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Comment by Scoundreller | Hacker News Reader

Accounting firms and their partnership structure confuses me. Seems very archaic relative to corporate structures. Makes it hard to figure out who’s calling the shots.

When I go to the Canadian E&Y website, it says:

> EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

PwC refers me to a separate website for their structure: https://www.pwc.com/gx/en/about/corporate-governance/network...

KPMG has been mixing it up, per wikipedia:

> KPMG International changed its legal structure from a Swiss Verein to a co-operative under Swiss law in 2003[25] and to a limited company in 2020.[4]

Are they basically franchises? Is there some uber-partner at the global hq collecting massive commissions?

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You'll see similar models in law firms. IMHO it's driven by two key elements in the business: An apprenticeship-like, up-or-out model for developing talent and a vested owner-operator class at the "partner" level.

These firms effectively operate as a collective for the benefit of the partner class. New partners must invest capital, ongoing partners get returns, and older partners retire with a terminal payout. Some partners may take on expanded leadership roles and get higher annual payouts.

The overarching legal structure is a sort of "modularization" to limit the liability of lawsuits and enable flexible operation. There is a usually a global partnership council that dictates universal operating norms and practices.

Again, fundamentally, it operates as a collective and international units support each other for collective benefit.

Can you elaborate on the "new partners must invest capital" part? I've heard of this, notably in the TV show Suits where when the lead character got promoted to partner, he was asked to contribute a lump sum of cash. Sounded nuts to me that a promotion meant you basically got a chance to pay (I know it's actually invest) money.

Every firm has its own specific way of doing it, but the short version is that non-partner workers at a firm are normal employees with a normal salary, benefits, etc. But they do not own any equity/stake/shares in the firm.

Once you are promoted to partner, you are no longer an employee of the firm and in some cases you no longer earn a salary. Instead when you are promoted to partner, you are allowed to "buy in" by purchasing a certain number of shares of the company. Once you own those shares you are then part-owner of the firm (rather than an employee) and enjoy profit-sharing.

Relative is in HR at a big4, this is basically correct. Some ballpark numbers.

A "first year" partner may have to pay ~$150,000 into the partnership, on perhaps a $300,000ish a year in profit sharing. Usually this is just a reduction in the profit sharing (or perhaps a multi year loan, i forget). Its not uncommon to earn less as a first year partner than your last year as Managing Director. You are not longer an employee, but part owner. You move onto a totally separate HR system (Benefits, etc.).

Relative works with mostly senior partners, multiple of them are making $1 million+ a year. That's not common, but as you move up the ranks of partnership, that's not a crazy salary. They work a lot, are all divorced, don't seem to even have time to enjoy the $$ etc. Listening to the details, I'm not super jealous.

It may be different in other firms but at least for the big 4 firm in familiar with sr managers can be promoted to either partner or managing director, and mds usually take home more that first year because of the buy in, usually in the form of an interest free loan.

That sounds correct from what I have heard as well.

you have to buy a partnership. The firm usually makes you an interest free loan to buy the partnership. Some people bought into arther anderson right before enron blew them up.

The partnership is often the most valuable single asset a partner owns. It prevents them from jumping ship and taking clients. And it acts to hopefully prevent a partner from taking risks that could destroy the firm. Even senior people who might become partners in the near future will not want to put that partnership at risk.

When you retire, they'll buy your partnership out - often paid out over a few years.

That doesn't feel much different from the (common, highly tax-favored) early exercise of stock options in a startup.

If you're becoming a part-owner, of course it makes sense you have to buy shares, my only confusion is how they determine the relationship between the value of those shares and what you have to pay for them.

They know how many shares in the partnership they have, and the profits they earned and have no other shareholders, the remaining profit gets divided up among the partners.

What is that replying to?

A partnership interest is an ownership stake in the firm which has significant value. Typically you buy in by paying this value.

The firm could just give it to you, but the value of the interest would then be taxable income to you that you would need to pay taxes on in cash.

As others note, buying in also makes you literally and figuratively “invested” in a way that is thought to promote better behavior.

Partners must buy equity (stock) in the partnership.

I would be really interested to see this model applied to software. I am unaware of any firm that has done it this way so far — which is odd, because it really does seem tailor-made to suit our sort of work, no?

