There has been a 61% increase over the last 12 months in the number of law firms and other professional service providers facing financial distress, according to a report by business consultants Begbies Traynor.

The Red Flag Alert report said that the number of professional services firms with financial issues has increased to 15,526, a 61% rise on this time last year.

The number grew 87% in the first quarter (Q1) of 2011, although the report adds that financial distress typically increases in Q1.

Across all sectors, Begbies Traynor found that almost 187,000 companies were suffering serious financial problems, 15% more than last year, and the second successive year-on-year increase.

Begbies Traynor partner Nick Hood said: ‘Downward pressure on fees remains a problem for many firms, as well as the increasing difficulty of supporting partner drawings out of shrinking profits.

‘The worst of the UK recession may be over, but it is hard to see any genuine indication of a sustainable recovery in most professional areas, especially in legal and accounting services where increased competition is prompting much consolidation among middle market and smaller firms.’

Red Flag Alert measures corporate distress by drawing on legal and financial data from a range of sources to identify companies with ‘significant problems’ or ‘critical problems’.

Companies with significant problems are likely to be facing court action and insolvency, and have out-of-date accounts. Companies with ‘critical problems’ are those with county court judgments of at least £5,000 and/or wind-up petitions against them.