Multidisciplinary Practice: Big Changes Brewing for the Accounting Profession

By Jack Baker, Randall K. Hanson, and James K. Smith

In Brief

It Won't Be Long Before It Happens

The offering of legal services through multidisciplinary practices (MDP) appears to be moving toward acceptance in the United States. The MDP movement has gained momentum from the American Bar Association Commission on Multidisciplinary Practice's recommendation to allow attorneys to share fees and partner with nonattorneys.

The rule changes would allow accounting firms to employ attorneys that, subject to certain restrictions, could offer a full array of legal services to their clients. Although the ABA House of Delegates voiced strong opposition and deferred voting, the MDP commission was instructed to gather additional information and resubmit the recommendation.

The commission's latest recommendation may have encouraged a number of recent strategic alliances between professional service firms. In addition to approaching accounting firms, law firms have shown an interest in strategic alliances with other professional service firms, such as financial consultants. These alliances are sure to increase the pressure on the ABA to restructure its ethics rules. The ABA recognizes that if it does not write the regulatory rules on MDP, someone else will.

The accounting profession's enthusiasm for multidisciplinary practices (MDP) that could offer and perform legal services in the United States is evidenced by its aggressive pursuit of MDPs in Europe, Canada, and Australia. However, the accounting profession is concerned with the regulatory approach recently suggested by the American Bar Association (ABA) Commission on Multidisciplinary Practice's recommendation. Although the ABA House of Delegates (its rule-making body) deferred the recommendation last year, the commission continues to work on a proposal that would be acceptable to the delegates. AICPA General Counsel Richard Miller says he is "pleased they're lowering barriers, but there are provisions that need to be studied because they could create other barriers." The AICPA has expressed particular concern over the overly broad way in which the MDP commission's recommendation defines the practice of law as well as the recommendation's regulatory-and-audit approach.

The MDP commission is currently accepting additional feedback from interested parties, and a recent update report from the commission acknowledges problems associated with the initial recommendation. Meanwhile, CPA firms continue to position themselves for the possibility of offering legal services under MDPs.

The Unauthorized Practice of Law. The ABA's decision to explore rule changes in the MDP area may result partially from its failed debate in the late 1990s with the accounting profession about the unauthorized practice of law (UPL). (See "CPAs and the Unauthorized Practice of Law," The CPA Journal, August 1998, and "Attorneys and CPAs: Cooperation or Confrontation?" The CPA Journal, June 1999, for background on the difficulties faced by bar associations in prosecuting accounting firms under UPL statutes.)

Not only is the definition of the practice of law elusive in many areas of CPA practice, such as tax, but Federal statutes that may preempt state UPL statutes further cloud the issue. These difficulties may explain why two recent UPL cases against Big Five accounting firms were dropped.

Accounting firms have further complicated the UPL issue by hiring a record number of attorneys. The Big Five now employ approximately 5,000 attorneys, making them the largest employer of attorneys in the United States. Attorneys employed by accounting firms perform many of the legal tasks that accountants are unable or unqualified to do. The state bar associations' primary weapon for combating this development is to charge accounting firm attorneys with violating Model Rules of Professional Conduct (MRPC) 5.4, which prohibits attorneys from sharing legal fees with nonattorneys, forming partnerships with nonattorneys to render legal services, or rendering legal services under the direction of nonattorney employers.

ABA's Proposed Changes to Model Rules of Professional Conduct

The ABA's MDP commission issued its recommendation in support of MDPs in June 1999, proposing that the ABA allow attorneys, subject to carefully defined safeguards, to share legal fees with nonattorneys and provide legal services to clients through MDPs. At the ABA's annual meeting in August 1999, the commission unanimously recommended ethical rule changes in favor of MDP to the ABA House of Delegates, which voted to defer action on the recommendation and instructed the commission to gather additional information and resubmit the recommendation.

