Commercial lawyers already under pressure to reduce fees as the market worsens are facing a new challenge with the introduction of new accounting rules governing M&A transactions.

The rules, which come into effect in June 2009, will force companies to change the way they account for the fees they pay to lawyers, bankers, accountants, recording such fees as a specific entry in their accounts.

Under the existing regime, deal fees, which can run into tens of millions of pounds on large or complex takeovers, are included in the overall price of the deal and there is no requirement to split them out separately.

The International Accounting Standards Board (IASB), the body behind the change, believes it will improve transparency and give shareholders a clearer picture of what directors are paying lawyers and bankers during takeovers.

However, industry insiders warn the move will heap further pressure on law firms, which are already facing declining revenues as the looming recession slashes deal flow for corporates and private buyers.

Mark Harwood, an audit partner at Baker Tilly, the accountants, said: “Having to make a separate entry in the accounts is certainly going to concentrate minds on the level of fees advisers are charging and might depress corporate willingness to go out and do deals altogether.”

Phil Hosp, head of transaction financial reporting at Ernst & Young, said he did not expect the rules – which come into effect in the US this month – would specifically harm deal flow but agreed with Mr Harwood’s view that the increased scrutiny on costs could spell trouble for professional advisers.

Mark Spinner, head of corporate at Eversheds, is already preparing for fee levels to come under attack. “Clients will use the changes, combined with the current lull in deal activity, to negotiate our fees down.”

Chris Randall, an M&A partner at Norton Rose, said: "Greater transparancy about precisely what law firms, accountants and banks are charging on deals will make it easier for companies to track fees and see whether they are getting a good deal compared to others .

"More information about who is charging what will put buyers of professional services in a stronger bargaining position and is likely to drive down fees."

Although fees will be hit, Mr Spinner believes the changes will have a positive effect because they will force law firms to become better at predicting costs.

“If costs are now going in the accounts instead of just getting scooped up into the acquisition price then when a client asks for a quote they are going to expect you to stick to it.

"So lawyers need to sharpen up their budgeting. The days of telling clients ‘sorry it was more work than we expected’ are over,” he said.

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