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The regulatory debate over lawyer-accountant partnerships just took a step sideways. The Securities and Exchange Commission’s new rules on auditor independence have something bold to say about accountants practicing law: “We believe that there is a fundamental conflict between the role of an independent auditor and that of an attorney,” the SEC writes in explanatory notes to the rules, which take effect February 5. So the multidisciplinary-practice debate is over, right? Well, no. A close reading of the rules reveals enough ambiguity and waffling that the Big Five accounting firms are sure to maintain the status quo in the legal market. Which means continuing to make tentative inroads in the U.S. while growing to monolithic proportions in Europe. Here’s how that clear SEC principle turns to mush: The independence rules are focused primarily on policing the sale of consulting services to audit clients. The Big Five fought mightily to avoid an outright ban. They were particularly concerned with protecting their computer-systems consulting work. In the end, the accountants won important compromises from an end-of-the-Clinton-era SEC. So what do the rules say specifically about legal services? Essentially, accounting firms will be barred from offering any service to an audit client that can only be performed by a licensed American lawyer. There are two loopholes in that: First, it is difficult to determine what is the exclusive province of American lawyers. Except for obvious activities like representing clients in court, the states either don’t define the practice of law or define it inconsistently. It’s this very ambiguity that undercuts the American Bar Association’s stand against MDPs [Bar Talk, "What, Me Worry?" September 2000]. Even if the lawyer-accountant boundary line were clear, the SEC’s next minefield is what to say about the huge law firm affiliates of the Big Five in Europe. How can the SEC — which regulates audit clients that have registered public debt or equity offerings — meddle in European affairs? Because a significant share of the Big Five’s foreign legal work is on behalf of SEC registrants. In effect, the SEC has decided to play the part of a hip parent. “We know what you’re up to overseas,” it’s telling accounting firms. “And we’ll let you continue so long as it doesn’t get out of hand.” Accounting firms’ lawyering overseas must be limited to work that is “not material” to the financial statements of audit clients or that is “routine and ministerial.” And that means . . . what exactly? In an interview, David Becker, general counsel of the SEC, offers no rule of thumb for materiality, noting that it depends on the client. He defines “routine” and “ministerial” as “the kinds of things that don’t require much in the way of analysis and discretion,” such as perfecting a security interest or filling in blanks in a form contract. Here’s the best part: To fall within the exemption, legal work can be either immaterial or ministerial. So, Becker concedes, an accounting firm could do legal work deemed material so long as it is only ministerial. Or vice versa. For example, he says, a firm can file a certificate with a clerk’s office (grunt legal work, in other words) even if it is in the service of an audit client’s $300 million, multinational deal. “That wouldn’t give us heartburn,” says Becker. But you can bet that some accounting firms will venture into heartburn territory. “Materiality is all things to all men,” says Nick Holt, the London managing partner of KPMG LLP’s KLegal. “I’d rather be robust about it and decide what is material within KPMG rather than reserve to the SEC that decision.” Joseph Petito, a PricewaterhouseCoopers LLP partner in Washington, D.C., says that “materiality” is an accounting term of art, so “if anybody knows what is material, it should be accountants or law firms with relationships to accountants.” So what is it? “It depends on the situation . . . and what the client does,” Petito says. “If someone makes a big mistake, the SEC will catch it.” In other words, it may take a mistake for the SEC to apply some stern parenting to accounting firms and their legal affiliates.

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