Looking Behind The Curtain

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Some financial collapses are a surprise, especially when clients and customers don’t see the house of cards on which a business is built.

There have been a number of surprises over the years, where companies seem to be financially well-off until the doors get locked and the lights are turned off one day. One of the most noteworthy such cases in recent years has been Enron, which was “cooking the books” for years until it finally got exposed and the company collapsed under its own weight.

Several large law firms have collapsed out of business recently, and those have taken many clients by surprise, but have armed these clients with new weapons and new questions to ask when they consider hiring a law firm for their civil, criminal or corporate law case.

Before Enron, there has usually been a reasonable expectation that larger companies have tended to be perceived as the most stable and the ones that will likely be around for a long time. But as much information is on paper and can be difficult to audit – especially in a relatively unregulated industry like law – it can be easy to keep things behind closed doors and not need to reveal the truth about a company’s finances.

The recent closures by these larger law firms have brought finances into the discussion for clients. While there is no industry-wide standard for reporting financial information, many law firms are being asked to be transparent with clients and prospective clients who ask about revenues and profits.

Financial disclosures are being nearly more important than a law firm’s success rate in cases, as the latest trend seems to suggest. Those in the industry believe that this is a positive development, as more transparency within and without the firm (where even the attorneys in the firm know as much as the partners) can not only build trust among the firm and clients, but also among attorneys and partners – and can help attorneys relax and focus on practicing law and not spending restless nights wondering about getting paid.

With transparency, potential employees can know the stability of a firm and whether it’s a good firm to work for, and recruiters can develop trust and credibility with these prospective employees, which can make a firm more comfortable to work with even if its revenues don’t match up with others.

While there is no standard for financial disclosures in the industry and there seems to be no hard push to develop such a rule nationally – leaving it to states to decide the necessity – there does seem to be a willingness to at least develop financial reports that will include certain information and be available to clients and to those working in the firm. Building trust and reliability are two factors that can be so important in law and the attorney-client relationship.

To protect yourself as a client, just as it would be OK for your corporation to reveal financial information to a law firm to show your ability to pay the bill, it also makes sense to request financials from the law firm you are considering, to understand how reliable the firm will be and how “desperate” that firm might be to have your business.

While desperate isn’t necessarily bad, the reason for the desperation may be important.

Melissa Thompson writes about a wide range of topics, revealing interesting things we didn’t know before. She is a freelance USA Today producer, and a Technorati contributor.