Governance of Accounting Firms
Ladislav Hornan
Chairman & CEO
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What we will cover today
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Structure of a Limited Liability Partnership (30 minutes)
Partner Profit Sharing Arrangements (20 minutes)
Accounting and Financial Management (10 minutes)
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Structure of a Limited Liability Partnership
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History of LLPs in the UK
Why convert to a Limited Liability Partnership?
UHY Hacker Young case study
What are the key issues to consider?
LLP agreements – what they should contain and why
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History of LLPs in the UK
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Until recently professional service firms in the UK were only allowed to form
unlimited liability partnerships
In 2001 the government in the UK agreed to the introduction of Limited Liability
Partnerships
This was an important step in protecting partners against the wrongdoings / failures
of one or a group of them
The rules do not protect the partner that erred from liability, and although liability
insurance can reduce the financial impact the business as a whole can still fail
The culture of the firm determines whether it is run in a similar way to a partnership
or as more of a corporate structure e.g. how much power is given to the Managing
Partner
LLP agreements allow flexibility of management
Most firms have an elected policy-making group and an appointed executive group
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Why convert to a Limited Liability
Partnership?
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A Special General Partnership 特殊普通合伙 in China is similar to a Limited Liability
Partnership in the UK
This type of partnership is only available to professional service institutions offering
services requiring professional knowledge and special skills
The structure shields partners from liabilities due to the wilful misconduct or gross
negligence of one partner or a group of partners
As protection for clients and third parties these firms must maintain a risk reserve
fund and obtain liability insurance to cover potential risks incurred by partners
The Ministry of Finance in China is encouraging all medium sized firms to convert
to this status
Although it appears that conversion to this structure would mean a move from 1 or
2 leaders to a greater ownership spread, the day-to-day management of the firm in
fact need not significantly change
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UHY Hacker Young LLP case study:
Structure
Partnership
Networks
Chaired by Managing Partner
UHY HY Group
Executive Committee
Chaired by Managing Partner
UHY International
LLP membership agreement
Guidance, policy and ultimate
decision making body
Elected by secret ballot every 3
years
Strategy, operating policy,
monitoring and controls
Managing Partner
Nottingham
Operations
Taxation
Services
Audit & Bus.
Advisory
International
Bus. Desk
Audit
Corp Tax
Audit /Bus adv.
China
Tax
Personal tax
Gen. Practice
Client Serv & Fin Plan
Payroll Services
Int. Tax
Corp. Finance
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Specialist
Services
Corp. Rec.
Support
Functions
Tech & train.
CIS/ CEE
Corp. Finance
Marketing & BD
Trusts
India
Lit. Support
Finance
VAT
Malaysia
Company Sec.
IT & Admin
Int. Tax
US
Israel
Info Services
UHY Hacker Young case study:
Chairman and Managing Partner
– Ladislav Hornan: Chairman and Managing Partner
since 1995
– Managing the day-to-day decision making process
and oversight of the firm
– Policy determination and implementation
– Responsibility for management and quality control
– Overseeing coordination and direction of marketing
and business development within the firm
– Financial control
– Representation on national and international Boards
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UHY Hacker Young case study:
How does the business model work?
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Day to day business decisions are principally carried out by the managing partner.
In the event of departure from normal policy, a consultation will be held with the
Executive Committee.
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This entails a more corporate style of management but only on daily business
issues. Policy is determined by the Executive Committee and, in some cases, by
all equity partners. The Executive Committee meets each month to review a range
of issues.
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The managing partner meets monthly with the heads of the larger client service
departments and four or more times a year with the heads of other departments
and support teams.
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Equity partners meet at least twice a year, mainly to deal with a range of issues
such as admitting new partners, profit sharing arrangements and mergers and
acquisitions.
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All partners meet at least twice a year to agree budgets and review the financial
position and business performance.
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What are the key issues to consider?
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To manage a firm in this way you need to remember that:
– Your authority to manage is derived from your partners’ willingness to be managed
– Partners perceive themselves to be owners, not employees
– Every firm has its own personalities, cultures and management techniques that may
not be effective elsewhere
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LLP agreements – what they should contain
and why
There is flexibility in what you can include but some aspects are very important
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The proportion in which partners own the business and their contribution to capital
Who is entitled to profits – and who is liable for losses
Rules for taking money out (drawings)
What happens in the case of sickness / death
What happens if someone wants to leave or retire from the firm and repayment of
their capital
Management of the firm
Decision making including voting rights
Restrictions on competition
Ownership of assets
(please refer to ‘LLP Agreement Clauses’ handout)
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Example 1:
Voting rights
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To require unanimous agreement in relation to certain decisions may be too
restrictive where there are a number of partners
Agreements can therefore dictate special majorities for certain decisions
Where partners feel strongly about a certain issue a higher percentage vote can be
required
Need to be wary of partners’ ability to ‘block’ changes
(Please refer to handout ‘Voting Rights’)
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Example 2:
Drawings by partners
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Drawings are cash advances paid throughout the year against anticipated profits
The agreement should detail
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Rules for drawings (how and when they can be made) and their accounting treatment
How much of the anticipated profits can be drawn and when
What happens if anticipated profits are over / under estimated – which highlights the
importance of good cash flow management
Example 3:
Leaving the firm
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A partner may leave the firm due to death; by agreement with other partners; by
giving notice to other partners; upon retirement; or due to expulsion
The agreement should always provide what payments a partner is entitled to in
each of these circumstances
The level of partner capital in the firm will form part of the firm’s annual accounts
Partners will usually leave the firm at the financial year end but if not it may be
necessary to require a set of accounts be prepared at the leaving date as a basis
for calculating capital and profit share on departure
The agreement could provide for any payment to be made in instalments to ease
the financial burden on the firm
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Partner Profit Sharing Arrangements
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A case study of how profits are shared in London
– Types of partner and exceptions
– Why a points-based system works
– Examples of individual partner remuneration
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Types of partner
– In UHY Hacker Young there are 3 levels of partner, designed to motivate
partners to progress within the firm. The senior level (‘equity’) also acts as the
ultimate decision-making body. The levels are:
– Associate: normally a two year salaried appointment with a partner development
programme.
