Accordingly, the MacCrate Report calls for amendment of New York’s Lawyer’s Code of Professional Responsibility to make clear the obligations of lawyers when conducting lawyer-controlled ancillary businesses incidental to the practice of law and providing coordinated legal services with providers of other services pursuant to strategic alliances.

For example, although a law firm is permitted to establish an ongoing professional relationship outside the practice of law, it is expected to continue to function as a stand-alone legal practice, in substance and in form, observing the ethical rules of the legal profession.

In November 2000, the NYSBA proposed new disciplinary rules that incorporate the recommendations of the MacCrate Report. Necessary court action implementing the new disciplinary rules could be announced before the end of March.

Similarly, the ABA resolved that each state bar should undertake further study in the one area where recent events demonstrate a need—side-by-side arrangements—and urged them to ensure that every effort at enhanced interprofessional cooperation is consistent with the need to preserve the core values and independence of the legal profession.

The Public Interest

The values and responsibilities of every profession demand recognition and respect. The duties of one learned profession are as important to society as those of any other. Each must be preserved and protected in furtherance of the common commitment to serve clients and society. While strict separation of one profession from another is required, nothing should be permitted to put self-interest above the public interest. Where traditional cooperation has proven effective, it should be continued and encouraged.

In light of enhanced mutual understanding provided by consideration of MDPs, preservation of the independence of the professions from each other must continue. No profession can or should seek to control or influence another. Each profession is best able to serve the public when it is independent in name and fact.

The public interest is paramount. Cooperation must be enhanced, but not at the expense of our common duty. Lawyers must always exercise independent professional judgment in the interest of the client. Otherwise, society is the loser.

Should Lawyers and CPAs Practice Together?
By Dan L. Goldwasser

Whether lawyers and CPAs should practice together is a highly controversial and emotionally charged issue. While both lawyers and CPAs seem to have few problems with the concept of a multidisciplinary practice (MDP), they differ strongly as to who should be in charge of such a practice and what regulations should apply to such an entity. Not surprisingly, both professions contend that they should have a majority interest and that their regulations should govern the activities of an MDP.

At this point, the accounting profession is alone in contending that the public wants seamless services from a single entity. While greater efficiencies can undoubtedly be achieved by an MDP, their extent is largely unknown, as is the price that clients will have to pay for seamless services. In short, there is no guarantee that if the professions are able to work out the myriad details of how MDPs will be operated and regulated, clients will avail themselves of the services of an MDP.

Ultimately, the pursuit of MDPs must be analyzed from a number of perspectives. First, are MDPs good for the accounting and legal professions? Second, will the public benefit from MDPs (i.e., will such services benefit clients and financial statement users)? Lastly, will MDPs ease or complicate the regulation of the legal and accounting professions?

The Accounting Profession’s Perspective

At present, the accounting profession is advocating the formation of MDPs. In Europe, large accounting firms are systematically acquiring law firms. In the United States, the Big Five firms are hiring large numbers of lawyers, although they cannot and are not holding themselves out as providing legal services. Nevertheless, PricewaterhouseCoopers has entered a strategic alliance with a Washington, D.C., law firm and Ernst & Young has helped create a law firm, which presumably will coordinate its activities with Ernst & Young.

From all appearances, the large accounting firms are seeking to take greater advantage of their significant client relationships by offering legal services, as well as a host of other nontraditional services. MDPs are particularly attractive to these firms as legal services are considered to be substantial revenue generators. In the United States, however, only law firms can render legal opinions, offer legal advice, and appear in court on behalf of their clients. Moreover, law firms can only be owned and legal fees can only be shared by those persons who have obtained a license to practice law. These restrictions can only be changed by amendments to state laws and regulations and changes to the ethical codes of the American Bar Association (ABA) and the state bar associations.

While the large accounting firms are seeking to leverage their client relationships by selling legal services, smaller CPA firms also appear to favor MDPs as a source of new client relationships. Moreover, many small accounting firms are heavily engaged in personal financial planning services, of which legal services are an important element.

Of course, legal expertise would help CPA firms in numerous other areas. For example, many CPA firms are now providing a wide variety of human resources services, and attorneys with experience in handling employment discrimination claims, sexual harassment claims, and claims under the Americans with Disabilities Act could complement these services. Similarly, attorneys with knowledge of ERISA could provide substantial assistance to CPA firms advising on employee benefits and executive compensation. The ability to draft complex legal documents and knowledge of the laws governing securities and commercial transactions could also greatly assist CPA firms in providing services in connection with the public and private offering of securities, mergers, and financing transactions.

