30 Mar Airo AV Reported UK accountancy and law firms prepare to withhold partner pa…
Some of the UK’s largest accountancy and law firms are preparing to withhold partner payouts to try to reduce the financial impact of the coronavirus pandemic.
It is just one measure being considered among the ‘Big Four’ accountancy firms — KPMG, Deloitte, PwC and EY — and their smaller rivals, BDO and Mazars, as well as big law firms such as Linklaters, to preserve cash as fees from clients fall away.
“We are already being hit by cash protection measures from our clients, some of which are extending their time to pay invoices” said a senior person at EY. “We are reviewing all of our loan facilities, partner capital and cash forecasts to make sure we have the headroom we need.”
A KPMG employee said withholding equity payments to partners — which give them a share of profits — was on a list of measures being considered to maintain the firm’s resilience.
“Luckily we are more healthy liquidity-wise than we have traditionally been because of a couple of big divestments recently and saving cash to pay fines,” the person said.
Meanwhile Deloitte, whose partners earned a record average of £882,000 last year, has offered a voluntary unpaid sabbatical to some of its 16,000 employees.
Deloitte declined to comment on pausing payments to partners. A spokesperson for PwC said: “We will stay focused on supporting our own people and clients while continuing to prudently manage our own business.”
Partners at the Big Four firms earned an average of £720,000 last year. At the four top law firms, where partner numbers are typically smaller, the average was £1.7m. Annual earnings have reached record levels in recent years, driven by demand for regulatory and Brexit planning advice.
The Financial Times is making key coronavirus coverage free to read to help everyone stay informed. Find the latest here.
“Everyone is looking at what levers we can pull,” said Bob Neate, head of UK audit at Mazars. “With audit, the risk is firms going bust and not paying us. For consulting work like transaction advice, the whole profession will get booted.”
Mazars, which audits Goldman Sachs and AIG, has introduced voluntary unpaid leave for “quiet” teams such as corporate finance, according to another person at the firm.
Scott Knight, head of audit at BDO, said: “There is a working-capital squeeze. Deferring profit payments means we can keep paying wages even while client payments slow down.”
Law firms including Linklaters, which had revenues of £1.6bn last year, Pinsent Masons and Fieldfisher are also considering reducing or delaying partner distributions, according to senior staff at each firm. Pinsent Masons said a scheduled payout in March could be held back because of “circumstances that none of us have faced before”.
Coronavirus business update
How is coronavirus taking its toll on markets, business, and our everyday lives and workplaces? Stay briefed with our coronavirus newsletter.
The law firm DWF said it was seeking additional contingency funding from its lenders and negotiating a relaxation of some of its credit covenants. Baker McKenzie told partners it did not plan to cut their next quarterly profit distribution, but is in negotiation over using more of its credit facility, according to two people with knowledge of the matter.
Fieldfisher managing partner Michael Chissick said: “Nearly every firm will now be looking at retaining [partner distributions] for a period to help get them through. It’s the uncertainty of this crisis, we don’t know what the impact will be on the business, how many employees will get sick so the safest thing is to scenario plan to retain the distributions.”
Professional services firms tend to operate with thinly capitalised balance sheets, paying the bulk of profits to partners each year. The UK government questioned the capital strength of the Big Four late last year and their ability to withstand a financial shock.
Unlike banks and insurers, accounting and law firms are not required to hold minimum levels of capital.
The financial strength of large auditors has been under increasing scrutiny in recent years, as a number of high-profile corporate collapses has increased their risk of litigation and regulatory fines. However, a senior audit executive at EY said: “The banks consider the sector to be quite resilient. I’d be more concerned about smaller firms that do not have the portfolio spread or the scale to survive.”