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Will Your Firm Pass a Stress Test?

By Steven A. Davis, Marc Feigelson and Tyler Quinn

The recent economic crisis put a strain on many law firms. Although there has been a tepid recovery, trends in the industry continue to expose weaknesses, as highlighted by the recent demise of a large, reputable law firm, Dewey & LeBoeuf LLP. In fact, over the last 25 years, more than 40 major law firms have gone bankrupt. How is it possible that outsiders and a majority of partners saw no warning signs before the sudden collapse of the Dewey firm and many others like it? What causes a law firm to suddenly implode?

There are common threads among law firm failures over the past few decades: failures of appropriate governance, inaccurate financial reporting and excessive leverage. These issues underscore the need for a change in law firm governance. It remains to be seen whether the current risks in the economy will accelerate the trend toward a more corporate style of partnership governance that is employed in some large firms.

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