Most CPAs have not given serious thought to the impact of having lawyers within their firm’s management. Unlike CPAs, lawyers are frequently motivated by principle rather than practicality and do not compromise easily. Put another way, there are few issues too petty for lawyers not to debate. Moreover, most lawyers believe that professional firms should be operated democratically; accordingly, once lawyers are introduced into a firm’s ownership, it may be difficult to keep them out of management.

It is also not clear what the effect on a firm’s professional reputation would be. For the most part, CPAs enjoy a much higher reputation for honesty and integrity than lawyers. Bringing lawyers into a CPA firm may well diminish the firm’s reputation, which is vital to the attest function. Moreover, the advocacy role normally played by lawyers could further erode the public’s confidence in CPA firms.

Admitting lawyers also poses a danger to a CPA firm’s independence. The SEC strongly believes that the practice of law is inconsistent with auditor independence. Therefore, it has adopted a rule precluding CPA firms from providing any legal services to their public company audit clients. Moreover, many of the state board of accountancy representatives that testified at the SEC hearings on the proposed independence rules supported this view. Thus, there is a serious danger that lawyers joining CPA firms will not be able to service the firm’s attest clients (whether public or not), actually decreasing, rather than enhancing, the value of their services.

The Legal Profession’s Perspective

The legal profession, being by far the older of the two professions, is much more rooted in the past. Thus, most lawyers are reluctant to compromise the ethical codes that have governed their activities for centuries (frequently called “core values”). At the heart of the legal profession’s resistance to MDPs is a general fear that the legal profession would quickly become dominated by the large accounting firms because of their size, financial resources, and client relationships. Many lawyers fear that the members of the younger, upstart accounting profession will surpass them.

Specifically, large law firms are concerned that if they merge with a large accounting firm, they will quickly lose their identity and be forced to conduct their practice with a “bottom line” focus. On the other hand, large law firms that do not merge will be at a distinct competitive disadvantage to those that do. Smaller law firms simply fear that the legal profession will be dominated by unprincipled individuals concerned only with the client’s operating results, compromising—or even extinguishing—the representation of individual rights and the protection of society’s less fortunate.

To be sure, there are those within the legal profession who view MDPs as a means of providing better and more efficient client service. Most, however, are not yet convinced that there is, or ever will be, a large demand for seamless professional services. Nevertheless, they realize that there could be client benefits and are willing to make such services available to the public.

There are a number of services that CPA firms currently provide which would complement the services now being offered by law firms. For example, the accounting profession has largely taken over the field of income tax services, making it difficult for many small law firms to counsel their clients regarding sophisticated business transactions without the assistance of a CPA firm. Most law firms also provide legal services to small privately owned businesses that frequently require business valuation services, which few, if any, law firms are able to provide. Lastly, litigation has become extremely expensive; many law firms are simply not capable of providing a full range of litigation services cost-effectively. They therefore need the services of accounting firms, which tend to be more cost-effective and include large litigation support practices.

One of the most important functions lawyers have is to analyze transactions and to develop ways to minimize the legal and business risks to their clients inherent in those transactions. Thus, their very background and training predispose most lawyers to focus on the numerous problems MDPs entail, such as conflicts between the two professions’ ethical codes. The inherent ethical conflict can be seen in the lawyer’s duty to maintain client confidences in the face of a legal subpoena versus the accountant’s duty to disclose all information material to the client’s financial condition and results of operations. Similarly, lawyers see conflicts between the fiduciary relationship between a lawyer and a client and CPA independence requirements. It is not surprising that the majority of lawyers have seized upon these conflicts as reasons for not proceeding with MDPs, while other lawyers have explored the ways in which these conflicting principles might be accommodated.

Users of Professional Services

Although studies have yet to determine the extent of the demand for MDPs, there are indications that many large companies might prefer to obtain their professional services from a single professional service firm. Theoretically, MDPs will result in services that are more efficient, easily coordinated, and less expensive. On the other hand, the client might lose the benefit of the debate among service providers and abandon the ability to prioritize its own various goals. Another consideration is that, by spending more money with one service provider, a client might enhance its bargaining position and achieve greater control over the activities of its professional service firm. Conversely, the professional service firm will have more relationships with its client and an opportunity to better secure its relationship with the client.

