Keith Mack
The separation between accounting and legal services is a complex issue, with some countries allowing multidisciplinary practices while others maintain strict boundaries. In the United States, accounting firms generally cannot practice law due to various regulations and ethical considerations. A key concern is the potential conflict of interest that may arise when an accounting firm offers legal services, as highlighted by the Sarbanes-Oxley Act, which prohibits audit firms from providing legal services to the same client. Additionally, rules such as Model Rule 5.4 prohibit lawyers from forming partnerships with non-lawyers, and the duty of confidentiality for lawyers contrasts with an accountant's duty to disclose certain information. Despite these restrictions, some accounting firms are expanding their legal services, particularly in Europe, and the future may hold further developments in the interplay between these professions.
| Characteristics | Values |
|---|---|
| Rules relating to law firm ownership | In the US, law firms must be owned entirely by lawyers |
| Duty of confidentiality | Lawyers have a duty of confidentiality, while accountants have a duty to disclose |
| Conflict of interest | Accounting firms may represent multiple clients simultaneously, while law firms cannot |
| Non-audit services | Restrictions on providing non-audit services to audit clients present a challenge to expansion plans |
| Regulatory compliance | Compliance with multiple jurisdictional rules is challenging, especially with the expansion of legal services |
| Professional standards | All tax professionals, including lawyers and accountants, must adhere to federal professional standards and state rules |
| Independence | The Sarbanes-Oxley Act prohibits the intermingling of audit and legal consulting services to ensure auditor independence |
| Revenue and growth | Legal services offer a new revenue stream and fuel growth for accounting firms |
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What You'll Learn
Rules and restrictions on law firm ownership
However, there are some exceptions and ongoing changes to this rule in certain states. For example, in Washington, D.C., non-lawyers are allowed to hold minority stakes in law firms. Utah has instituted a regulatory "sandbox" to oversee non-traditional firms with non-lawyer ownership, allowing non-lawyer-owned entities to apply for a license to offer legal services. Arizona has also eliminated Rule 5.4, permitting non-lawyers to hold ownership interests in law firms, specifically in entities known as Alternative Business Structures (ABS) that must include at least one licensed attorney. California has amended its Rule 5.4 to allow greater fee-sharing with non-attorney-owned non-profit organizations, while Massachusetts allows law firms to share fees with "qualified legal assistance organizations" with full disclosure to and approval from the client.
Outside the US, jurisdictions such as England and Australia have also lifted the prohibition on non-lawyer ownership, allowing for greater collaboration with professionals outside the legal field and potentially lowering costs for clients.
The debate surrounding law firm ownership rules is influenced by the expansion of accounting firms into legal services, with some arguing for greater integration of multidisciplinary practices. However, concerns have been raised about potential conflicts of interest, the protection of investor interests, and maintaining the independence and ethical standards of legal professionals.
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Conflict of interest
The Sarbanes-Oxley Act of 2002, enacted in the wake of the Enron scandal, prohibits audit firms from providing legal services to clients. The Act was designed to protect investors by ensuring that auditors, as the "guardians of the capital markets", were not unduly influenced by non-audit services.
The issue of conflict of interest is central to this separation of legal and accounting practices. Accounting firms may have multiple clients with conflicting interests, and allowing them to provide legal services could compromise their ability to serve all clients objectively. This is especially pertinent given that accountants are permitted to represent multiple clients simultaneously, as long as they believe they can do so with objectivity, whereas lawyers are prohibited from doing so if any one attorney in their firm has a conflict.
Furthermore, the duties of an accountant and a lawyer can be incompatible. Accountants acting as auditors of financial statements have a public duty to disclose certain matters, whereas lawyers have a duty of confidentiality to their clients. If a single firm were to provide both accounting and legal services, it is unclear how these conflicting duties could coexist.
In addition, there are strict rules prohibiting lawyers from forming partnerships with non-lawyers, providing legal services under the control of a non-lawyer, and sharing legal fees with non-lawyers. These rules present significant challenges to accounting firms seeking to expand into the legal services market, as they must navigate complex regulatory environments to ensure compliance with multiple jurisdictional rules.
Despite these challenges, some accounting firms have begun to expand into legal services, particularly in Europe and Asia. In the US, however, strict regulations continue to restrict the provision of legal services by accounting firms, especially to audit clients.
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Duty of confidentiality
The duty of confidentiality is a key consideration when examining the question of why accounting firms cannot practice law. This issue is particularly relevant in the context of auditors, who have a public duty to disclose certain matters, which may conflict with a lawyer's duty of confidentiality.
In the United States, the Sarbanes-Oxley Act of 2002 prohibits audit firms from providing legal services to the same client, aiming to protect investors by ensuring the independence of auditors from nonaudit services. This Act was a response to the Enron scandal, where accounting firm Arthur Andersen was pressured by Enron to sign off on dubious methods, leading to Enron's bankruptcy.
