Biglaw, Finance

Informed Advice (Part II): Lessons For Lawyers From The Tax And Accounting Industry

In the finance world, material weaknesses -- or instances when a company doesn’t have control over its financial reporting -- are a bad problem to have.

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In my article last month, I explored the value that legal professionals can offer by understanding their clients’ business to provide more informed advice. This month, we’ll go a step further to delve into lessons that lawyers can learn from their counterparts in the tax and accounting industry to help their clients take action on the advice they provide to them — another excellent pathway to increase your value and deepen your client relationships.

In the finance world, material weaknesses — or instances when a company doesn’t have control over its financial reporting — are a bad problem to have. For publicly listed companies, it means that an independent firm has concluded an audit and must include commentary on the “lack of control” in their audit report about the company. This can cause the company’s stock price to go down, and it is not uncommon for someone to lose their job.

During my time working with corporations on tax and accounting problems, I was in a unique position to study the root cause of a number of material weakness situations. While many of these issues were simply caused by manual processes or spreadsheet errors that got out of hand, there were several situations where a tax advisor proposed a way to save taxes or to restructure the organization to be more tax efficient. While the outcome of the engagement was almost always positive, operational considerations weren’t always factored in at the conclusion of the engagement. As a result, a lack of consideration for change management was often the beginning of a control issue that could lead to the material weakness. Here is a quick example.

A cost segregation study is an engagement where a skyscraper, a manufacturing plant, or other very expensive assets are broken down into individual components. To illustrate, a company that owns a $100 million building might isolate various components of the building into different buckets for accounting purposes. Rather than track one building that is worth $100 million, the corporation might choose to “segregate” costs like elevators, air conditioning systems, security systems, doors, and bathroom fixtures into different buckets, grouping assets so the company can take a larger tax deduction and save money.

At the end of the engagement, the advisor shares a spreadsheet with thousands of lines in it, representing the components of the skyscraper broken down into thousands of parts. The corporation books the tax deduction and then submits a request to their IT department to “split” the one asset into many assets in the back office systems — but the IT department tells the tax department that it will take 18 months before they can even look at the request, so the tax department starts managing these assets in spreadsheets. Someone takes another job, a calculation error is introduced, and before you know it, the spreadsheet is giving inaccurate answers. For a corporation that is capital-intensive, there may be billions of dollars of fixed assets on the balance sheet, and mistakes made in calculations can rise to the level of creating a material weakness. How big can the errors be? For large corporations, the errors can be measured in the hundreds of millions of dollars.

In this example, advisors can dispense the sound advice, but without connecting dots and seeing the full picture, it’s possible for these kinds of issues to occur. Lawyers can learn some lessons from the tax and accounting industry that may help better advise clients, and empower clients to take action on advice in ways that bring more benefit.

Have an appreciation of what your client may need to do implement advice. Many law firms tout their expertise in specific industries and practice areas. It goes without saying that knowing and advising on the law is table stakes. Helping craft a policy or guiding a client through scenarios to get to a decision is important to help contextualize the advice and make informed decisions — but having an appreciation of what it takes to actually implement advice is a worthwhile knowledge base for a firm to have.

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Ask your client if they have considered how to operationalize the advice. It is not the law firm’s responsibility to implement advice, but it is certainly wise to prompt a client about the operational considerations. That might be a casual discussion or simply encouraging a conversation between your client and the affected groups within the organization to ensure expectations are managed. Over time, a law firm might understand how some clients implement more common advice and share those learnings as part of the advice or as a checklist of sorts for future clients to consider.

Understand the big picture for your clients. In the case of the material weaknesses example, it is not uncommon to see the exact same firm identify the material weakness under audit without realizing that it was another part of their own firm that may have contributed to the issue in the first place. Likewise, it may be rather important to ensure there is visibility across practice areas when multiple practice areas are advising the same client. Any issues that are surfaced may not rise to the level of the accounting issue discussed in this article, but the ability to collaborate with other involved parties or consultants and help connect the dots for a client could be impactful. More often than not, a firm can struggle with this when there aren’t shared incentives for doing so.

Clients are looking for more from their law firms, and the pressure is on to serve clients more effectively. Regardless of profession, nobody would ever want to advise a client in a way that could potentially have unintended consequences — so it’s up to the advisor to do the work to understand the situation from their client’s perspective to provide the right insights and counsel. Doing so has the potential to demonstrate deeper value, and set you up for stronger, longer-term relationships with your clients.

Ken Crutchfield is Vice President and General Manager of Legal Markets at Wolters Kluwer Legal & Regulatory U.S., a leading provider of information, business intelligence, regulatory and legal workflow solutions. Ken has more than three decades of experience as a leader in information and software solutions across industries. He can be reached at ken.crutchfield@wolterskluwer.com.

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