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Fortified auditor independence standards under the Sarbanes-Oxley Act of 2002 have dealt a blow to the Big Four accounting firms’ legal services initiatives and whatever remains of their multidisciplinary practice ambitions. The global law networks that once rivaled the world’s largest law firms are in the midst of a vast restructuring. Meanwhile, in the United States and overseas, the migration of prominent tax lawyers into the giant accounting firms appears to have reversed course. “It will be a long while before multidisciplinary practice turns up again, if ever,” said Sherwin P. Simmons, chairman of the tax group at Steel Hector & Davis of Miami and former chair of the American Bar Association’s former Commission on Multidisciplinary Practice. A Securities and Exchange Commission (SEC) strengthening of auditor independence restrictions under Sarbanes-Oxley “has certainly halted any attempt by the major firms, at least, to incorporate a wide-ranging legal service within their firms,” according to Richard I. Miller, general counsel and secretary of the American Institute of Certified Public Accountants. In 2001, the then Big Five accounting firms were assembling massive forces of lawyers with the expectation that multidisciplinary practice was the wave of the future, and that their audit clients would provide a base for unprecedented market-share growth in legal services. Collectively, in 2001, the Big Five firms counted more lawyers within their ranks than the largest five law firms in the world. Out in front was Andersen Legal-Arthur Andersen’s associated global law network, which, with 2,880 lawyers in 2001, had become the world’s second-largest law firm in terms of lawyer count. It also had broken into the top 10 law firms worldwide by revenue. Domestically, attorney fee-splitting restrictions and other state and local bar rules prevented accounting firms from engaging in law practice. In addition, the SEC prohibited auditors of public companies from providing legal services to “attest,” or audit, clients in the United States. However, thousands of lawyers worked within the Big Five providing tax-advisory services and other law-related services to clients and the accounting firms were lobbying hard to ease the restrictions on law practice. The SEC was well aware of the Big Five firms’ overseas expansion into legal services but, in the course of revising its auditor independence standards in November 2000, it backed off a restriction that would have banned Big Five legal services for publicly traded U.S. audit clients abroad. The SEC thus allowed the associated global law networks to continue to offer audit clients some legal services outside of the United States. At that time, the SEC’s then-general counsel, David Becker, said that the agency had “made a prudential decision” not to address the Big Five overseas law networks. Andersen Legal, its fortune tied to its associated Big Five accounting firm, Arthur Andersen, was obliterated in the midst of the Enron debacle. Many of Andersen Legal’s lawyers moved to Ernst & Young’s global law alliance. Regulatory fallout The regulatory fallout from Enron and the many subsequent accounting disasters left the remaining Big Four firms and the entire accounting industry battling for credibility and weakened in their negotiating power with the SEC. Under Sarbanes-Oxley, the Securities Exchange Act of 1934 was amended with respect to auditor independence. Legal services were specifically included in a list of prohibited activities for audit clients. In light of Sarbanes-Oxley, the SEC revisited the question of whether to continue to permit auditors to perform some legal services in foreign jurisdictions for issuers. Despite lobbying by the accounting firms to maintain the opportunity to provide some legal services outside of the United States, in the altered context of a widespread credibility crisis, the SEC’s final rule strengthening auditor independence added a new prohibition on legal services in foreign jurisdictions. In November, KPMG announced it was discontinuing its relationship with its associated law network, KLegal, as a result of “market conditions, including the U.S. Sarbanes-Oxley Act-which restrict the provision of non-audit services to audit clients, particularly legal services.” Ernst & Young adopted a take it or leave it stance with many of its associated law firms. The Ernst & Young law alliance was reborn as EY Law and required that its member firms either contractually agree to restrictions on their practices or opt out of the network altogether. The focus of EY Law’s practice is on clients that are neither SEC-registered audit clients nor audit clients in other markets with regulations preventing auditors from providing legal services. Tax, transactions and risk management services are three areas of focus for EY Law. U.S.-based McKee Nelson, which was launched by Ernst & Young and has a relationship with Ernst & Young, and Ernst & Young’s associated U.K.-based law practice were not included in EY Law because of regulatory restrictions in those jurisdictions, according to EY Law. Deloitte is reviewing its relationships with the participants in its global law network to “comply with the spirit and letter of the complex and evolving web of regulation with respect to the provision of different professional services,” according to a Deloitte spokesperson. PricewaterhouseCoopers is adopting a wait-and-see approach with respect to its law network, Landwell, which has seen some recent member-firm departures. “Until we have further clarity around the Sarbanes-Oxley rule-making process, it’s difficult to predict any additional changes to the Landwell network,” said Joseph Petito, a PricewaterhouseCoopers partner in the firm’s professional and public affairs group in Washington and an attorney. He said that the firm had restricted the types of legal services that Landwell member firms could provide to SEC-registered audit clients and their affiliates even prior to Enron, but that further limitations have been required under Sarbanes-Oxley. In the United States, the high-octane auditor independence standards are affecting the Big Four firms in their retention and deployment of lawyers. Saba Ashraf, a tax partner at Atlanta’s Alston & Bird, said the new regulatory environment has hit audit firms in two areas that involve the employment of tax lawyers-tax litigation services and tax-shelter work. But beyond those two areas, there is a “more general impact of Sarbanes-Oxley. There is this sort of general consideration for all audit committees in public clients and they will scrutinize much more carefully the services they will obtain from their auditor.” This has had a “chilling effect” on the hiring of audit firms for other services, in Ashraf’s view. She said there is increased talk about law firms eyeing certain Big Four tax litigation practices, while Big Four associated tax lawyers are displaying more interest in offers from law firms. Among the recent examples: Duane Morris of Philadelphia hired two lawyers from Ernst & Young as partners; Washington-based Shaw Pittman hired six lawyers from PricewaterhouseCoopers, including two partners; and two tax litigators from McKee Nelson joined Latham & Watkins as partners. Gerald A. Kafka, a tax controversy lawyer who left McKee Nelson for Latham, said, “The effects of Sarbanes-Oxley were a consideration” in his departure. A spokesman for PricewaterhouseCoopers denied that Sarbanes-Oxley and the new auditor independence rule had triggered an exodus of lawyers from the Big Four to law firms and said that his firm had lost only 2% to 3% of its tax business revenue to law firms. Ashraf predicts tax lawyers will continue to move from Big Four-related tax businesses to law firms in the near term, but she said that whether the pattern continues will depend upon the strength of enforcement of standards by the Public Company Accounting Oversight Board.

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