Or maybe I am missing something.

I'm not sure it's what you'd describe as "software", but consultancy firms like Deloitte have an identical structure, and they do a lot of IT projects

i think the reason consultancies (legal firms, accounting firms, etc) do it, and not traditional software companies, is because the worker hours translate directly into billable hours. Partners are incentivized to bring in more business, which the associates (and the partner him/herself) can bill against. I think partners are usually expected to bring in a certain amount of business to justify their profit share.

In a traditional software company, like a SaaS business, I don't know how it would translate. A developer fixing bugs might be important for the business, but ultimately is hard to translate to the bottom line. It's not like hiring a high level executive will have a guaranteed ROI in the same way.

Sounds like the distinction is between project work and owning one or more products. A Wipro could function like this. No reason a Microsoft couldn’t, but they just don’t.

Deloitte make a huge point of hiring apprentices - taking on dozens (maybe nearly ~100) of them on every year. Seems the general goal of everyone there is to make partner one day.

In software co's, profit sharing is split between equity vs commission, where equity for hard-to-attribute & motivate stuff and commission for easy-to-attribute-and-motivate stuff. Doing profit sharing incentives for devs risks getting weird quickly.

-- It's hard to measure contributions of a dev in a team of 5-10 (how much was them, another dev, the PM, the designer?) while pretty clear for say a sales + sales eng pair.

-- Likewise, there's a danger of confusing incentivizes of having a dev make commission-based decisions, esp. when counter to what a PM needs to incentivize. in a sense, part of the PM's job is to prevent sales/marketing/management from confusing the rest of the org!

For product orgs, some companies do incentives and promotions based on profit/loss measurables ("1% datacenter power savings => $10M/yr savings => ..."), I think team-based w/ some sort of hierarchy. Alternatively, Cisco weird spin-in system worked well... for those liked by the involved leads.

When _not_ a product org and a more direct line to $, like a sales eng supporting sales, or a dev supporting a quant, easier to go commission/profit-sharing based..

Wouldn’t be a VC model but wouldn’t need to be. Interesting thought. Maybe someone with knowledge of an example will find this thread and add to it.

> to limit the liability of lawsuits

I always wondered why law firms used partnership structures, but this seems like the core reason (most other reasons could would still work within a limited liability corporate structure).

Its because in most (perhaps all) states of the US it is illegal for a non-lawyer to have an ownership stake in a law firm.

I know opportunity costs are a thing but a lawfirm seems like the one of the worst possible targets for a lawsuit even without attorney-client priveledge complicating matters. Barring smoking gun damning evidence (which they would be skilled at knowing how to avoid both in terms of not doing it and not getting caught).

I would have guessed it as more a result of billable hour basis means it is practically "pure per person labor" dependent even with structures of management, less experienced lawyers and paralegals to effectively transmute the less experienced working hours into more experienced hours by them reviewing and signing off on the work of underlings.

Without the head partner you have 400 billable hours of junior lawyer and paralegal work. With one you effectively have 410 hours of partner legal work and they have staked their reputation and used their expertise on it to verify it. If the partner spent those 10 hours day drinking and signing off without reading it turns out to be 400 hours of soverign citizen tier pseudolegal nonsense arguments is their head essentially.

> I know opportunity costs are a thing but a lawfirm seems like the one of the worst possible targets for a lawsuit even without attorney-client priveledge complicating matters.

If you're suing someone else's lawyer, yah. But if you're suing your own lawyer... that privilege is client's privilege, and they can waive it if they want to sue their attorney (AFAIK).

there is a concept in RICO law called 'piercing the corporate veil,' where lawsuits against a company can 'pierce through' layers of holding company structures, to exactly prevent people from creating shell companies to limit liability.

In practice, however, it is another line of defense, because you have to argue in court for each layer to peel back.

On the contrary, a partner has often unlimited liability, unlike an investor in an LLC or Ltd. company.

In the U.S., law firms are very often structured as "limited liability partnerships," a.k.a. LLPs. In most versions of LLPs, each individual lawyer is responsible for her own malpractice and that of the people she supervises, but not of the malpractice of others. [0]

[0] https://en.wikipedia.org/wiki/Limited_liability_partnership

Limited Liability Partnerships exist in many jurisdictions. In fact the Big Four strongly lobbied for them in the UK.

