Summary of the Testimony of William D. Elliott
Before the Multidisciplinary Practice Committee
William D. Elliott of Kane, Russell, Coleman & Logan is past Chair of the Tax Section of the State Bar of Texas. He discussed the Arthur Andersen unauthorized practice of law case in Texas, which was terminated in July 1998. He explained that the Unauthorized Practice of Law Committee, a creature of the Texas Supreme Court and not directly connected to the State Bar of Texas, works through subcommittees of volunteers appointed regionally who are not always assured of expense reimbursement. Mr. Elliott said he drafted the complaint against Arthur Andersen that was filed by someone else. The complaint asserted broad allegations that the firm was: employing persons with law degrees and offering legal services to the public; forming legal entities - partnerships and corporations - for clients; drafting compensation agreements for clients; drafting estate planning documents, including trusts, for clients; and preparing and filing documents for and prosecuting tax court litigation. In vigorously denying it practiced law, Arthur Andersen hired Weil, Gotshal & Manges, along with two other law firms, which took aggressive measures against the investigation and narrowly interpreted document requests. The volunteer lawyer running the UPL investigation was a private practitioner with a family, who had to handle the investigation virtually by himself; he was overwhelmed. Only two subpoenas to Dallas-based corporate clients of the accounting firm issued and then the Texas UPL committee decided to terminate its investigation because it did not have sufficient proof of UPL violations. Mr. Elliott maintained that it was a lack of will, not a lack of proof, which thwarted the investigation; that the State Bar is not equipped to take on the big cases. Although no one - lawyers, ex-Arthur Andersen employees, general counsel - would talk for the record, Mr. Elliott stated that anecdotal evidence of UPL violations by accounting firms abounds. He mentioned training films inside Arthur Andersen on how to draft legal documents. He recounted conversations he has had with CFOs and general counsels, who have told him that their outside auditors had offered to draft administrative service contracts and Delaware incorporation papers. He stated that the client of a partner in a Dallas law firm, who was working on a merger of publicly held companies, had received an unsolicited transmittal of merger documents, from one of the Big 5 accounting firms, who were the auditors in the case. He further stated that he had been involved in transactions where a screen was offered as the excuse for an accounting firm being on both sides of an acquisition. The seller’s president told Elliott that the president had a problem with facts related to the golden parachute and employment agreement he was being required to sign for the acquiring company but he couldn’t tell the auditor because it would compromise the entire transaction and the financial statements that resulted. Mr. Elliott said young lawyers in the accounting firms are uncomfortable with these activities. The ABA ethics rules, Mr. Elliott maintains, allow no compromise in the areas of independence, that is, conflicts avoidance and confidentiality. These core values should be preserved. He thinks the European experience is irrelevant because the U.S. attorney-client relationship is unique.
In questioning, Judge Friedman drew a parallel between accounting firms and today’s large law firms, which are run like businesses, without the same loyalty between partners or to clients that once existed. Mr. Elliott disagreed, because the nature of the accounting firm’s legal work is dominated by audit, or at least business interests, rather than the interest of the client. Ms. Garvey later commented that if the audit function were split off - a measure the SEC might push - this would help. Mr. Elliott talked about ALR annotations which cite cases that set up the guidelines that the determination of the 'practice of law' revolves around - drafting documents, forming entities, advising that a particular form is suitable to the goals sought. He cited to Justice Holmes in saying that the ‘practice of law’ is a matter of prediction - the predicting of a consequence as a result of the advice and decision that’s being made, predicting the likely risk of this coming about or not. He also said it’s a matter of proportion and degree - the greater the legal question the more a client needs independent legal advice. He said his objection to the affiliation of lawyers with any other profession arose because clients’ interests are compromised if nonlawyers are involved as superiors of lawyers as the nonlawyers exert control. He believes that clients think that core values are important to them to the extent that, say, a conflict of interest would allow a client’s interest to be compromised to some other value. In response to Mr. Rosner’s request that Elliott consider the German MDP model where the professionals are held to the highest of applicable ethical standards and that only nonaudit professionals be included, he found no objection if the professional maintained a direct relationship to the client. He agreed with the Chair that Texas tax lawyers who had moved from a law firm to an accounting firm were performing the same tasks, that is, practicing law.