Consulting

Should BigLaw firms worry about increasing competition from the Big Four accounting firms?

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Not So Fast

There are limits to the international growth, however, for the Big Four.

When deciding what countries to expand into, Grossmann at EY says the firm is driven by demand and regulatory limitations. India, Portugal and the U.S. are just some of the countries where the Big Four have not offered full-fledged legal services because of such restrictions.

In the States, there are two main hurdles keeping the Big Four out of the traditional legal services market. The first is statutory. In 2002, in the wake of the Arthur Andersen scandal and the 2001 recession, Congress passed the Sarbanes-Oxley Act, which limited auditing firms from providing legal services to audit clients.

The sprawling legal framework covers numerous issues, including the limitation of audit firms to provide certain legal services, which was meant to limit conflicts of interest.

Other countries—Canada, India, South Africa and Turkey—passed similar laws.

However, these limitations have not stopped auditing firms from offering legal and other services to nonaudit clients, “which they all now aggressively do,” wrote Ferrer and Wilkins for the CLS Blue Sky Blog. They conclude that the Big Four’s legal networks are now larger than they were when Sarbanes-Oxley was passed.

They go on to write in Law & Social Inquiry that even after Sarbanes-Oxley, “gaps in auditor independence regulation have allowed the Big Four to rebuild their nonaudit businesses, including legal services, in many countries around the world—even in the United States.”

The Public Company Accounting Oversight Board, created by Sarbanes-Oxley and run under the Securities and Exchange Commission, provides external, independent oversight of audit companies. The board’s spokesperson, Colleen Brennan, says, “Existing independence requirements would preclude an issuer’s auditor, or affiliates of the auditor, from providing legal services to that issuer or any of that issuer’s affiliates.” She adds that “the PCAOB monitors for compliance with that requirement and other independence requirements.”

The other major restriction comes from within the legal profession itself. The ABA Model Rules of Professional Conduct, which serve as the basis for the ethics rules of most jurisdictions in the U.S., favor a ban on nonlawyer ownership of law firms and a prohibition on fee-sharing of a legal services business.

Despite that, the ABA has explored the possibility of new forms of legal services delivery. Predating Sarbanes-Oxley, the ABA created the Commission on Multidisciplinary Practice to study “the manner and extent to which professional service firms operated by nonlawyers were seeking to provide legal services to the public.”

With the Big Four’s initial move into legal services as a backdrop, the commission recommended that the House of Delegates reinforce core values of independent professional judgment, client confidentiality and the avoidance of conflicts of interest while not inhibiting “the development of new structures for the more effective delivery of services and better public access to the legal system.”

This meant allowing lawyers to deliver legal services through a multidisciplinary practice, in which lawyers and nonlawyers provide legal and nonlegal services. This recommendation came with an endorsement of fee- and governance-sharing between lawyers and nonlawyers within an MDP.

The recommendations were debated by the ABA House of Delegates during the annual meeting in Atlanta in 1999.

Carolyn Lamm—a member of the commission and supporter of the recommendations who served as 2009-2010 ABA president—reminded those convened that even without an MDP structure there were some 5,000 lawyers already working at the Big Five accounting firms.

“They tell us they’re not practicing law; they’re offering environmental or tax services. They’re offering litigation support services and all kinds of other services,” she said at the debate and confirmed by email. “And the bar does not have any means to assure that the lawyers at the Big Five comply with any of the ethics regulations and/or core values” of the profession.

To her, the commission’s recommendations would bring licensed attorneys already working in MDPs back into the professional responsibility fold.

“It envisions system safeguards that the MDPs would have to pay for,” she concluded.

While acknowledging that lawyers already work in something resembling MDPs, lawyers opposing any relaxation of the restrictions on such practices warned that allowing for fee-sharing with nonlawyers would end the independence of the profession, diminish the ethical standards around confidentiality and conflicts of interest, and provide negligible benefit to consumers.

In 2000, the House voted against the commission’s recommendations and reaffirmed that fee- and governance-sharing with nonlawyers were not compatible with the rules and values of the profession. The commission was discharged.

According to Dennis Rendleman, ethics counsel at the ABA Center for Professional Responsibility, which housed the commission, the center is not currently working on the topic of multidisciplinary practice. Even so, he says, “the issue is one that will never go away.”

When asked, Meeter says Deloitte is not lobbying to change current laws and rules limiting its business model from expanding into the United States. Grossmann at EY declined to comment.

Across the Sea

While the movement for fee- and governance-sharing stagnated in the U.S., Australia in 2000 and, more aggressively, the U.K. in 2007 moved forward to create alternative business structure schemes that would allow for nonlawyers to be owners and fee-sharers in law firms.

Although he is not in direct competition with the Big Four, Simon Goldhill—the founder of Metamorph Law in London, a consolidator of small firms—says the ABS structure allows for significant flexibility that the traditional model did not.

“Before its liberalization and opening up to outside influences, the U.K. legal market had remained isolated—indeed insulated—from the development of the 21st-century consumer service culture,” he says.

Michelle Peters, principal at the Business Instructor law firm consultancy in London, says the traditional firm model is not a good business model. First, the billable hour limits profitability because the lawyer must work on a matter to make money. Second, firms are often ruled by committee, which makes direction and institutional change challenging. Third, lawyers are not trained in business development yet are expected to run every aspect of a firm, which cuts into their only mode of making money.

Goldhill adds that traditional law firm structures meant they could not take capital funds to grow their business. As an ABS, they can.

 

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This article was published in the September 2018 ABA Journal magazine with the title "Sleeping Giant: Should BigLaw firms worry about increasing competition from the Big Four accounting firms?"

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