The American Bar Association has formed a Commission on Multidisciplinary Practice to study how accounting firms are seeking to provide legal services. This Commission primarily focuses on the "Big Five" accounting firms' tax consulting practices, which employ thousands of lawyers worldwide. However, the rules relating to law firm ownership and the audit regulatory environment in the US present significant challenges to the expansion of legal services by accounting firms.
The duty of confidentiality for accountants is governed by the AICPA's confidentiality rule, which mandates that members obtain consent before disclosing client information. This rule includes exceptions for complying with specific standards, accounting principles, valid subpoenas, and government regulations. The rule also addresses situations involving litigation, director positions, and third-party disclosures.
In contrast, lawyers are generally prohibited from sharing legal fees with non-lawyers and forming partnerships with non-lawyers for legal practice under Model Rule 5.4. This rule creates a challenge for multidisciplinary practices that offer legal services. Additionally, Model Rule 1.10 addresses conflicts of interest, disqualifying lawyers with conflicts from representing clients. Accountants, however, are permitted to represent multiple clients simultaneously as long as they believe they can maintain objectivity and obtain client consent.
The interplay between the duty of confidentiality for lawyers and the disclosure requirements for accountants presents a complex issue for accounting firms considering legal services.
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US auditor independence rules
Auditor independence is the cornerstone of the auditing profession. It ensures that auditors do not have any financial interest in the firms they are auditing and are not placed in a position where they are auditing their own work. Auditor independence rules are strong and robust, and they get complicated quickly.
In the US, the Securities and Exchange Commission (SEC) has issued Requirements Regarding Auditor Independence. The SEC's rules apply to auditors of plans that file on Form 11-K with the SEC. The SEC independence rules are dictated by CFR 210.2-01(a) – (f), commonly referred to as Rule 2-01(a) – (f).
The AICPA, DOL, and SEC all have rules regarding auditor independence. The DOL rules apply to all employee benefit plan auditors, while the AICPA rules apply to auditors who are members of the AICPA. The Sarbanes-Oxley Act stipulates that the audit committee has responsibility for the appointment, compensation, retention, and oversight of the company's independent external auditor.
To maintain independence, auditors must be free to approach their work in whatever manner they consider best and must have unlimited access to all company information. They must also be able to choose to reveal to the public any information they believe should be disclosed.
In recent years, the SEC has updated its auditor independence rules to focus on relationships and services that are more likely to jeopardize the objectivity and impartiality of auditors. These updates were informed by decades of staff experience and aimed to modernize the rules and protect investors.
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Non-audit services
The Sarbanes-Oxley Act of 2002, enacted in the wake of the Enron scandal, prohibits audit firms from providing legal services to clients. The Act ensures that the auditor's "guardian of the capital markets" role is not unduly influenced by nonaudit services. This promise of independence is now at risk as accounting firms increasingly push into legal services.
In the US, there are strict rules prohibiting accounting firms from providing nonaudit services to audit clients and their foreign affiliates. For instance, US auditor independence rules generally bar accountants from acting on behalf of company managers, and US securities laws specifically prohibit auditors from providing legal services to publicly traded clients. These rules aim to prevent potential conflicts of interest and inappropriate influence or bias in the oversight of the corporate world.
However, some accounting firms are finding ways to expand their legal services. For example, KPMG has become the first Big Four accounting firm to practice law in the US, starting in Arizona, where ethics rules have been modified to allow non-lawyer-owned entities to practice law. KPMG must navigate conflict-of-interest rules and has stated it will not offer legal services to audit clients, focusing instead on multinational corporations and non-audit clients.
The expansion of accounting firms into legal services raises concerns about potential threats to audit quality and independence. It also complicates the issue of confidentiality, as lawyers have a duty of confidentiality, while accountants have a public duty to disclose certain matters as auditors.
While some argue for keeping professional services separate, others suggest that the merger of law firms with other businesses can bring benefits. The American Bar Association has formed a Commission on Multidisciplinary Practice to study how non-lawyer-owned firms are seeking to provide legal services to the public. This expansion of legal services by accounting firms presents challenges in maintaining compliance with multiple jurisdictional rules.
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Frequently asked questions
In the US, there are legal restrictions on accountants practising law. One such restriction is that accountants cannot provide legal advice to their clients. This includes answering questions relating to the interpretation or application of tax statutes, administrative regulations and rulings, court decisions, or general law.
In the UK, there is a serious debate about potentially requiring "audit-only" firms. Globally, the Big 4 accounting firms employ thousands of lawyers, but these lawyers do not provide legal services to clients.
There is a conflict of interest between the lawyer’s duty of confidentiality and the accountant’s duty to disclose. This could result in inappropriate influence or bias in the corporate world.
In 2021, Arizona modified its ethics rules to allow non-lawyer-owned entities to practice law. This has allowed PwC to launch ILC Legal and KPMG to practice law in the state.
