are the earnings per unit going to be?”
They knew their income that year was going to be in a range. But they didn’t know exactly what it was until the books were closed. And they didn’t so much question the process as they wanted to know about such things as should they be buying a bicycle or a car.
Barton goes on to say that whether or not he disclosed that info "depend[ed] on the management team" as some would not disclose anything. He went on to say that, "Most partners do not know what other partners make," with the exception of the CEO and partnership board whose pay is ratified by all the partners.
We hardly ever think about it, but of course the CFO of an accounting firm has a unique perspective that no partner could possibly have. He or she knows where the bodies are buried (the aforementioned Haber situation was probably a doozy), which clients are deadbeats, a front-row seat to the firm's success or lack therof and they're thinking about it all the time. Partners, while owners of the business, don't have the time to understand the firm to this degree and in some cases, they probably don't want to.  
If we're going to learn anything about these firms, it's going to be from people like Barton. Hopefully we see more stories like this.