Enron Mess Gives a Boost to MDP Foes

Arthur Andersen's controversial handling of Enron Corp.'s books is sure to give fresh ammunition to critics of the marriage between the accounting industry and the legal profession, or multidisciplinary practice. At the heart of this ethical quagmire are the potentially conflicting roles of accountants and lawyers as independent auditor and client advocate, respectively.

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The controversy over Arthur Andersen’s handling of Enron Corp.’s books may not only stain the accounting giant’s reputation, but could be a fatal blow to a marriage between the accounting industry and legal profession. For several years, an increasing number of lawyers and accountants have advocated multidisciplinary practices, which in their purest form, allow nonlegal professionals like accountants to deliver joint services with attorneys and share legal fees. While proponents still argue that multidisciplinary practices — or MDPs — can be saved, the scandal at Arthur Andersen gives fresh ammunition to an array of critics who believe the idea is an ethical quagmire for lawyers. Their primary concern is that conflicts of interest may arise when accountants and lawyers are linked financially to the same client. And they argue accountants shouldn’t be supervising law firm business, in part because they do not have a code of professional conduct that is as strict as the one followed by lawyers. Professional conduct has been the key issue in the Enron mess. Andersen is accused of shredding key documents and helping Houston-based Enron cover up its questionable financial practices. “It won’t help,” said Arthur Garwin, who was staff attorney for the American Bar Association’s Commission on Multidisciplinary Practice. “Obviously, any time something of that nature and magnitude happens, it will make something like MDPs more difficult.” “I think it’s a complete vindication,” said Robert MacCrate, a New York attorney who helped kill an ABA resolution that would have given the bar’s blessing to multidisciplinary practices. So far, no state has given a green light to fully integrated multidisciplinary practices — and attorneys say the accounting industry’s problems will likely stall the issue further. But while MDPs in the strictest sense may have been derailed, attorneys say hybrid forms — such as law firm subsidiary businesses or alliances between law firms and other professions — will continue to emerge. Lawyers already have been engaged in referral networks which “come close to being MDPs in many respects,” said Thomas Steele, a Morrison & Foerster partner. “Is [the Arthur Andersen controversy] the death knell for MDPs? Not a chance,” said Steele, who was involved in MoFo’s 2-1/2 year alliance with accounting firm KPMG. But MacCrate, a former ABA president and senior counsel at Sullivan & Cromwell, said such so-called MDP models are a different kind of entity. “The important thing is that the control of law firms remains with the lawyers,” he said. FOUR-YEAR STRUGGLE The issue of MDPs came to the forefront in 1998 when the ABA established a Commission on Multidisciplinary Practice. At that time the Big Five accounting firms were acquiring law firms in Europe, in some places becoming the dominant source of legal service. The following year the commission issued a report recommending that lawyers and nonlawyer professionals be able to establish partnerships and share fees. That proposal was subsequently shot down in 2000 when ABA delegates from the New York State Bar Association won passage of a resolution prohibiting nonlawyers from sharing legal fees or owning or controlling a law practice. It’s up to each state bar, however, to adopt its own rules. The California State Bar’s task force on multidisciplinary practice issued a report in July voicing support for fully integrated MDPs in which lawyer and nonlawyer professionals would share profits and be co-owners of a firm. Many lawyers regard accounting firms as valuable partners in the drive to provide a full range of services. “The [MDP] issue is perceived to be turf-battling between lawyers and consultants,” said Ralph Baxter Jr., chairman of San Francisco-based Orrick, Herrington & Sutcliffe. What’s overlooked is “the public importance of providing ready access and efficient access to all the advice [a client] needs.” Rules that keep consultants out of the practice of law are “not in the best interest of the public,” he said. While full-fledged MDPs haven’t emerged in the United States, a few firms have established ventures with accounting firms. In Washington, D.C., lawyers took advantage of the D.C. Bar’s more relaxed MDP rules and started a firm with financial backing from Ernst & Young. Originally called McKee Nelson Ernst & Young, the accounting firm’s name was recently dropped from the masthead. William Nelson, a name partner of McKee Nelson, said the alliance with Ernst & Young is not truly a multidisciplinary practice, since the two don’t share profits and the firm is managed as an independent entity composed solely of lawyers. The firm initially did not represent companies that Ernst & Young audited. But since the firm has obtained independent bank financing and changed its name, Nelson said there is no longer any restriction on the types of clients it represents. MoFo’s alliance with KPMG, which ended about six weeks ago, also pushed the boundaries between the legal and accounting realms. Steele, who heads the firm’s San Francisco and Denver state and local tax practice groups, said the project allowed each group to educate the other about their business models and tax issues. As to how MoFo may work with KPMG in the future, Steele said the firm is “looking at what we’ve learned” and evaluating what’s next. The notion that law firms and accounting firms might one day put out a shingle together seems unlikely now. “A scenario in which law firms get into businesses other than the practice of law — such as serving as real estate brokers, benefits consultants or financial advisers — is benign, assuming appropriate disclosure and compliance with the applicable ethical rules,” said Cooley Godward partner Glen Kohl. However, Kohl, who previously had stints at Ernst & Young and the U.S. Treasury Department, said the core responsibility of an accounting firm is to provide an “assurance function” to the investing public. “The Securities and Exchange Commission has taken the position that this function, and the accounting firm’s role as an independent auditor, is inconsistent with the practice of law, which generally requires lawyers to be an advocate for their clients,” Kohl said. Arthur Andersen’s predicament “I think will have no effect on law firms’ drive to provide more services to clients,” Kohl said. “However, it will probably slow down the accounting firms’ march into extra professions.”

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