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When the Sarbanes-Oxley Act was passed earlier this year, opponents of multidisciplinary practice danced a jig. The law seemed to be the death knell of MDP — that grand vision of accountants partnering with lawyers to create one-stop megafirms. On its face, Sarbanes is indeed lethal. It bars accounting firms from offering legal services to any of their SEC-registered audit clients. That cuts out a lot of potential legal business. Pardon the Big Four accounting firms if they are less than impressed by Sarbanes. These firms have been around the block. They have labored now for almost two years under a regulatory jackboot — in 2000 the American Bar Association and the SEC both cracked down on MDP — yet the Big Four (minus their fallen comrade, Arthur Andersen LLP) have continued to build huge legal empires in Europe. The latest American regulatory heavies will be no more successful at stamping out these European law networks. Unfortunately for the accountants, though, MDP faces a much tougher opponent: the marketplace, which is moving quickly away from one-stop shopping. The accounting firms will have a harder time conquering this foe. Like the SEC before them, the drafters of Sarbanes sought to preserve the integrity of audits by circumscribing the relationship between accountants and their audit clients. The law provides that accounting firms can no longer offer legal services to their SEC-registered audit clients (as well as other services, such as human resources consulting). This law doesn’t just affect U.S.-based companies, but any company with securities registered with the SEC, which would include certain European clients of the Big Four’s law firms. How many clients isn’t known, but the European MDP landscape will be altered. “Sarbanes is a substantial and important limitation [on business],” says Antonio Garrigues Walker, a Madrid partner in the 1,000-lawyer Spanish law firm Garrigues, Abogados y Asesores Tributarios, which parted ways with the Andersen Legal network earlier this year. The Sarbanes provision barring legal services to audit clients could be softened a bit. Regulatory experts predict that the SEC will ultimately define the law so that it tracks the agency’s current auditor independence rule, which was passed in 2000 and took effect in February 2001. That rule, in line with the ABA model rules, bars accounting firms from practicing law in the U.S. But the SEC allows accounting firms to offer legal services to audit clients overseas, provided that the services are either “routine” or “not material” to a client’s financial statements. “The legislative history [behind Sarbanes] and the intent of Congress was … to codify the existing SEC rule,” says Thomas Riesenberg, associate general counsel of Ernst & Young LLP. But David Becker, the general counsel of the SEC under President Clinton, counters that the SEC is free to diverge from its current rule. “I don’t think the SEC is constrained on how they define legal services,” says Becker, a partner in the Washington, D.C., office of New York’s Cleary, Gottlieb, Steen & Hamilton. If the current SEC rule remains in effect, it will need to be fleshed out, since the agency has yet to define what it means by routine and immaterial legal services. European lawyers affiliated with the Big Four accounting firms claim that they haven’t taken chances with the SEC rule and do not even get close to the line of materiality. In the wake of the SEC rule, they say, they were forced to scale back the level of work they did for audit clients. Take as an example Landwell, a 2,850-lawyer network affiliated with PricewaterhouseCoopers. It adopted a set of compliance guidelines in response to the 2001 SEC rule that included warning any audit client of PwC that the firm couldn’t handle legal work for that client until the auditor first concluded that there were no independence problems. “When the current SEC independence rules were published, we took the view that … we would err on the side of caution. And I mean extreme caution,” says Paul Downing, a Landwell partner in London. “This inevitably means that we have lost some major work. In one instance, we couldn’t act for [a PwC] client in a huge pan-European acquisition.” No matter what Washington does, however, has the market already spoken? Companies have been chastened by Enron and other corporate scandals. European lawyers believe that some general counsel won’t use Big Four law firms, even when the law allows it, out of fear that it may raise an appearance of impropriety. “The marketplace has decided that it wants to split up its professional services,” says a partner in an Italian law firm affiliated with one of the Big Four. “I’ve spoken to many [corporate] people in different jurisdictions who say, ‘We aren’t going to get caught in a conflict. We don’t want an Enron on our hands. We want our auditors to be just auditors.’ “ David Hardie is hearing the same from his clients in Scotland. “There is a market desire as well as a regulation issue here. The market desire is to see professional services become more independent,” says Hardie, a partner with Edinburgh’s Dundas & Wilson, which was affiliated with Andersen until last June. Hardie says he is happy that his firm is now a free agent. “Many of our top clients are audited by the Big Four. If we had an association with one of the Big Four, it would inhibit our cause.” Of course, there’s always tax consulting to fall back on. Both in Europe and the U.S., the Big Four can and do offer tax advice to audit and nonaudit clients alike. In many countries, tax counseling is not the exclusive province of lawyers and is thus not a “legal service” barred by regulation. And the accounting-tied law firms can still mine the small and middle European markets, where there are many companies that do not access American capital markets and are thus not SEC registrants. In fact, these are the market segments where the Big Four law firms, at this point in their evolution, have had the most success. The Big Four have had a tough time graduating to the top rung of the legal food chain, and they will have an even tougher time now. Sarbanes and the shift in the European market’s appetite for MDP represent not just a loss of work for accounting-tied firms, but a loss of opportunity — the opportunity to parlay their audit connections into big-ticket corporate work. In short, the entire cross-selling logic of MDP is severely undercut, if not gone. “In the general counsel world, the accounting firms are still considered Brand X as far as legal work,” says John Peterson, the Palo Alto, Calif.-based chair of Baker & McKenzie’s global tax practice. “The [accounting] firms’ best opportunity to build a deal list and a base of experience to compete for high-end legal work was dependent on them getting a chance to do that work for their captive audit clients.” And now they can’t. European lawyers predict that European regulators will soon mimic the Americans and adopt auditor independence standards of their own. These standards, moreover, could reach European companies that are beyond the SEC’s reach. “Inevitably Europe will adopt the same rules,” says Antonio Garrigues Walker. Big Four lawyers have already adapted to the new accountant-lawyer divide, says David Temporal, of London’s Temporal Consulting, a law firm consultant. Temporal says he has spoken with Big Four lawyers, and they realize that they need to loosen some of their accounting ties. “Their view is that they need to establish themselves in their own right … and generate an independent client base,” he says. “What they might find is that by … taking a greater self- examination, there will be a greater opportunity for these firms to evolve into good stand-alone law firms.” Temporal believes, however, that firms that can bundle professional services will still be a hot commodity. It will just be a different-looking bundle than envisioned in the past. Big Four lawyers, for example, will continue to team with technology consultants — many of whom work for consulting firms that have spun off from the Big Four — on technology outsourcing deals. Lawyers and computer geeks. Now that sounds like a promising relationship.
Sarbanes-Oxley Act of 2002: What Lawyers Need to Know

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