LIMITED LIABILITY PARTNERSHIPS: THE BRAIN DRAIN CONTINUES

By Ronald M. Mano and E. DeVon Deppe

Limited liability partnerships (LLPs) are being touted as the solution to the accounting profession's "brain drain." Proponents claim that as a result of the national CPA firms reorganizing as LLPs, the three most critical brain drains will be curtailed. Those three are 1) the brightest students choosing careers other than public accounting, 2) the profession's younger CPAs balking at becoming partners, and 3) mature professionals being driven away from the profession.

In our opinion, however, the brain drain issue has not been sufficiently analyzed. In addition, there may be reasons this form of business organization might lead to significant inefficiencies, especially for national CPA firms and even some larger local firms.

LLPs and Local CPA Firms

For some local CPA firms, the LLP makes all the sense in the world. The type of firm that would benefit is one where each partner has his or her own clients but shares office expenses such as rent, secretary, and a photocopy machine. By converting to an LLP, each "partner" would avoid any personal responsibility for the others' shortcomings.

LLP vs. General Partnerships

A general partnership and an LLP are very similar until the firm is liquidated. If a lawsuit is filed against the firm, the assets of the firm and its insurance coverage would be available for judgment claims. Only after the firm is liquidated will the partners be personally liable, and under general partnership law, each partner is responsible for all of the partnership's liabilities in excess of partnership assets. In an LLP, to the extent that the lawsuit is related to performing professional services, only those partners who had active involvement on the engagement will be liable if partnership assets are deficient.

If a major firm is liquidated, there are no longer 2,000 partners sharing the risk of claims arising out of professional acts.

Under the LLP, there are just a handful of partners facing the litigation rather than all of the partners throughout the world. Suppose you are one of the handful of partners still facing unresolved lawsuits after the liquidation of the national firm of Winkin, Blinkin, & Nodd. Since you and your partners have always been such a collegial group, you call up your 2,000 former partners and say, "Tom, this is Bob Martin. I have a real problem because I still have this lawsuit pending and the firm has been liquidated. Can you help me a bit financially?" Tom will probably say, "Bob who?"

Bright Students Avoiding Accounting

LLP proponents say that the brightest students have been avoiding public accounting, and the LLP will remedy that problem. We have discussed this with numerous current and former students, and they seem to think differently. Here is their thinking. In a lawsuit, all who worked on a subject audit could be named. Under a general partnership, all 2,000 partners could be named. Thus staff accountants were seldom named along with the partners. Under the LLP, only those partners directly involved or involved from a management aspect can be named. Thus, it seems likely that under the LLP, virtually everyone who worked on the audit will be named rather than just the partners. In discussing this issue with several current and recent former students, it seems the LLP will cause more of a brain drain of the brightest students rather than less.

The Profession's Bright Young CPAs

Proponents also claim the LLP will solve the problem of the profession's bright young CPAs balking at the prospect of becoming partners. Our crystal ball says the LLP will cause young CPAs to balk even more than they would under a general partnership.

Let's take it hypothetically. Bill was just admitted as the newest partner of the Las Vegas office of the National CPA firm of Winnam, Loosim, & Hope. Prior to Bill's promotion to partner, there were two partners in the Las Vegas office, Ted and Carol. Each had nine audit clients and will now give three each to Bill so each partner will be serving six clients.

Carol's clients include six of the large casinos and the University in Cedar City, Utah that is 150 miles away at an elevation of 7,000 feet. That audit has to be done in January, and Carol has always hated it because it is so cold at elevation of 7,000 feet in January. The eighth client is an explosives plant in Henderson, a suburb of Las Vegas. You remember the explosives plant. That is the one that exploded a couple of years ago and killed two people. They just rebuilt it, but, because of the nature of the business, they cannot get any insurance on the plant nor liability insurance. Carol's ninth client is a casino near Jean, Nevada. It is 50 miles west of Las Vegas on the border of California and Nevada. They built it there because they were sure people from Los Angeles would rather stop there to spend their money rather than drive another 50 miles to the glitz of Las Vegas. Well, it didn't happen. Jean, Nevada is close to where the state penitentiary is located. The casino has not been doing well at all in recent years; in fact, it has never done well.

