May 24th, 2014 by Jim Cotterman
Law firms are somewhat unique in the amount of information that is publicly available regarding their finances. Most closely held businesses do not operate in such an open manner. Of course, the accuracy of that publicly available information is a separate matter to consider, particularly when obtained from unofficial sources. Here each firm must decide what is appropriate for public disclosure and how to best convey that information.
Yet, transparency in the governance and operation of a law firm is a good practice for the owners of the firm. They are a large group relative to their firm’s total employment and are all active and personally invested in the firm. But such disclosure is not sufficient to avoid financial distress. Two additional factors are also important.
First, lawyers are not schooled in accounting or financial analysis. If transparency is to have meaning, partners must be able to understand and interpret the financial information and metrics. Firms should Invest in training sessions to acquaint partners with the financial reports and operating information, how to interpret that information, banking covenants and the metrics the bankers rely on, and how to reconcile the tax return, year-end financial statements and internal financial reports.
Second, and possibly most important, is a culture where 1) firm leaders welcome questions from partners and others about the firm and 2) where integrity and honesty is embedded in the ethos of the firm. Transparency assists accountability, but it also establishes responsibility. The responsibility to ask and then act when action is required.
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