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Opponents of letting accounting firms into the U.S. legal business have a new battle cry: Remember Enron. Controversy surrounding the actions of accounting giant Arthur Andersen before the collapse of Enron “seems to me a complete vindication of everything we wrote in the year 2000,” says Robert MacCrate, a Sullivan & Cromwell senior counsel. MacCrate is referring to a report issued two years ago by a committee that he chaired, the New York State Bar Association’s Special Committee on the Law Governing Firm Structure and Operation. Its report on the Big Five law-related practices warned the legal profession of the risks of “nonlawyer influence.” The report led to new rules in New York State on so-called multidisciplinary practice (MDP). The growing Enron scandal, and Andersen’s dual role as accountant and consultant, MacCrate says, shows the kind of conflict lawyers could face if their law practice were based in a Big Five firm. Andersen has admitted that it destroyed documents and e-mail messages relating to its work for Enron. The firm is grappling with contentions that its auditors signed off on questionable partnerships that concealed Enron’s financial problems, and that it attested to misleading financial statements. Andersen was fired as Enron’s auditor Jan. 17. MacCrate says the debacle is certain to be invoked in the MDP debate at the ABA’s midyear meeting, which starts Jan. 30 in Philadelphia. The New York Bar Association is asking the House of Delegates to endorse changes to its Model Rules of Professional Conduct to prevent nonlawyers in lawyer-owned nonlegal businesses from directing or regulating the professional judgment of lawyers in their rendering of legal services, limit contractual relationships between lawyers and nonlawyers in multidisciplinary relationships, and to ensure a client’s informed consent to any such arrangement. The broad debate over multidisciplinary practice concerns whether lawyers can practice with nonlawyers by arrangements such as sharing fees or business ownership. Some of the debate concerns what services, other than law, a law firm may provide. But the heart of the controversy is over the Big Five firms’ desire to become providers of legal services by offering their clients multidisciplinary services, including both accounting and legal services. The Big Five firms — Andersen, Ernst & Young, KPMG International, PricewaterhouseCoopers and Deloitte Touche Tohmatsu — are trying to expand into legal services. Worldwide, Andersen Legal is ahead of its rivals. In effect, it is one of the world’s 10 largest law firms as measured by gross annual revenues. It ranks second in the number of lawyers, with about 2,880. The Big Five advance into the legal business has ignited a conflict between the U.S. legal and accounting professions. By early 2000, it appeared that the U.S. law profession had softened its stance and would be more amenable to the notion of permitting multidisciplinary practice. But the Big Five’s U.S. ambitions suffered a major blow at the ABA House of Delegates meeting in July 2000. A resolution introduced by MacCrate resulted in a 314-106 vote to encourage states to prohibit lawyers from sharing fees or control of law firms with nonlawyers. Since then, there have been some moves on the state level both toward and away from multidisciplinary practice, but no groundswell of support for admitting the Big Five into the legal profession. The Enron collapse seems unlikely to help the MDP cause. MacCrate says that before the collapse, the role of Andersen as auditor may have conflicted with its role as a private consultant to the company. Had Andersen also been providing legal counsel to Enron, he says, a similar conflict would have existed. EFFECTS ABROAD An association of law firms spanning six continents, Andersen Legal has attracted high-quality foreign law firms and some internationally respected lawyers. Tony Williams, former managing partner at Clifford Chance, now serves as a worldwide managing partner at Andersen Legal. Prominent lawyers joined the Andersen Legal network anticipating an affiliation with the Big Five firm would offer technology and joint marketing opportunities. In addition, there was an expectation that the Andersen name would offer instant credibility. Now, some lawyers, including some at Andersen Legal, are asking whether the name will be a liability. Several observers say that Enron reflects only on Andersen’s auditing practices and won’t hurt its consulting or legal practices. Richard Miller, general counsel at the American Institute of Certified Public Accountants, says that Enron has “nothing to do with practicing law within an accounting firm.”One Andersen Legal attorney in Latin America, however, says the crisis “could have a huge impact on our image before clients.” Others say the collapse could add to discomfort with nonaudit services by auditors. “There’s going to be a lynch mob out there and it may have large consequences” for nonaudit services provided by auditors, says William T. Allen, director of New York University’s Center for Law and Business and former chancellor of Delaware’s Court of Chancery. At the request of the SEC, he chaired the Independence Standards Board, which considered consulting and legal services by accounting firms in light of concerns over auditor independence. As for the delivery of legal services by the Big Five, Allen says, “I think this just creates another impediment if the accountants are trying to get into the practice of law. The future may still be in MDP, but this kind of event probably delays what I think is an inevitable evolutionary trend.” Some of Enron’s legal advisers have ties to Arthur Andersen affiliates that could raise questions if Enron and Andersen become legal adversaries. Advising Enron on its bankruptcy and related matters is Weil, Gotshal & Manges, which is linked to Andersen Legal through Andersen Legal’s Singapore-based member firm, Rajah & Tann. The strategic alliance of the law firms, announced in July 2000, was believed to be the first such collaboration between a U.S.-based law firm and a Big Five-related law firm. In addition, Weil represented Arthur Andersen in a proceeding in Texas over allegations of unauthorized practice of law, and it represented the firm in an arbitration when Arthur Andersen fought Andersen Consulting over their breakup. A Weil Gotshal partner says that his firm had considered conflict of interest questions before agreeing to represent Enron in the bankruptcy and related matters. Citing Weil’s strength in the bankruptcy area, attorneys outside of Weil said they found its representation of Enron to be appropriate. Sullivan & Cromwell, MacCrate notes, is representing an Andersen partner fired in the Enron crisis. SEPARATE FUNCTIONS Enron “emphasizes the importance of separating the consulting — and in that word I’m including legal services — from the audit function,” says Sherwin P. Simmons, chairman of both the tax group at Steel Hector & Davis and chairman of the ABA’s former Commission on Multidisciplinary Practice. “The commission in our report constantly stressed that. The SEC constantly stressed that.” Simmons predicts that the Enron crisis will put MDP initiatives under added scrutiny. “Any state which changes its rules to permit MDPs will certainly want to take another look at the provisions permitting the structuring of legal services with audit services, which is a real, major problem,” he says. In addition, he says, the Big Five international law networks may face increased attention from federal regulators. “Often you need a terrible catastrophe to move things further along,” Simmons says, predicting that the Securities and Exchange Commission will be pressured to take a closer look at the global law practices associated with the Big Five firms. David M. Becker, SEC general counsel, says it is too soon to tell whether the Enron fallout will extend to the Big Five’s law networks. As for whether the Enron disaster will ultimately dampen the Big Five firms’ interest in legal services, John A.C. Keith, former president of the Virginia State Bar and chairman of Virginia’s Joint Commission on Multidisciplinary Practice, says, “It may make them want to get into law practice all the more — to get out of auditing.”

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