The MDP commission defines an MDP as a "partnership, professional corporation, or other association or entity that includes lawyers and nonlawyers and has as one, but not all, of its purposes the delivery of legal services to a client(s) other than the MDP itself or that holds itself out to the public as providing nonlegal as well as legal services."

Under the recommendation, attorneys practicing in MDPs remain subject to the rules of professional conduct, such as independence of professional judgment, protection of confidential client information, and loyalty to clients through avoidance of conflicts of interest.

The MDP commission's recommendation calls for altering the MRPC in a number of ways, most notably by amending MRPC 5.4 and adding MRPC 5.8. Under the amended MRPC 5.4, attorneys would be allowed to share fees with nonattorneys as long as they comply with the new ethical rule.

The proposed MRPC 5.8 contains the most controversial aspect of the MDP commission's recommendation: certification-and-audit requirements for MDPs. Under MRPC 5.8, the MDP is required to provide the state's highest court with written statements signed by the CEO (or similar official) that it will--

* not interfere with an attorney's exercise of independent professional judgment;
* establish, maintain, and enforce procedures designed to protect an attorney's exercise of independent professional judgment from interference by the MDP or anyone associated with the MDP;
* establish procedures to protect an attorney's professional obligation to segregate client funds;
* require its members (attorneys and nonattorneys) to abide by the rules of professional conduct when they are engaged in the delivery of legal services;
* respect the unique role of the attorney in society and acknowledge that attorneys in an MDP have the same obligation to render pro bono legal services as those in a law firm; and
* annually review the procedures established in subsection 2 and annually certify its compliance with subsections 1­6 with the state's highest court.

MRPC 5.8 also requires the MDP to permit the state's highest court to review and conduct administrative audits of the MDP and to pay for the audits through an annual certification fee. Failure to comply with any of the rules of MRPC 5.8 would result in the MDP being stripped of its permission to deliver legal services or other sanctions.

Defining 'Legal Services' and 'Practice of Law'

The definitions of "legal services" and "the practice of law" are key components of the MDP commission's recommendation. First, MRPC 5.8 applies only if any of the activities of the MDP constitute the practice of law. Second, MRPC 5.8 requires attorneys that are dual professionals, such as attorney/CPAs, to communicate to clients (preferably in writing) that attorney-client privilege is not applicable to nonlegal services.

Unfortunately, the way the MDP commission's recommendation defines legal services and the practice of law is vague and overly broad. The recommendation defines legal services as "services which, if provided by a lawyer engaged in the practice of law, would be regarded as part of such practice of law for purposes of application of the rules of professional conduct." The recommendation defines the practice of law to include services such as "preparing or expressing legal opinions."

Reactions to the Recommendation

The AICPA wasted little time in responding to the MDP commission's recommendation. In July, the AICPA issued a resolution stating that it applauds and supports the vision of the commission regarding the need for MDPs but objects to its proposed regulatory approach and believes the flaws in the proposed rules are sufficiently great that they might impair the formation of MDPs.

In particular, the accounting profession expressed concern with the certification-and-audit regulatory regime, the overly broad definition of legal services, and the severity of the conflict of interest rules in the MDP commission's recommendation.

The AICPA calls the commission's definition of the practice of law a dramatic expansion of the current understanding of the practice of law. Under the new rules, many services currently being provided by accounting firms, such as tax consulting and estate planning, might be classified as legal services and therefore would require accounting firms to submit to the certification-and-audit regulatory regime or risk sanctions from the state supreme court. The resulting uncertainty would surely be magnified by differing interpretations issued by each of the state supreme courts (which are required to enforce the rules).

The accounting profession is also concerned with the onerous regulatory oversight that the certification-and-audit rules impose on accounting firms. Multistate CPA firms that provide legal services would be required to file in each state in which they operate. In contrast, law firms would not be required to submit to the certification-and-audit requirements. The AICPA believes the certification-and-audit rules should apply to all firms that provide legal services to clients, including law firms.

