Dewey Survive? If Not, Do We Learn?

The death spiral has tightened for the Dewey LeBoeuf law firm. The cascade of partner defections and other bad news since its erosion began in January has accelerated day-by-day. Official lay-off warnings have been announced, and the end was foretold over the weekend with the casual insouciance and indignity of a Twitter message.

Briefly among the top-20 US-based firms, with nearly 1300 lawyers, the terminally-ill Dewey has shown again the instability of a business model based on the recruitment of over-priced superstars into its bloated 2007 post-merger structure, and the inability to handle the demands of big-ticket partner guarantees, issued without internal transparency and conflicted with declining levels of recession-era business.

Anyone surprised? Not with any memory, decade-by-decade, of Finley Kumble (RIP 1987), Mudge Rose (1995) or Altheimer & Gray (2003).

Put more plainly, the drug-like attraction of a hot lawyer’s addictive book of business leaves behind the nastiness of overdose and withdrawal when the revenues prove just as hot by rushing out the door.

The global market for legal services will digest Dewey’s disintegration without a hiccup of regret. The notion can be dismissed as fancy, that a law firm should be “too big to fail,” or that clients will be deprived even momentarily of immediate and costly attention.

Not so, the parallel issue of continued access to global scale audit services, if a Big Four accounting firm reaches the same crisis point.

The fragility of the Big Four has been a matter of on-going concern in these precincts, because of their calculable financial inability to withstand the existential shock of a worst-case performance failure (here), and the complete absence of viable strategies for their survival (here). The collapse of the Dewey firm makes it of pressing interest that nobody is asking this question: 

Can a large professional services partnership be saved by reorganization, a “living will” or some other contingent failure-preventive? 

In Dewey’s context, commentators would find the question foolish, as the firm's collapse displays yet again that high-cost lawyers can be as fickle and unready to be loyal colleagues as they are to be competent strategists and managers.

It is risible to suggest that a collection of leading counselors to clients in the global economies could be reorganized with stability in bankruptcy, when a firm’s lawyers flee like cockroaches under the harsh light of financial distress. It is no less impossible to conceive that the personnel of a Big Four firm, similarly pressured, could be persuaded to suspend their self-interest and hang around to be caught up in a culture of failure as the last rats on a sinking ship.

It is fair to observe, on one hand, that the large accounting networks are less dependent on the individual egos of their leaders, or that their mega-engagements would be as mobile as a lawyer’s prima donna attitude. But, on the other, it is also the case that those networks are larger in headcount and global locations and complexity by several orders of magnitude than the BigLaw firms, making even less feasible the possibility of resuscitation of a patient in intensive care. 

Yet the accounting regulators continue to avoid the reality and to advance the impossible – legacy of the loopy idea advanced in 2008 by Paul Volcker as part of Bush-era Treasury Secretary Paulson’s Advisory Committee on the Auditing Profession, that accounting firm leadership replacement or a pre-packed failure-management strategy would have the least chance of credibility or success.

Examples:

• Last fall’s “reform” proposals of EU markets commissioner Michel Barnier purported to recognize the “systemic risk if one of the Big Four… collapses” -- without a credible suggestion how to accomplish the oxymoron of an “orderly failure” (here).

• In the spring of 2011 the House of Lords in London tossed out the idea of “living wills,” drawing on the thoroughly inapplicable model of the troubled financial institutions (here).

• And the marathon attention given by the PCAOB to possibly mandated auditor rotation included hundreds of comment letters and three full days of hearings (here), without a shred of attention to the survivability issue.

To believe that the fate befalling Dewey simply “can’t happen” to the much larger, therefore more clumsy and inflexible accounting firms, reflects some mix of denial, hubris and naïveté.

But it will be the consequence of the disintegration of the global audit franchise, as with the rubble that was once Dewey LeBoeuf, that -- as put by the poet Percy Shelley -- “nothing besides remains.”

 

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[Jim]

Update at May 29 -- The death spiral took three weeks to conclude, with Dewey's bankruptcy filing yesterday, an interesting Memorial Day.