With solicitors up in arms over a change to the accounting rules, Mark Smulian talks to law firms' internal watchdogs who advise staff on financial, regulatory and compliance issues

It is not every day that 80 solicitors attend a protest meeting about anything, and especially not about a technical change to an accounting standard.

But the change in question could land them with a large one-off tax bill because it impacts on the way that solicitors show their work-in-progress in their accounts (see [2004] Gazette, 29 January, 4).

They would have to show the projected profits of equity partners in their work-in-progress calculations, and not, as now, when billed business is shown.

The prospect of large tax bills spurred the multi-disciplinary Association of Partnership Practitioners to hold the protest meeting and it has formed a working party to deal with an issue which several firms complained came as a 'bolt from the blue'.

But there are people employed to watch the skies for bolts for larger firms of solicitors.

They are the internal accountants.

Solicitors naturally enough wish to practise law, and many regard administration as a necessary evil rather than something in which they take a deep interest.

But with an increasingly competitive environment for law firms, someone has to, at the very least, make sure bills go out when they should, get paid on time and that the practice is making money.

Internal accountants do far more than simply mind the books.

Laurence Milsted, finance director at magic circle firm Freshfields Bruckhaus Deringer, lists regulatory matters, and the consequences of the money laundering regulations and of the Proceeds of Crime Act 2002, as some of the big compliance issues they face.

'The Proceeds of Crime Act has led to a bundle of training, as we have to be aware of who we are dealing with and that the money we handle is honourable money,' he says.

'We have had to train our people to look for early warning signs.

With our client base it should not be an issue, but we cannot be complacent.'

Changes to accounting rules, as with work-in-progress, can affect solicitors without being aimed directly at them, and internal accountants have to be vigilant for what might be on the horizon.

'One example is that European Union harmonisation is coming for the way private clients' interest is dealt with,' says Mr Milsted.

'That means it will become more complicated than at present with co-ordinated disclosures required to European revenue authorities [in addition to those currently required to be given to UK authorities].'

Key operational issues for his team are cash management and cost management.

The former means taking steps to ensure that billing is regular and accounts are paid promptly, an issue recently identified by accountants PricewaterhouseCoopers as a problem for many large firms.

'That is all second nature to most business people, but not perhaps to lawyers,' Mr Milsted says.

'We have a credit-control operation and in addition our people chase partners to send out bills.

'Cash is always king, but more especially when the market is slower.

Cost management needs reliable data from operations to see what we are spending money on.'

Charlotte Balfry is only a few weeks into her role as finance director at City firm Berwin Leighton Paisner (BLP), joining from the telecommunications industry.

She says: 'I have been aware that some law firms are trying to put more emphasis on commercial aspects and are striving to improve their profitability.

I think the pressure from US firms has put pressure on to get in people with a commercial background to drive profitability.'

Moving into a law firm appealed to her because 'I'm not a status quo person.

I like to drive change and BLP seemed extremely ambitious about where it wants to go', Ms Balfry says.

This background may make her part of a new breed.

She explains: 'BLP was specifically recruiting someone from outside the legal profession and I know from talking to recruiters that a number of other firms are too.

'If you have a financial background, your skills tend to be cross-sectoral and transferable.

If a law firm is going to get more commercial, it needs people who can look at things from a different angle.'

One issue facing non-legal staff of law firms is coping with the whole partnership ethos and structure.

'That means that you have to do some things more slowly than might be the case in a corporate environment and have to manage partner relations,' she explains.

Ms Balfry sees part of her job as making sure controls are in place to make the firm efficient and profitable, but not to the point where partners are tied in red tape.

'Some may see me as a necessary evil, but the face of the firm I've seen is very supportive,' she says.

Even the accountancy profession is running to catch up with the full implications of the rule change that has led to the work-in-progress controversy, says Ms Balfry.

But she adds that 'there are no more unexploded mines out there that affect solicitors, as far as I'm aware'.

David Higdon is director of finance and administration at City firm Rooks Rider and also a committee member of the Institute of Chartered Accountants (ICA) solicitors group.

He contends that the work-in-progress change may not hit as badly as some think because it is a complex, technical area open to debate among specialist accountants who cannot yet be certain of its effects.

He says there may yet be ways found to mitigate any problems it causes.

Nevertheless, he foresees 'lively debate' on the matter.

He too reckons that 'a lot of firms have had to come to grips with a changed business environment, as professional practices now have to compete with each other'.

They tend to seek qualified accountants rather than old-style 'practice managers', who were recruited from the armed forces or had general administration backgrounds.

'In turn, having a professional accountant within a practice makes it easier for the lawyers to get on with the law,' he says.

Ms Balfry shares this view, saying that her perception is that some firms have done without a finance director and instead had 'someone who was more like a bookkeeper, and it seems that as some firms grew those people got promoted to a level that was beyond them'.

Mr Higdon was a partner in an accounting practice and specialised in working with lawyers, from which vantage point he decided that law 'was obviously an exciting area in which to work because it is an ever-changing environment'.

The internal accountant has not just a cashiering role, but can be overseeing the complete management of a large business.

'These days, practice management is becoming a specialism in its own right,' he says.

'It is a matter of putting the accountancy brain to business use.

We need to be aware of things that are happening in accounting and taxation that have an impact on the firm.'

Firms that decide to hire their own accountant need to make full use of their knowledge, Mr Higdon advises.

For example, although he cannot be a partner, he attends all partner meetings.

The ICA solicitors group works far more closely now with the Law Society 'as there are new accountancy standards evolving constantly', he adds.

Indeed, Law Society President Peter Williamson will address the group's conference in March, and it is now the ICA's largest specialist interest division with some 300 members.

The Institute of Legal Cashiers and Administrators (ILCA) is also a thriving organisation.

Barry Hilton, the president of ILCA, says: 'Over the years, law firms have felt that it was unnecessary to have skilled cashiers.

The big firms are now using accountants and realise the value of them because they are commercial.

Most smaller firms were not very commercial.

But now they are realising that they have to be commercial or they will not survive.' He says that ILCA - which was founded 26 years ago and which offers a training and support network - is growing, and now has 2,800 members.

One issue for both solicitors and their accountants is the possibility of conversion to a limited liability partnership.

Mr Milsted says this would bring both cultural and regulatory changes.

'We would have to send accounts to Companies House and register partners' address changes, for example, which would be a large administrative burden,' he says, adding that this is not something Freshfields would want to rush into.

He sees his colleagues' role as dealing with financial and statistical matters that are 'not things most partners want to do'.

'They came into it because they like doing law,' says Mr Milsted.

'We have "nagging rights" in the firm to persuade partners to do what they know they should do anyway.'

Mark Smulian is a freelance journalist