Finally, many rules in the MDP commission's recommendation have the potential to be overly burdensome on accounting firms employing attorneys. For example, requiring CPA/attorneys to communicate to a client that they are not covered by the attorney-client privilege each time they advise the client on a nonlegal topic is excessive. Likewise, imposing the legal rules of ethics, such as the conflict of interest rules, on nonattorneys in MDPs ignores the extensive ethical codes governing accountants and other professionals.

MDP Commission Responds to Criticism

The MDP commission responded to many of the criticisms of its original recommendation by issuing an "Updated Background and Informational Report and Request for Comments," posted on the ABA website in December 1999 ( Continued support is evidenced by the sections in the updated report that highlight the movement toward MDPs by other countries and the possible alternatives to the MDP commission's original recommendation (such as the unlikely success of more stringent UPL enforcement).

The updated report also acknowledges the problem of how the original recommendation defines the practice of law. The MDP commission admits that the definition was not sufficiently clear in the original recommendation and states that its intent was to leave the definition up to individual states. This scenario would likely result in 50 different definitions, which would surely cause problems for multistate CPA firms. Fortunately, the commission appears to be flexible on this issue and invites comment from interested parties.

The MDP commission also addresses concerns regarding the certification-and-audit rules, but offers little insight into alternatives. The commission indicates that it was deliberately "conceptual" in the initial recommendation about how the certification-and-audit procedures would work and intended that each state work out the details. The updated report does not address the accounting profession's concerns about the onerous nature of the proposed certification-and-audit rules, but it does mention peer review as a possible alternative and invites comments.

The updated report also brings a potentially critical issue into the discussion by commenting on the SEC's concern over whether an MDP should be allowed to provide audit and legal services to the same client. The SEC views the roles of auditor and attorney as incompatible under Federal securities law. It has stated specifically that it considers an auditing firm's independence from an SEC registrant to be impaired if the firm also provides legal advice to the company. The MDP commission indicates in the updated report that it shares this position.

This is an important issue for larger accounting firms, because restricting their ability to deliver legal services to audit clients substantially limits the growth potential of MDPs. The Independence Standards Board (ISB) is currently reviewing comments from a discussion memorandum (DM) on the issues related to auditor independence and the performance of legal services. Presumably, the DM will lead to a standard for auditors of public companies.

Strategic Alliances

The problems associated with the MDP commission's recommendation have not slowed down the MDP movement. If anything, it has gained substantial momentum, as evidenced by the number of strategic alliances between law firms and other professional service firms. While the most notable alliances are with accounting firms, some law firms show a willingness to consider alliances with other professional service firms.

The most significant strategic alliance to date is between Ernst & Young and a new Washington, D.C., law firm. Ernst & Young has agreed to supply the law firm with a significant amount of start-up capital and to lease it adjacent office space in a building that Ernst & Young owns. In return, the law firm has agreed to be known as McKee, Nelson, Ernst & Young LLP (MNEY). MNEY will initially focus on tax-related legal work with plans to expand to a full-service law firm. Philip A. Laskawy, chair and CEO of Ernst & Young, pointed out that while the firm already provides legal services directly or through similar alliances in 40 countries through Ernst & Young Law, this alliance will extend that capability to the United States.

Ernst & Young's alliance with MNEY certainly tests the limits of the current legal ethics rules that prohibit attorneys from sharing legal fees with nonattorneys. Ernst & Young may have selected Washington, D.C., because of its more liberal ethics rules: Washington, D.C., is the only jurisdiction that allows attorneys to share profits with nonattorneys, but it requires the attorneys to remain in control of the firm providing the services.

In addition to the choice of jurisdiction, Ernst & Young has been careful to address the literal requirements of the MRPC. For example, Ernst & Young's Washington, D.C., accounting firm and MNEY are set up as separate entities with separate billing. In addition, Ernst & Young is not involved in the firm's day-to-day management.

Ernst & Young has been assured by outside counsel, a former chair of the District of Columbia's UPL committee, that the arrangement is perfectly allowable under its rules of professional conduct. However, other ethics experts believe that Ernst & Young is trying to see how far it can push the regulators.