Carol is now prepared to give three of her clients to Bill. Carol understands full well the concept of LLPs as opposed to general partnerships. She understands that under the general partnership, her exposure would neither have increased nor decreased no matter which of her nine clients she gave to Bill. Under the LLP, however, she now has a great opportunity to limit her own exposure. Which three clients do you suppose Bill gets?

Ted, the other partner, also has three clients to give to the new partner, Bill. What type of clients do you suppose Bill will get from Ted? Now, according to the proponents, Bill is supposed to be much happier to have become a partner now that Winnam, Loosim, & Hope is an LLP. We say, "NOT!"

Mature Professionals Bailing Out

Another problem the LLP is supposed to solve is that of the mature professional leaving at the earliest possible opportunity. We say, "We don't think so."

Let's continue to take it hypothetically. Assume you are one of those mature professionals. You have just been offered a promotion to regional partner, and Winam, Loosim, and Hope has converted to an LLP. As an office partner in an LLP, your personal exposure only extends to your specific clients. If, as a regional partner, there are any clients in this region with unresolved issues, you may be named as a defendant. As a general partner, you would not have had any more exposure than a partner on the other side of the country. In a general partnership, your exposure to risk is the same whether you are an office partner, partner-in-charge of an office, regional partner, or national partner. What do you think? Will you will accept this promotion?

We have an even better promotion for you. Since you have proven yourself as one of the most technically proficient of Winnam, Loosim, & Hope's partners, you are going to be promoted to National Technical Partner. What that means is that anytime any office anywhere in the world has a difficult issue, they are going to call for your advice. You will never hear from anyone who has a nice, clean audit. If any of those clients go down, you will be named. You would have been named in a general partnership, but so would 2,000 others. Now as an LLP, you will be one of only a handful of partners who will be named. Remember in the past, National Technical Partner has been one of the truly "plum" and sought after assignments in national firms.

National Firms May Lose Efficiency

Let's continue with the hypothetical as we give you one more potential problem. Carol, the Las Vegas office partner went to the national partners' meeting a few months ago and met Phil from the Philadelphia office. Phil has a new client. The management has been extremely aggressive with public announcements in recent months, and the stock is at an all -time high. Phil has now completed the audit, but has some major concerns about the financial statements and how some items are being reported. He also has some going concern reservations. Phil was so impressed with Carol that he decides to call her up and ask her to do the second partner review.

Now Carol is a bright woman and fully understands the implications to her, now that the firm is an LLP rather than a general partnership. She understands that if Phil's client goes under and lawsuits start to fly, her name will appear on those lawsuits. Now what do you suppose Carol tells Phil?

I'm a Good Auditor; I Don't Have to Worry

We know the arguments every national firm partner makes. He or she says, "I am good and do good audits. I like the LLP because now I do not have to be concerned about the faulty audits of my less competent partners."

The more important issue is that not all lawsuits and adverse judgments are the result of audit failures. Consider the case of Fund of Funds. In that case, a firm was sued because it failed to notify one client of information it had obtained from another about a breach of contract between the two companies. The CPA firm contended it had a responsibility under the rules of conduct of the Code of Professional Ethics to keep the information confidential.

This raises yet another possibility. Would the plaintiffs proceed against the six partners if the total of their individual net worths was only several million dollars? Clearly the whole psychology of proceeding against accounting firms will change with the change to the LLP form. Whether it will help in any way in reducing the brain drains remains to be seen. *

Ronald M. Mano, PhD, CPA, and E. DeVon Deppe, JD, CPA, are professors of accounting at Weber State University, Ogden, Utah.

Editor's note: The views expressed in this article by authors Mano and Deppe are not necessarily shared by all observers. The CPA Journal is interested in other opinions on the subject, which should be directed to‹

The Managing Editor
The CPA Journal
530 Fifth Avenue
New York NY 10036-5101

Editor:
Dan L. Goldwasser,
Vedder, Price, Kaufman,
Kammholz & Day

DECEMBER 1995 / THE CPA JOURNAL