Partners, staff still stunned by how quickly Laventhol & Horwath plunged to its death.

Partners, staff still stunned by how quickly Laventhol & Horwath plunged to its death

Even the partners at Philadelphia-based Laventhol & Horwath had difficulty believing how fast the life of their 75-year-old accounting firm could drain away.

"I think it's a very interesting study of what can happen to a company once it starts downhill," said Laventhol Partner Ken Lever, now a partner at Century City-based Satin Lever. "Like water spinning down the drain, it got faster and faster. It makes your head spin how fast it can go down."

Little more than a year ago, Laventhol was growing bullishly and, fueled by a number of acquisitions, had boosted its revenues from $153.1 million in 1984 to a record $345.2 million in fiscal 1990.

Laventhol seemed to be disproving those who claimed it had sacrificed service quality in its rapid growth. And then, in October 1989, the first of a number of major lawsuits and pre-lawsuit settlements was brought against the firm.

Little more than a year later, on Nov. 21, 1990, Laventhol filed for Chapter 11 bankruptcy protection.

Yet if Laventhol & Horwath had problems, very few stemmed from the Los Angeles office.

It was one of the firm's top performers nationwide, said former Los Angeles Managing Partner Art Nemiroff. The Los Angeles office had been the most profitable of the firm's 50 offices for the 36 weeks prior to bankruptcy and was the fourth largest in terms of operations, he said.

And only one of the many lawsuits that plagued the firm from a year ago originated from a Los Angeles client, said Lever. The settlement, he said, was not one of the major ones which were perhaps the leading

Nemiroff said the office's leading accounting operations included: real estate, which provided 40 percent of the office's income; entertainment, 20 percent; apparel, 15 percent; automotive, 10 percent, and health, 10 percent. The balance was made up by general practice business.

Laventhol had the seventh-largest CPA presence in Los Angeles County as of January, according to statistics the company provided the Business Journal.

L.A.'s success led some partners to feel that other, less profitable offices were a drain on their operations, said the marketing and public relations director of the Los Angeles branch, Gailyn Fitch.

"Some of the partners thought there was a lot of fat in Philadelphia and that the L.A. office was doing well and smaller offices weren't, so why were we spending revenues on unprofitable practices?," Fitch said.

The Los Angeles operation had been in a downsizing mode for a year prior to the bankruptcy, Fitch said, with the number of CPAs at the three local offices declining from 95 to 50 between September 1989 and November 1990, and the number of professionals declining from 300 to 200, Fitch said.

Nemiroff praised Philip Winik, his predecessor, for initiating cutbacks and said that he attempted to follow Winik's lead. "Phil was a good money manager; part of the financial success of the Los Angeles office was due to his no-frills management," Nemiroff said. "He made painful cutbacks. He eliminated excess administrative personnel and what he considered frivolous expenditures like holiday parties and excessive purchases."

Winik retired voluntarily from the company on June 1 and is now a financial advisor at the Century City office of money management firm Sanford C. Bernstein & Co. of New York.

Another partner said that one problem that was not addressed adequately at the L.A. office was integrating the partners who entered the firm through Laventhol practice acquisitions. "There was a lot of divisiveness in the firm, bickering between departments, although that's endemic to a lot of large firms," said the partner, who requested anonymity.

"The atmosphere was like a lot of sole practitioners practicing under the same roof," Fitch said.

The Los Angeles office, like others, had grown by acquisition. In 1983 and 1984, most of the partners who would form the Century City office were merged into the firm.

Within the last two years, one sole practitioner, auto tax and consulting CPA Ted Kobayashi, and two partnerships - apparel tax and consulting firm Friedman & Rosenthal and Levien & Rich, a construction monitoring firm - merged their practices with Laventhol's.

Most partners questioned for this article praised both Nemiroff and Winik and emphasized that the problems that caused the firm's demise were national ones.

As Laventhol began to encounter problems, some partners called for the Los Angeles office to spin off and become its own entity. But most partners rejected the idea.

"We looked at spinning it off by itself," said Lever. "But that doesn't happen when you operate under extreme trauma for several months. There's a tremendous desire to move on to something new."

Many employees said that they were unaware of how serious the company's problems were until near the very end. "They (the partners) had a meeting several weeks before (the bankruptcy) and said it would be O.K.," said Laventhol secretary Nancy Fong. "They said to hang in there until February."

Others saw clear signs from the partners that the firm was in trouble. "Over the last five months, when partners learned computer programs or spent time at home, the staff started getting the feeling that things were insecure," Fitch said.

