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JIM RICE | Forensic Accounting
Are Your Law Firm’s Financial Statements
Useful to You?
Many attorneys receive periodic nancial state- ments from their accountants but do not fully understand those nancial statements. Many
times, the nancial statements are provided to the attor- ney a er too much time has passed and are therefore not as meaningful. Other times the attorney perceives errors in the nancial statements and dismisses their usefulness. e perceptions o en are incorrect and are the result of not being properly advised on how to read the nancial statements. All of this makes for attorneys not getting the maximum bene t from having nancial statements pre- pared for them.
e two most o en prepared nancial statements are the balance sheet and pro t and loss statement. However, there is another nancial statement called the statement of cash ows that has very valuable information, yet is rou- tinely not prepared at all. We will talk about the statement of cash ows later.
THE BALANCE SHEET
Most law rms keep their books on a cash basis, which reports cash in and cash out only. Whereas cash is king, the attorney should also be advised on what the cur- rent client receivables balance is as compared to the same period for
the prior year. e attorney should also be advised on the aging of the receivables, such as 30-day-old receivables, 60 days, etc. But keep in mind how the client receivables have changed from the prior period to the current period
as a decline in receivables could mean a problem is brewing.
e balance sheet is as of a set day, say at midnight of the date listed. So the cash balance is exactly that amount on that date. Equipment is usually listed at its purchase price and then reduced for
depreciation taken over the years up to that date. Liabilities are reported at their payo amounts as of the same
date. Note though
that most liabilities
on the balance sheet
are only for loans taken
for the purchase of equip-
ment, vehicles, etc., so that regular
accounts payable, like rent, supplies, taxes
are not listed. If the law rm is not paying these monthly type liabilities timely, those liabilities can
be an indication of nancial problems that are not noted on a cash basis balance sheet. What is le a er subtracting the liabilities from the assets is the law rm’s equity. e law rm’s equity indicates the general nancial well-being. However, keep in mind that the balances in the client re- ceivables and accounts payable must be considered in any assessment of nancial well-being of a cash basis prepared balance sheet.
All nancial statements prepared for attorneys should be comparative with the prior period. So if the attorney is looking at 12-31-18 nancial statements, those statements should have a column with the 12-31-17 numbers. Com- paring the current period with the prior period numbers is extremely helpful in understanding trends, checking unusual variances in collections and expenses, compar- ing to budgeted numbers and for benchmarking against industry standards. Budgeting is a very helpful tool to see if goals set at the beginning of the year are being met. Benchmarking by using common industry standards for various expense categories to see how the law rm com- pares to other rms is also important in understanding how well or poorly a law rm is doing. e discussion here is very basic. ere is a large amount of informative data from various sources, including the American Bar Association, on nancial statement ratios and types of
Jim Rice, CPA is a shareholder at Sol Schwartz & Associates P.C. He has 39 years of experience in public accounting. In addition to providing business consultation, nancial planning, litigation support and various other accounting services, Jim specializes in income tax planning and consultation. Contact Jim at (210) 384-8000 Ext. 112 or at [email protected].
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