Why YOU need to care about Congress’ push for accrual based accounting for law firms

My daughter asked me a math question the other night. I replied, “I haven’t had to take a math class since Algebra II.”

Okay, that’s kinda a lie. I had to take stats in college to graduate, and was really happy to get through that class with a C.

But, needless to say, I don’t do math. And I certainly do not do accounting (yet).

Photo courtesy of meisdupid on Photobucket

Scrolling through my e-mails and blog feeds this morning and came across A Call to Arms: I by Adam Smith, Esq.:

I fear that most of you may be unaware that Congress is considering a proposal that would have, I believe, have tremendously negative consequences for Law Land, without any scintilla of a principled justification or countervailing benefit other than a cheap shot one-time hit of revenue heroin.

Those of you who are aware of this proposal may have dismissed its prospects as extremely unlikely on the assumption that it would only be enacted as part of a truly comprehensive tax reform initiative. Don’t be so sure. I understand from one governmental affairs person I’ve spoken with that the Congressional reflex to grab revenue when they can may trump any longer-term perspective.

Yes, Adam Smith, Esq. has been and always will be uncompromisingly apolitical, and that remains resolutely the case. This isn’t an issue of Democratic or Republican, left or right, progressive or conservative: It’s an issue of accounting, finance, and dollars and cents—and the international competitiveness of the US legal industry.

The Congressional proposal sounds innocent enough: It would require law firms, among other qualifying professional service firms, with annual revenues over $10-million to switch from cash-basis to accrual-basis accounting. Permit me today to describe the straightforward factual implications of this proposed change; future columns will elaborate upon (a) the financial impact; and (b) the implications for US law firms’ competitiveness on today’s global landscape.

Happy Monday to you too.

Tim Corcoran had a great and meaty comment in there … so go read the whole thing.

As I pulled by jaw off the keyboard, I quickly did a Google search and came across this PwC White Paper: Congressional Proposals Requiring Law Firms to Report Taxable Income on the Accrual Method of Accounting.

I am no CPA. I rarely balance my checkbook. But even I can tell that this proposal will dramatically change the way that we — legal marketers — do business. It will affect alternative fee arrangements, partner compensation (which impact playing nice in the sandbox), management of debt, and who knows what unintended consequences this will bring.

Or maybe it will be awesome.

I have no idea.

I have sounded the gong here, and will do a lot more reading and educating of myself so that I can speak clearly and with authority within my firm. But the conversation needs to begin. So let’s start it. I’ll post this onto my FB Group: Legal Marketers Extraordinaire. If you are not a member, just email me your email address you use for your Facebook.

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  1. Heather, firms will find their clients have been using this kind of accounting system for a very long time. We used it when I was in marketing management back in my Time Warner days (80s and 90s). It was all I knew. Accountants know this well, and will adjust any shortfalls or overages in the following time periods. The assumption that I might have read in Adam’s post or comments about firms taking advantage of this by over-booking/accruing doesn’t have to be made because they will then be dinged for it in accounting periods that follow. The same follows for tax implications that will be adjusted the following year.

    I’m not saying yea or nay to this change, nor that I think it will be easy, nor am I an accountant, CPA or financial analyst. I am just joining your conversation to say that firms will find many parts of the non-legal world already operating in this fashion.

    • While all of that is undoubtedly true, Nancy, another truth is that lawyers and law firms do not like change, do not adapt well to change, do not believe change will happen, and will fight change at all costs.

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