Washington, D.C. 20549
July 12, 1999
Philip S. Anderson, Esq., President
American Bar Association
541 North Fairbanks Courts
Chicago, IL 60611-3314
RE: Report to ABA House of Delegates on Multidisciplinary Practice
Dear Mr. Anderson:
We understand that the ABA House of Delegates may vote as early as its August meeting on recommendations contained in the report prepared by the ABA Commission on Multidisciplinary Practice ("MDP Commission"). We are writing to express our concern that the MDP Commission’s report may be misinterpreted by some as suggesting (Endnote 3) that there are no existing Securities and Exchange Commission rules that govern the provision of legal services by auditors and that the SEC is simply deferring to the Independence Standards Board on the critical auditor independence issues raised by multidisciplinary practice.
To the contrary, while the SEC has taken no position on multidisciplinary practice per se, the SEC has long made clear that its independence rules prohibit an auditor from certifying the financial statements of a client with which his firm also has an attorney-client relationship. Indeed, just several weeks ago, the SEC issued an order formally disciplining an attorney-accountant who gave legal advice to an audit client of another partner in his accounting firm. In its order, the SEC reiterated its long-held position that the attorney-client relationship is inconsistent with the independence required of accountants in reporting to investors. Matter of Charles E. Falk, Exch. Act Rel. No. 41426, AAE Rel. No. 1136, 1999 SEC LEXIS 1013, 1999 WL 311802 (SEC) (May 19, 1999).
In United States v. Arthur Young & Co., 465 U.S. 805 (1984), the Supreme Court stressed the importance of auditor independence – and the "public perception" of auditor independence – to the mission of the SEC:
"… The SEC requires the filing of audited financial statements in order to obviate the fear of loss from reliance on inaccurate information, thereby encouraging public investment in the Nation’s industries. It is therefore not enough that financial statements be accurate; the public must also perceive them as being accurate. Public faith in the reliability of a corporation’s financial statements depends upon the public perception of the outside auditor as an independent professional. …If investors were to view the auditor as an advocate for the corporate client, the value of the audit function itself might well be lost. …"
465 U.S. at 819 n. 15. Consistent with this Supreme Court reasoning, the SEC has for some time stated in Codification of Financial Reporting Policies § 602.02.e.ii that:
"A legal counsel enters into a personal relationship with a client and is primarily concerned with the personal rights and interests of such client. An independent accountant is precluded from such a relationship under the securities acts because the role is inconsistent with the appearance of independence required of accountants in reporting to public investors."
The Recommendation of the MDP Commission notes that all rules of professional conduct that apply to a law firm should apply to an MDP. It may well be that these rules prohibit an MDP from providing both legal and audit services to a client. In any event, as the House of Delegates considers the MDP Commission’s report, all involved should realize that the SEC will continue vigorous enforcement of its rules on auditor independence and that, unless and until those rules are modified, those rules prohibit an auditor from certifying the financial statements of a client with which his firm also has an attorney-client relationship.
Very truly yours,
Harvey J. Goldschmid
Lynn E. Turner
Richard H. Walker
Director of Enforcement