While there are a number of potential advantages for clients of MDPs, there are also certain disadvantages. Most importantly, there will have to be a compromise of the attorney-client privilege if a client is to receive both attest and legal services from the same entity. It is highly unlikely that regulators will permit CPA firms offering legal services to rely on a firewall between their audit and legal service departments; therefore, clients using an MDP might be required to waive the attorney-client privilege with respect to required disclosures in audit and other attest reports. While many companies may be willing to make this sacrifice, others will not or will resist severing their relationships with their current legal service providers.

Financial Statement Users

Many financial statement users might be concerned about relying upon the reports of a CPA firm that also provides legal services to the issuer. Like the SEC, they may fear that a CPA firm cannot provide a truly objective audit report on financial statements of a client to which it owes a fiduciary duty. Financial statement users might be reluctant to give full credence to an audit report rendered by such an MDP. Similarly, financial statement users may be troubled by the mere size of the fees the MDP receives from a single client. Another potential concern is that an MDP might come under the control of the firm’s attorneys, whose highest duty of loyalty runs to the client, not the public. Thus, financial statement users will be looking for MDPs at least to adopt organizational structures that would isolate accounting decisions (as opposed to the flow of information) from firm management.

On the other hand, it can also be persuasively argued that the audit process would be enhanced if an audit firm were able to provide a variety of services to the client. The audit process tends to be relatively superficial, and any opportunity that the audit firm has to learn more about the management, operations, and outlook of the client enterprise will enhance its ability to understand and audit the financial statement. Moreover, the audit firm will be receiving representations from attorneys whose interests will coincide with the audit firm’s, greatly diminishing the possibility that the client’s attorney will not disclose material risks of loss to the audit firm.

The Regulators’ Perspective

The regulators of both the accounting and legal professions are deeply troubled by the thought of MDPs. Specifically, accounting regulators question whether the independence and objectivity of auditors can be maintained where the audit firm owes a fiduciary duty to the client. This concern is heightened if the firm is controlled by lawyers and not CPAs. To date, the National Association of State Boards of Accountancy (NASBA) has insisted that CPAs own and control at least 51% of every accounting firm; the SEC’s new independence rules would be far more restrictive. It seems unlikely that the regulators of the accounting profession are likely to accept the MDP concept in the near future, especially if CPAs hold minority ownership.

The legal profession is currently regulated in each state by the courts and not by an agency within the executive branch. Unlike the state boards of accountancy, the courts have yet to join the MDP debate. Nevertheless, it seems relatively unlikely that the courts would be willing to relinquish their control over the practice of law and law firms. Therefore, there is a concern as to who will regulate MDPs. The most likely solution is that MDPs will be subject to regulation by both the courts and the state boards of accountancy, raising the question of how conflicts between them will be resolved. While the accounting profession seems to think that the conflicts should be resolved by relaxing the current regulations of both professions, the legal profession disagrees. Moreover, there is no indication that the regulators of either profession share this view as it could potentially jeopardize the public interest that they are charged with protecting. The other possibility is that MDPs will be subject to a single set of regulations and a single regulatory agency. This seems highly unlikely; it would undoubtedly require legislative, if not constitutional, action in each state in order to accommodate such a regulatory overhaul.

Among the issues that will have to be reconciled if MDPs are to become a reality are accounting independence, legal confidentiality, ownership and control of MDPs, forms and sources of compensation, and activities deemed incompatible with the professional services performed by the MDP. These are not insignificant problems for regulators, and, until they are resolved, it seems highly unlikely that there will be any movement toward acceptance of MDPs.

The Future of MDPs

Because of the potential benefit of MDPs to the public, their eventual acceptance has taken on a certain air of inevitability. Nevertheless, the problems that must be confronted and overcome are quite substantial; joining the two professions will require compromising the current professional and ethical standards of both. The most difficult issue by far will be convincing regulators to compromise their respective missions to protect the public. Whether it will be possible to mobilize public opinion in favor of some compromise, in turn, depends upon the extent of the efficiencies to be gained by MDPs and the costs of compromising auditor independence and the attorney-client privilege. Thus, the advocates of MDPs are caught in a “chicken and egg” predicament: They will not be able to convince the public of the benefits of MDPs until regulators permit them, and the regulators will not permit MDPs to exist until the public has been convinced of their benefits.