Other Big Five firms are also announcing strategic alliances with influential U.S. law firms. In addition to its strategic alliances with the Chicago law firm of Horwood Marcus & Berk and the San Francisco-based international law firm of Morrison & Foerster, KPMG has announced an alliance with members of SALTNET, a network of state and local tax attorneys. KPMG is also expected to announce the hiring of seven international tax attorneys from the firm Weil, Gotshal & Manges, a move that John Lanning of KPMG says "will allow KPMG to take a leap forward in the international tax arena."

PricewaterhouseCoopers has announced an alliance with the Washington, D.C., law firm of Miller & Chevalier, and, perhaps more significantly, the ABA's litigation section has selected the accounting firm as its litigation-consulting sponsor.

The more high-profile strategic alliances involving the Big Five are not the only ones being pursued. Gary S. Shamis, partner of Saltz Shamis & Goldfarb, Inc., and chair of the AICPA Management of an Accounting Practice Committee, says that in the last six months, two regional law firms trying to position themselves for the future have approached his Cleveland-based CPA firm.

Many other accounting firms pursuing arrangements with law firms or attorneys may be keeping a low profile to prevent UPL sanctions. For example, some smaller accounting firms have reportedly hired attorneys as part-time employees with the understanding that their associated legal work will be done outside the accounting firm and billed back.

Other Professionals. Accounting firms are not the only professional firms pursuing arrangements with law firms in the United States. The Boston law firm of Bingham Dana LLP announced a joint venture with the investment firm Legg Mason, Inc., last October. The new firm, called Bingham Legg Advisers LLC, will offer wealthy clients investment advice. Bingham Dana's managing partner Jay S. Zimmerman said that "our philosophy is that delivering a variety of integrated products makes sense for law firms. The accounting firms have proven that." In a similar move, one of Minnesota's largest law firms, Fredrikson & Byron, has announced a consulting service for physicians and medical organizations.

No Standing Still

MDPs that offer legal services are already reality in much of the world and appear to be just around the corner in the United States, as a result of the rule changes that the ABA is exploring. Even without a set timetable for determining when the rules will become law, the ABA is certainly feeling pressure--both from the marketplace and from attorneys within the ABA that are beginning to pool their talents with other local professionals. The ABA taxation section and the ABA general practice, solo, and small firms section have both endorsed the MDP concept.

Outgoing ABA President Philip S. Anderson believes the MDP situation is urgent and told the House of Delegates that by ignoring the MDP issue, the ABA is effectively deciding against MDPs. If attorneys do not write the rules, then "someone [else] will write the rules," said Anderson. Incoming ABA President William G. Paul promises that "in the end, it is the client needs and client interests that will determine the outcome" of the MDP decision.

It is important to remember that the rule changes the MDP commission is exploring are only illustrative and not directly binding on individual states. Each state has the option of accepting, modifying, or rejecting the amended MRPC. Several states, including New York, Washington, and Florida, are currently conducting independent studies of MDP issues. The ABA also worries that the accounting lobby will try to win legislative approval of MDP on its own terms. As this issue plays out, CPAs should monitor the changing landscape of the professional services market and correctly position themselves for the future. *

Editor's note: On May 15, the ABA's MDP commission renewed its recommendation to allow sharing of fees with other professionals, with the suggestion that the ABA House of Delegates postpone any action until its 2001 midyear meeting in order to give state and local bar associations time to complete their own reviews. For the full text of the latest report, please see

Jack Baker, PhD, CPA, is an associate professor of accounting and
Randall K. Hanson, JD, LLM, is a professor of business law, both at the University of North Carolina at Wilmington.
James K. Smith, PhD, JD, LLM, CPA, is an assistant professor of accounting at the University of Nevada, Las Vegas.

Home | Contact | Subscribe | Advertise | Archives | NYSSCPA | About The CPA Journal

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2006 CPA Journal. Legal Notices

Visit the new