If staff members had missed the writing on the wall, on Oct. 26 the firm announced it would cut the pay of its 3,500 employees by 10 percent for three months.

As cash at the firm dwindled in the off season, and the lawsuits and bad publicity continued, partners, practice areas and offices themselves pushed to leave the firm.

The hospitality consulting and the real estate consulting and appraisal branches pushed to form a new company, Horwath Consulting, in September.

Other key partners, including some from Los Angeles, were picked off by rival firms.

While many partners were feeling the pressure of cutbacks, business continued as usual for other autonomous subsidiaries even through the dissolution of the firm.

`We are a separate company," said Al Yuen, a vice president of the Los Angeles branch of Valuation Counsellors Inc., a wholly owned subsidiary of Laventhol headquartered in Chicago. "We had our own client base. In fact, many of our clients don't even know we're a part of Laventhol. This isn't affecting our operations."

That was also true for the Century City office of Laventhol, which catered to a specialized entertainment niche market. "It didn't affect things locally," said Laventhol Partner Bob Satin. "Things went on smoothly, even if payments out of Philadelphia were slow close to the end."

Laventhol did not pay the November rent on its Mid-Wilshire office and possibly not on its Century City office, Nemiroff said.

The Century City office will continue to do business but split into three separate firms formed by the Century City Laventhol partners, Satin said.

On Nov. 18, the 350 partners nationally of Laventhol held an emergency weekend meeting in Houston to discuss the firm's future. Discussed at the meeting was a possible downsizing of the firm from 50 to 30 offices and from 350 to 250 partners, said Nemiroff.

However, when Laventhol Executive Partner and Chief Executive Robert Levine told partners that a cash infusion of $15 million to $20 million from partners would be necessary to provide short-term funding and said that he could not recommend the infusion because it might not make a difference in finding long-term financing, "that was all she wrote," said Nemiroff. An informal hand vote against the cash infusion sealed the fate of Laventhol.

The following Monday, Nemiroff notified Los Angeles employees that they would be terminated by Laventhol the next day.

The consequences of the firm's failure his past and present partners hard. Retired partners lost the stipends they received each month from the company. Employees and partners lost health benefits. Employees last week had not been paid the last eight days of accrued pay and apparently may not be paid.

But the greatest legacy may be the legal liabilities which will continue to cloud partners' futures despite the firm's dissolution.

"The losses will be beyond the funds of most partners," said Lever. "It will wipe out their assets. The catch phrase is that they (losses) are going to hurt but not kill."

Laventhol's legal problems began in October 1989 when it paid $30 million to nine creditor banks which were defrauded when the assets of a real estate corporation Laventhol audited, Grabill Corp. of Chicago, turned out to be vastly overstated.

In March, the company negotiated a $13 million settlement with another group of potential litigants.

Other major suits followed. While many large CPA firms face large litigation cases, Laventhol's total of 110 cases pending at bankruptcy exposed the firm to staggering losses. Many of the cases accused the firm of poor work.

Probably the most prominent of the suits has Laventhol defending itself against a multimillion-dollar lawsuit in Charlotte, N.C., brought over its audits of Jim Bakker's PTL ministry. Deloitte, Haskins & Sells, now Deloitte & Touche, also has been sued by the PTL investors.

While admitting that many of the suits reflect "legitimate concerns," Lever and others said that the settlements have been excessive.

In the end, it was a combination of factors, not just litigation, which doomed Laventhol, Lever said. The two settlements tapped out the company's insurance and then partners agreed to settle about 70 percent of a mounting litigation bills in a single package funded primarily out of their earnings, Lever said.

The decision for partners to fund the settlements was a blow to their morale as well as their pocket books, Lever said.

Then a number of the firm's clients, fearing that a potentially insolvent Laventhol might abandon its obligations, refused to pay the firm until it completed its contract, causing a cash flow crunch.

The firm's problems were compounded by the reduction in cash revenues as the traditional busy season ended in June and as the economy slowed.

Revenues were already down because of nationwide slumps in the real estate and hospitality businesses, two of the firm's major moneymakers.

The final nail in the firm's coffin, said Lever, was a decision by its banking creditors - Fidelity and Chase Manhattan banks, to which Laventhol owed at least $80 million - not to extend the firm additional credit. "We had no money to operate with, we couldn't defend ourselves against lawsuits and we couldn't pay adequate draws for partners," Lever said.