One of the most frequent questions I get asked as a journalist tripping between accountants and lawyers is why lawyers apparently get paid more money than their more numerate colleagues.
Facetious responses, of course, are easy to come by. Put the question, for instance, to a top accountant and he’ll say the reason is that lawyers have never been responsible for running their own business. One such partner told me candidly: ‘They’ve habitually over-paid themselves. When he gets his profit-share a lawyer is capable of running out and buying an Aston Martin in cash.’
Ask a lawyer the same question and the response is likely to be: ‘Accountants.
Just bookkeepers. Why would they need brains, anyway? They should consider themselves lucky to get beans because whiplashes would be more worthy of them.’
Now, in the Britain of old – that is when competition between lawyers and accountants was about as cut-throat as running the egg and spoon race on the school playing fields – this type of pseudo-humourous attitude was legion.
Today, however, with the coming of multi-disciplinary and limited liability partnerships and the audited, published, accounts that go with them looking likely to bring permanent changes in the way professional services are delivered, the question about the disparity is being asked by members of both sides.
Curiously – and this is the real reason I raise it now – I had been sensing over the past year or so that there might be a shift in perception. This intuition was prompted in the first instance when the senior partner of a large law firm, with whom I was lunching, looked at me incredulously and announced: ‘Arthur Andersen tax partners are charging themselves out at nearly #500 an hour! Can you believe this?’
A little later, in a chat I had with Colin Sharman, senior partner of KPMG, he too drove this feel-good factor home. He proudly told me that many of his partners were now ‘well up in the #400,000s per annum in profits’.
He clearly had lawyers in mind as the immediate benchmark. So, armed with these two pieces of information, I started to wonder if indeed the ‘unthinkable’ for lawyers was finally happening. Was there indeed a convergence taking place? Were legal partners’ earnings coming down, and accountancy partners’ earning going up? Could a centuries-old truism be finally crumbling? If this was true, I thought, it would be enough to tempt hundreds of arrogant, superior-minded lawyers to reach for their revolvers or step out onto the window ledge. The answer, after investigating on both sides of the fence, is a qualified yes – and a qualified no.
It is certainly true, after decades of being poorer cousins, that earnings for partners in the Big Six firms, and some in Group A firms, are now keeping pace with partners in law firms – and the signs are that, for some, profits will keep on going up. The reason behind this is that business clients are increasingly happy with the way accountancy partners look into their deals at a very early stage. Through management consultancy, human resources, tax and corporate finance advice they have found the perfect way to get into the food chain early and stay there. It’s harder work and requires more manpower, but in return the client is willing to pay added value fees.This has led to the rising profits that suddenly accountants seem to want to talk about. But before I could definitively decide there was something in what they were claiming, another factor had to be taken into consideration; that of disclosure.
Accountants, unlike lawyers, have rarely spoken about profits per partner in the past. Ironically, while they have been happy to talk about total fee income, they have never previously wanted to disclose exactly how much money individual partners might make. Lawyers, conversely, will talk about profits, but fight shy of revealing annual turnover, confirming that in one way or another both sides, in exchange for unlimited liability, still jealously protect their right to privacy under the law. Therefore, inside information was necessary to analyse exactly where the two sides really are. Currently, from the few published accounts available, and sources inside the firms, average profits per partner in the 12 largest accountancy firms are running at #190,000 – #270,000 pa.
By comparison, most lawyers in the top 30 firms will earn at least that, with as many as half of that number recording average profits in excess of #300,000.
If, for argument’s sake, the average is #400,000, then there will be several dozen partners in one firm who are earning close to Colin Sharman’s salary of u770,000 recently revealed in KPMG’s published accounts. This is bad news for accountants, but worse, the junior end of the partnership will equal the partners’ average currently being boasted by several of the Big Six firms. In mitigation, the Big Six say their average, unlike lawyers with only one office in London, is badly skewed by regional partners who are are paid much less. If they were single-office firms, say the profits convergence exponents, then accountants’ profits would look similar to those of City law firms. But they are not, the lawyers counter, so the extrapolation is invalid.
Accountants, they quite rightly point out, need offices in every major city in order to function. Take them away and they would not have a business.
Few City lawyers, on the other hand, feel the need to spread themselves out into the regions. There are law firms out there already, and many of their partners already earn around #200,000 a year, providing further evidence to discredit the dilution theory. The facts, then, are that today only several hundred accountancy partners will be earning as much as City lawyers, and this is largely in areas such as tax and consultancy where accountants have created a niche as cutting-edge business advisers.
In contrast, there will be several thousand lawyers eight to ten years into their partnerships who are making as much as their senior accountancy counterparts. In an average, smallish, City firm, partners at their peak can expect to clear #350,000 each year.
All of which means, in spite of the talk by the gung-ho accountants of the gap closing, that they still have a long way to go.
And that begs the real question asked at the outset; why? The answer comes down to creativity. Lawyers working with an English legal system open to myriad interpretations can always find a way to add value. In any business transaction, any contract, any litigation or any tax scheme the thousands upon thousands of laws going back centuries are an open invitation to clever legal minds.They will use words to provide a client with something that will be upheld by the highest authority in a democracy – the Law.
Sadly, for accountants, numbers are not so flexible; nor are they so difficult to understand.
Patrick Wilkins is news editor of Commercial Lawyer.