Should Law and Accounting Firms Be Allowed to Merge?Published: July 19, 2000 in Knowledge@Wharton
In the recent war between lawyers and accountants over whether the two professions can merge with or acquire each other’s practices, round one appears to have gone to the lawyers. But the issue is far from settled. According to Wharton legal studies professor G. Richard Shell, "This is just one battle in an ongoing war over professional turf. My money is on the accountants. The justifications for keeping lawyers out of the multi-practice firms are weak and mostly self-serving. Lawyers should know a bad argument when they see one."
The latest development is a vote on July 11 by the American Bar Association’s policymaking House of Delegates that recommended against these mergers and acquisitions, also known as multi-disciplinary practices (MDPs). The vote was 314 to 106.
Although the ABA has long been against MDPs, supporters of the mergers had hoped that the conference might open some doors to accountant-lawyer combinations.
"We’re disappointed in the outcome," says Joel Allegretti, a spokesperson for the American Institute of Certified Public Accountants (AICPA). "The action does not demonstrate a sense of vision, and it deprives clients [of the ability to] exercise their freedom of choice." The Big Five accounting firms have been especially strong proponents of MDPs, partly because they have already made inroads into legal markets abroad through their overseas offices.
Some observers, however, think it’s too early to write off the issue, especially since the ABA’s regulations are not binding on state associations. "The topic of MDPs isn’t dead yet," says Barbara Berger Opotowsky, executive director of the Association of the Bar of the City of New York. "Discussion will continue at the state level." In addition, despite the ABA’s anti-MDP stance, accountants and lawyers have found ways to get around the ban. Considering the time and money invested, it’s a "gray area" activity that will probably continue.
On a practical level, the issue gets down to this: Should CPAs and JDs be able to combine their practices, offering one-stop shopping for corporate and other clients? Or would the resulting legal-accounting powerhouses be breeding grounds for a host of conflict-of-interest issues?
Taken at face value, the question appears to be a non-issue. Permitting accounting firms to enter the legal field, and vice-versa, would in theory be a win-win situation for clients—fostering more competition, putting pressure on pricing structures and, at the same time, bringing together top thinkers in both disciplines. On the other hand, some professionals believe that closer ties between CPAs and attorneys raise potentially troubling questions.
Geoffrey C. Hazard Jr., a law professor at the University of Pennsylvania law school, is one of those who has ethical concerns, but also sees other, less altruistic considerations that are motivating opponents of MDPs.
Situations might arise that "could be viewed as placing an MDP in a position of conflict-of-interest," says Hazard. "For example, what if the accountant is working on an audit, which requires independence, while a lawyer from the same firm is making advocacy statements on behalf of the same client?"
Hazard is quick to note that a sizeable number of accounting firms currently offer both audit and financial services to their clients. "So the conflicts behind an accounting-legal package may not be [that] serious in practice. But the public perception of these high-profile combinations could be more serious than simply offering financial services as an add-on."
Attorneys may be as worried about fees as they are about perceptions of independence, Hazard adds. "There are fears about the effects of competition and what it might do to the rates of billable hours, as well as how it may affect [lawyers’] professional independence."
Lawyers opposed to an accounting-legal model have been able to shore up their position by pointing to Model Rule 5.4 of the ABA Model Rules of Professional Conduct, which prohibits a lawyer or law firm from sharing legal fees with a non-lawyer or forming a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law.
But according to Shell, the Model Rule begs rather than answers the question of whether combining accounting and legal services is a good idea. "One has to ask why Model Rule 5.4 is on the books in the first place," he notes. "Is it to protect the public or protect the legal profession from competition? I think protectionism is more than 50% of the story."
Shell’s view is supported by actions taken within the legal profession itself. For example, an ABA Commission on Multidisciplinary Practice issued a report several years ago recommending that "lawyers should be permitted to share fees and join with non-lawyer professionals (defined as ’members of recognized professions or other disciplines that are governed by ethical standards’) in a practice that delivers both legal and non-legal professional services (multidisciplinary practice), provided that the lawyers have the control and authority necessary to assure lawyer independence in the rendering of legal services..."
