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June 20, 2011
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June 28, 2011

The importance of learning the basics of accounting and financial statements

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LegalJob is pleased to introduce another new guest blogger, Charles Fox. Charles is an ex-Big Law partner and the founder of Fox Professional Development LLC, the preeminent provider of training for transactional lawyers.  He is the author of Working with Contracts:  What Law School Doesn’t Teach You

 

I am often asked this question:  “What is the single most important area of substantive training for a beginning transactional lawyer?”  The answer is simple, and perhaps counterintuitive:  accounting.

Transactional lawyers are often classified into specialties such as finance, M&A, fund formation, and the like.  As a result, it is easy for them begin to think that deal lawyers of different stripes are more different than alike.  But  they are all business lawyers.  Their clients are businesses, and the deals that they work on are designed to address their clients’ business objectives.

If you were a sports agent and didn’t know a double play from a touchdown, how effective (or successful) do you think  would be?  By the same token, if one is a business lawyer, wouldn’t it make sense for one to be able to speak the language of business with some degree of fluency?  And what is the language of business?   For better or for worse, much of the language of business derives from accounting and financial reporting.  When your clients discuss things like capital expenditures, EBITDA, working capital, operating earnings, accounts receivable, liquidity and depreciation schedules, you need to know what they are talking about.

Furthermore, the deals that you work on directly involve financial issues that you will not be able to negotiate well — or at all — unless you get up the learning curve on this subject.

You don’t need an accounting degree, and you don’t necessarily need to know most of the details of double-entry bookkeeping.  But to be a successful business lawyer, you MUST be able to read and understand financial statements.

If you are like I was when I came out of law school – that is, entirely or mostly unversed on all of this — it may seem like a daunting challenge.  It’s not as hard as it may sound.   Here is my advice:

    ▪ If you are in law school, take classes that involve the study of accounting and financial statements.

    ▪ If you are at a law firm that offers training programs on these subjects, make every effort to take advantage of them.

    ▪ Start reading the Wall Street Journal, the business section of the New York Times or a similar newspaper every day, and at least one of the major business magazines – Fortune, Business Week and Forbes – once a week.

    ▪ Start reading companies’ – preferably your clients’ – financial statements.   Every public company’s quarterly and annual financial statements are available on the SEC’s EDGAR database.  Pay careful attention to the footnotes, where much interesting narrative will be contained.  Also, reviewing the “Management Discussion and Analysis” section of a company’s annual report (commonly referred to as the “MD&A”) will help you draw connections between the numbers set forth in the financial statements and the company’s actual performance.

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