If we were in Corporate Land, this would be the beginning of earnings reporting season, with the close of the customary calendar year-fiscal year for most of BigLaw.
It’s too early to draw any statistically solid conclusions about what 2009 looked like overall, but sometimes a report raises so many more questions than it answers that it begs for a bit of comment, analysis, and “deconstruction,” if you will.
That would surely appear to be the case with Sonnenschein’s reporting.
Here’s the headline, from The American Lawyer:
Profits per equity partner dropped 3 percent at Sonnenschein Nath & Rosenthal in 2009, according to figures reported by the firm late Thursday, and gross revenue was flat. PPP fell from $804,000 in 2008 to $780,000 last year. Gross slipped from $473 million in 2008 to $472.5 million, according to the firm.
So far, so innocuous. But if you read a bit more carefully, there’s more to the story.
First of all, Sonnenschein added 100 lawyers from Thacher Proffitt effective January, 2009. To add 100 lawyers and be “very pleased” that gross revenue was flat must establish some new apogee or highwater mark in redefining “the new normal.”
Second, the decline in RPL (using an apples-to-apples, same accounting method comparison, of which more momentarily) is -11%. This is can only be viewed as a quite negative indicator which suggests the firm, despite going through three rounds of personnel cuts in the past 18 months, may not yet be “right-sized” or certainly is not achieving pre-bust utilization rates.
Third, PPP dropped more than 12% in 2009 vis-a-vis 2008, and now we are told it dropped another 3%. But I understand that partners have been told that cash distributions to them are off 19%. This doesn’t quite compute if PPP is actually down just 3%, unless something strange is going on with “cash.”
Which brings us–fourth–to the weirdest and most inexplicable part of the Sonnenschein news (emphasis supplied):
The firm also restated its 2008 gross revenue numbers Thursday. Last year the firm reported $492 million in gross revenue in 2008, but yesterday Sonnenschein lowered that figure to $473 million. The firm attributed the discrepancy between the two figures to a change in accounting. Sonnenschein previously reported gross revenue on an accrual basis, but now reports it on a cash basis…
This is a firm founded in 1906, which has used Arthur Andersen and now McGladry Pullen as accountants. Why would this be the year they would change accounting methodology? I have no inside information as to why that might be the case, but it strikes me as oddly convenient that the change in stated 2008 gross revenue from $492-million to $473-million quite nicely enables them to say that revenue in 2009 was “flat” at $472.5-million.
Well, aren’t revenues revenues? And isn’t the cash basis more rigorous than the accrual basis? Yes, and yes.
First, I for one can’t imagine advising a client to “restate” revenues, any more than I can imagine restating a budget once it’s set. You can miss the budget or exceed the budget, but the budget is the budget. In my book, rewriting history just shouldn’t be done, however tempting it might be to succumb to the desire. States that do this are rightly accused of Kremlinology.
And second, as for whether cash recognition of revenues is more disciplined than accrual, the short answer is of course it is. You either have the check in hand by midnight December 31st or you don’t. No squishiness or wiggle room to that. No woulda-coulda-shoulda.
But ponder for a moment the other side of the Income & Expense statement: Expenses. If you were recognizing expenses on an accrual basis (conservative accounting), but now you only recognize them on a cash basis (more aggressive accounting), voila, I can virtually guarantee you that reported profits will go up. (At least as a one-time shot, but that’s a story for another day.)
Now, please understand: I have no brief against Sonnenschein in the least, and I wish the firm, its clients, its partners, associates, staff, and their many dependents all the best in these times of unprecedented difficulty.
Sometimes, however, you have to look behind the story. If there are innocent and plausible explanations for all of this, I welcome them and will publish any comments I receive as updates to this piece (assuming the writers’ permission).
In the meantime, take what you read with a grain of salt. Or better yet, a nod to critical thinking.
The link to the American Lawyer article on Sonnenschein’s reporting appears to be intermittently broken, so here’s the original article. If I’ve offended “fair use,” I apologize forthwith to the American Lawyer but the thing about the Web is that links should work.
The Am Law 100:
Sonnenschein Profits Drop 3 Percent
The American Lawyer
By Ross Todd
January 22, 2010
Profits per equity partner dropped 3 percent at Sonnenschein Nath & Rosenthal in 2009, according to figures reported by the firm late Thursday, and gross revenue was flat. PPP fell from $804,000 in 2008 to $780,000 last year. Gross slipped from $473 million in 2008 to $472.5 million, according to the firm.
“[The] bottom line for us is that we are very pleased with the performance in view of the substantial investment we made in January of 2009 to add 100 new lawyers from Thacher Proffitt,” Sonnenschein chair Elliott Portnoy said via e-mail Thursday. Portnoy (pictured at right) was traveling and unavailable for a phone interview.
Last year marked the second straight year of lower profits at Sonnenschein; PPP dropped more than 12 percent to $804,000 in 2008. The firm also restated its 2008 gross revenue numbers Thursday. Last year the firm reported $492 million in gross revenue in 2008, but yesterday Sonnenschein lowered that figure to $473 million. The firm attributed the discrepancy between the two figures to a change in accounting. Sonnenschein previously reported gross revenue on an accrual basis, but now reports it on a cash basis to match the method it uses to report net distribution to partners. The change in accounting affects Sonnenschein’s revenue per lawyer numbers. The firm reported Thursday a drop of 7 percent from $778,000 in 2008 to $722,000 in 2009. When using the numbers the firm reported last year, the drop in RPL is 11 percent from $808,000 to $722,000.
Part of the RPL drop can be attributed to Sonnenschein’s boost in head count. The firm grew from 608 lawyers in 2008 to 654 in 2009. On January 1, 2009, Sonnenschein added 100 lawyers from New York’s Thacher Proffitt & Wood, including 40 partners. The hires–the largest lateral group the firm has taken on–nearly doubled the size of Sonnenschein’s New York office.
The Thacher Proffitt lawyers brought with them a $500,000 contract awarded in December 2008 by the U.S. Department of the Treasury to advise on its investments in the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF). In March, Sonnenschein was chosen along with Cadwalader Wickersham & Taft and Haynes and Boone to advise the Treasury Department on its role in last year’s auto industry restructurings. The auto industry contract carried a ceiling value of $8.59 million.
Sonnenschein, like many firms last year, also employed a number of cost-cutting measures. The firm cut associate compensation in June and announced in December that it would roll out a new merit-based associate compensation structure in early 2010. In September the Am Law Daily’s colleagues at The National Law Journal reported that the firm cut about 30 lawyers, including 10 income partners–the third series of personnel cuts at the firm in an 18-month period.
This report is part of The Am Law Daily’s ongoing Web coverage of The Am Law 100’s 2009 financials. Results are preliminary. Final rankings and full results for The Am Law 100 will be published in The American Lawyer’s May 2010 issue and on AmericanLawyer.com. The Am Law Second Hundred will be published in the June issue.
