In my article last month, I explored the value legal professionals can offer by understanding their clients’ cases to provide more informed advice. This month, we’ll take it a step further to delve deeper into the lessons lawyers can learn from their counterparts in the tax and accounting industry to help their clients implement the advice they provide – another great avenue to grow. your value and deepen your customer relationships.
In the world of finance, physical weaknesses – or instances where a company does not have control over its financial reports – are a big deal to have. For listed companies, this means that an independent firm has concluded an audit and must include a comment on the “lack of control” in its audit report on the company. This can cause the company’s stock price to drop and it is not uncommon for someone to lose their job.
While working with companies on tax and accounting issues, I was in a unique position to investigate 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 escalated, there were several situations where a tax advisor came up with a way to save taxes or restructure the organization. to be more fiscally efficient. While the outcome of the engagement was almost always positive, operational considerations were not always taken into account when entering into the engagement. As a result, a lack of consideration for managing change was often the start of a control problem that could lead to material weakness. Here’s a quick example.
A cost segregation study is an engagement in which a skyscraper, manufacturing plant, or other very expensive assets are broken down into individual components. As an example, a company that owns a $ 100 million building may isolate various building components into different compartments for accounting purposes. Rather than tracking a building worth $ 100 million, the company could choose to ‘separate’ costs such as elevators, air conditioning systems, security systems, doors and bathroom fixtures. in different compartments, by grouping together the assets so that the company can benefit from a larger tax deduction. and save money.
At the end of the engagement, the advisor shares a spreadsheet with thousands of rows, representing the components of the skyscraper broken down into thousands of parts. The company records the tax deduction, then submits a request to its IT department to “split” the single asset into multiple assets in the back office systems – but the IT department tells the tax department it will take 18 months before it even to be able to watch. on demand, the tax department therefore begins to manage these assets in spreadsheets. Someone takes another job, a miscalculation is introduced and before you know it the spreadsheet gives incorrect answers. For a capital-intensive business, there can be billions of dollars in fixed assets on the balance sheet, and miscalculations can go so far as to create material weakness. What can be the magnitude of the errors? For large companies, mistakes can be measured in the hundreds of millions of dollars.
In this example, the advisers can give sound advice, but without connecting the dots and seeing the full picture, it is possible that these kinds of issues will occur. Lawyers can learn lessons from the tax and accounting industry that can help advise clients better and empower clients to act on advice in a way that brings them more benefit.
Get a feel for what your client may need to do to implement the advice. Many law firms tout their expertise in specific industries and practice areas. It goes without saying that knowing and advising on the law are table issues. Helping to develop a policy or guide a client through scenarios to arrive at a decision is important to help contextualize advice and make informed decisions – but having an appreciation of what it takes to implement advice is. a useful knowledge base for a business.
Ask your client if they have thought about how to operationalize the advice. It is not for the law firm to implement advice, but it is certainly wise to educate a client on operational considerations. This can be an informal discussion or simply encourage a conversation between your client and relevant groups within the organization to ensure that expectations are being managed. Over time, a law firm can understand how some clients implement more common advice and share that learnings as part of the advice or as a sort of checklist for future clients to consider.
Understand the big picture for your customers. In the case of the material weaknesses example, it is not uncommon to see the exact same firm identify the material weakness being audited without realizing that it was a different party. of their own company that may have contributed to the problem in the first place. Likewise, it can be quite important to ensure that there is visibility across practice areas when multiple practice areas are counseling the same client. The issues that are raised may not reach the level of the accounting problem discussed in this article, but the ability to collaborate with other involved parties or consultants and help connect the dots for a client could have an impact. More often than not, a business can struggle with this when there are no shared incentives to do so.
Clients expect more from their law firms, and the pressure is on to serve clients more effectively. No matter what profession, no one would ever want to counsel a client in a way that could potentially have unintended consequences. This has the potential to demonstrate deeper value and prepare you for stronger, longer term relationships with your customers.
Ken Crutchfield is vice president and general manager of legal markets at Wolters Kluwer Legal & Regulatory US, a leading provider of information, business intelligence, regulatory and legal workflow solutions. Ken has over three decades of experience as a leader in IT and software solutions in all industries. He can be contacted at [email protected].