– Fixed share: this next step normally lasts three years with a limited share in the
firm’s actual performance.
– Equity: at this level the partner achieves a gradual increase in the share of profits
which is only adjusted every 3 years and has full partner (equal) rights in decision
making.
– The Managing Partner can also issue discretionary bonuses – this is important
to reward exceptional performance and to deal with any anomalies
– This system is stable, transparent and to some extent predictable
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Exceptions
– It is possible to make exceptions to this structure and to remunerate a partner
on a special basis
– This is common in the UK where the nature of the work and fees generated by
an individual are non-recurring such as in corporate finance and insolvency
– Also a good idea where a firm is trying to grow a new activity or service line
– Good way to attract and retain talented individuals
– Remuneration could be based on profits e.g. 25-35% of net profits
– Remuneration could be based on fees e.g. 10-15% of fees received
– There must be clear rules around such structures to avoid tensions
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Why a points-based system and other
incentives work well
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Maximising profits is important to partners as there is no goodwill value to a
partners’ client base – ‘naked in, naked out’
The points system encourages partners to contribute to the profitability of the whole
firm, not just their area
Partners more likely to work together and not in ‘silos’
Clear progression structure
Potential to review profit share and a mechanism to review points up (or down)
every 3 years if there is proof of a sustainable increase in performance (not
annually to avoid increments due to large non-recurring work)
Transparency of performance due to financial reporting by firm / department /
individual
Managing partner has the power to motivate individuals with a discretionary profit
share (to be agreed / vetoed by the Executive Committee)
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Evidence to support the points system
2008
2009
2010
2011
Proportion of total
profit in ‘T1’
51.6%
71.4%
56.7%
49.4%
Proportion of total
profit in ‘T2’
45.7%
26.5%
41.4%
48.2%
Proportion of total
profit in ‘T3’
2.7%
2.1%
1.9%
2.4%
Var
Actual value of
single point £
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9,541
3,893 -60%
Var
Var
7,812 +100% 10,570 +35%
Accounting and Financial Management
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Accounting and financial reporting are important tools in the
management of an LLP. Firms can benefit from producing
regular:
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Reporting
Budgets
Management accounts
Performance measures and benchmarking (KPIs)
In the UK there there is a culture of time recording of work done
for clients whilst at the same time recognising the need to deliver
value to clients by setting fees at fixed or predictable levels
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Reporting
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Fees and cash
– weekly
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Working capital lock up
– monthly with targets for billing and collections
– Management accounts
– Quarterly financial results
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Recovery rates by department
Example
Recovery Rates
Audit
Business Advisory
China Desk
PCS (Personal Tax)
VAT
Corporate Tax
PCS (Trust)
Corporate Recovery
Nottingham
Jackson Bly
Corporate Finance
City Registrars
Payroll Services
Total Practice - O'all
Actual
2009/10
73
76
78
92
87
91
77
78
71
53
124
76
77
Actual
2010/11
75
77
98
79
92
83
94
83
79
80
79
121
72
79
Budget
2011/12
75
75
90
80
92
85
91
83
80
1% change = £x change in profit
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70
124
75
79
Utilisation rates by department
Example
Utilisation rates
Actual
2009/10
Actual
2010/11
Budget
2011/12
Audit
54
54
61
Business Advisory
64
67
66
53
68
China Desk
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PCS (Personal Tax)
58
57
68
VAT
42
38
48
Corporate Tax
65
63
69
PCS (Trust)
69
62
75
Corporate Recovery
65
61
68
Nottingham
57
59
61
Jackson Bly
67
0
0
Corporate Finance
43
33
48
City Registrars
57
65
58
Payroll
49
44
60
Technical & Training
14
10
10
Total Practice - o'all
59
59
63
Utilisation by level of staff
Example
Actual
2009/10
Actual
2010/11
Budget
2011/12
%
%
%
%
Partners
40
42
46
50
Managers
62
64
63
70
Staff
68
65
71
75
Students
54
59
62
60
Total
59
59
63
65
Utilisation
1% change = £x change in profits
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Benchmark
KPIs and Performance Measures
– Key performance Indicators
– Key to performance measurement and target-setting
– Enables delivery of a service to be targeted, managed and evaluated, and potential
problems identified
– Non-financial measures as important as financial measures
– Performance measures
– Set and reported on by individuals and departments:
– Fees
– Recovery rates
– Staff utilisation (chargeable hours and value of time worked)
– Working capital lock up
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Questions?
Ladislav Hornan
Chairman & CEO
UHY Hacker Young
e: l.hornan@uhy-uk.com
t: +44 (0)20 7216 4600
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