Here they act a lot like limited companies but are tax-transparent.

> global partnership council

Do they ever clean house of one of the national divisions? Or wouldn't do that (too directly) because that could be construed as being too involved in the local operations?

Not if the firm is an LLP under U.S. law. [0]

[0] https://en.wikipedia.org/wiki/Limited_liability_partnership

>Are they basically franchises? Is there some uber-partner at the global hq collecting massive commissions?

Yes and no. In practice, each "country firm" (such as the PwC US firm) operate as individual companies with their own leadership team that, while they don't have the typical CxO titles, they have the same roles. Tim Ryan is basically the CEO of PwC US, for example, and PwC UK is a different company with a different CEO.

Internationally there is also an umbrella organization that helps coordinate really high level stuff like branding (since all the country organizations share the same branding), internal IT strategy (such as getting everyone to use the same productivity tools to make it easier for cross-firm collaboration), etc.

The individual companies reap benefits from this coordination because of the singular, strengthened brand, culture, methodology etc. So in that way it sort of is like a franchise. But that international organization doesn't have much to do with the day-to-day in-country operations or decisions about specific audits/projects. That would be the responsibility of the local partners/leadership team.

They are global collectives of individual country-level partnerships (though in some countries they are allowed to be corporate entities rather than partnership entities).

Each country-level partnership is its own independent firm, and can generally choose to re-affiliate with another multinational "firm" as it desires. This actually happens quite frequently.

Generally, the member firms cross-bill each other at discounted rates. They make up for it through increased volume of work and/or more lucrative work.

> Makes it hard to figure out who’s calling the shots.

Making it very hard to hold someone, well, accountable.

Almost as if not an accident.

Nah, the reality is that it's very easy to figure out who's accountable for any specific project. While it may not be clear who is in charge of a firm as a whole, that is not the case at the project level. Every project/audit must be signed off on by a partner, and that partner is the responsible party for any and all firm activity that happens on that project/audit.

The water gets muddied because that partner may not actually be involved in the project very much, and in controversial situations they may try to blame someone else (such as a lower level firm employee who was involved) for any mistakes, but at the end of the day the partner who signed their name to the contract is the person held accountable.

Is this a similar type of standard Professional Engineers are held to? I'm sure they don't, e.g. design every member of a bridge and do the stress calculations by themselves, but when it comes time to certify the design, the PE (and the PE alone, if I understand the way it works correctly, regardless of how many people worked on the drafts) is the one upon whom the entirety of the blame lies should the bridge collapse.

AFAIK, yes. Other people on the project/audit can be held responsible too if they contributed negligently, but the partner who oversaw the project is ultimately accountable for the work. That partner is also who the PCAOB/SEC would fine and/or suspend their accounting certification.

This is correct, the firm will usually have internal fines for partners with inspection failures / comments. There is significant individual liability for an audit partner.

They also provide project management services and run PMO in multi vendor scenario. At least according to my personal experience they field in rookie armed with powerpoint and excel templates and zero brain. Perhaps they Re asked not to use brains.

There is no need to say what kind of mess they end of creating.

Well it's mostly because partnerships are extremely flexible flow-through structures.

If it were a corporate structure, there is corporate tax, so you have more of an incentive to spend as much as you can as opposed to tight spending and paying people as little as you can so you get as much profits as you can (partnership flows directly to the individuals, so there is no form of double taxation).

Also with a partnership you just rewrite your agreement which you keep 100% internally and do whatever you want. Corporate structure has a lot more overhead, you have requirements that should be met and so forth.

There are good reasons.. most of them the same old bs taking advantage of the system in one way or another.

They're partnerships because they're usually legally required to be partnerships as a matter of liability concerns. (Most countries now allow professional firms to be professional LPs, LLPs, or PCs, limiting the financial liability of partners for the debts of other partners but not those resulting from their own malpractice.)

This is how I understood it was well. Big four partnership structure is optimized to comply with the legal requirements for auditors. That is why e.g. accenture (which has no auditing arm) can be publicly traded but the rest cannot.

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