Why this conciliatory stance? The ABA Commission observed that "forces of change are bearing down on society and the legal profession with an unprecedented intensity. They include: Continued client interest in more efficient and less costly legal services; client dissatisfaction with the delays and outcomes in the legal system as they affect both dispute resolution and transactions; advances in technology and telecommunications; globalization... and the strategy of Big Five professional services firms and their smaller-size counterparts that has resulted in thousands of lawyers providing services to the public while denying their accountability to the lawyer regulatory system."
The ABA’s House of Delegates didn’t buy that, though, and its July 11 resolution reaffirmed the ABA’s disapproval of MDPs and also called on each jurisdiction to implement principles to "preserve core values of the legal profession," including maintaining a single profession of law. Addressing jurisdictions like Washington, D.C. that effectively do allow MDPs, it recommended that no non-lawyer should own or control the practice or regulate the judgment of lawyers in the firm giving legal services.
As for the ABA’s commission on MDPs, the one that recommended relaxation of the ban, it was disbanded as of July 11.
Despite the longstanding rule against lawyer-non-lawyer combinations, the largest accounting firms typically have in-house attorneys on their payroll. In some cases, their sheer numbers dwarf even the largest law firms. According to the May 2000 issue of the New York Law Journal, Chicago-based Arthur Andersen has more than 3,600 lawyers working both domestically (primarily in tax, corporate finance and other areas), and internationally (MDPs are generally not prohibited in Europe) through the firm’s affiliated international law network, Andersen Legal. By contrast, the law firm Baker & McKenzie, which the magazine says employs more attorneys than any other traditional law firm, reported approximately 2,478 attorneys in 1999.
Ernst & Young, meanwhile, has provided financial backing to a Washington, D.C-based law firm called McKee, Nelson, Ernst & Young. The choice of location was not a fluke, since the District of Columbia, as noted above, is the only jurisdiction in the U.S. to permit lawyers and accountants to share fees.
How do other accounting firms get around the accountant-lawyer prohibitions? Their domestic lawyers say they don’t practice law. Instead these non-lawyers limit their role to offering advice on taxes and other topics. It’s a piece of legal fiction that simultaneously satisfies everyone and no one.
If the organization that represents accountants’ interests, the American Institute of Certified Public Accountants (AICPA), had its way, there would have been no need for creating job categories to get around the MDP prohibition. "There’s no conflict of interest," according to Richard I. Miller, an attorney who serves as general counsel and secretary of the AICPA. "CPAs need to be independent for audits and other reports that may be relied upon by third parties, but they already serve an advocacy role in areas like tax, consulting and litigation support."
But what about the appearance of a conflict of interest? "When an accounting firm performs an audit on a publicly held company, perhaps it could refrain from taking on a high-visibility piece of litigation for the same client," offers Miller.
Peter Knutson, an accounting professor at Wharton, doesn’t buy that rationale. "CPAs have to be independent of their clients to assure outsiders of fairness," he says. "Lawyers are advocates. The two don’t mix. Some firms may say they won’t perform legal services for their audit clients, but then what is the economic rationale of MDPs?"
Issues like these may have dominated the ABA’s discussions about multi-disciplinary practices, but there are deeper differences that divide the two professions, raising questions about whether or not they can ever truly operate in tandem. Accounting, after all, is about an attempt to value observable items like assets and liabilities, to quantify verifiable activity like profit and loss. The practice of law, on the other hand, is dedicated to discovering such ephemeral concepts as truth and justice that do not easily lend themselves to measurements and verifiability.
Since the ABA’s July vote against multi-disciplinary practice won’t necessarily bar the way for MDPs, the suit-clad counselors may not have achieved closure with their thumbs-down vote. Instead, they may find they’ve simply driven a wedge between the very lawyers who form their constituency.