Limited Liability Partnerships: The Brain Drain Continues

By Mano, Ronald M.; Deppe, E. DeVon | The CPA Journal, December 1995 | Go to article overview
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Limited Liability Partnerships: The Brain Drain Continues


Mano, Ronald M., Deppe, E. DeVon, The CPA Journal


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' shortcoming.

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.

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