The vast majority of law firms believe they are financially solvent (90%) despite evidence to the contrary, according to research from accounting firm Baker Tilly.
This is due to a lack of understanding as to what financial stability means, said the report, The Importance of Being Financially Stable.
Only half of respondents said they understand what is involved if they get into financial difficulties, and the effect on partners.
This lack of knowledge and understanding is 'worrying', the report said. ‘It would be advisable for partners and firms to understand both the consequences of financial instability and how the Solicitors Regulation Authority can intervene if the worst happen.'
Matt Haw, partner at Baker Tilly’s restructuring and recovery professional practices group, said: ‘This is a big problem if partners are not aware of financial issues they can’t take measures to tackle them.’
The research identified common financial issues in the current ‘unprecedented levels’ of high-profile law firm failures.
Property liabilities, excessive profit distributions to partners and tax arrears were named as key contributors.
‘Excessive reliance on secondary lenders may leave firms feeling they can survive, only to discover that they cannot. And, worst of all, a lack of awareness on the part of both fixed and non-fixed share equity partners as to what exactly is going on in their business,’ it said.
Earlier this month big four accountancy firm PwC warned one in three firms could be at financial risk.