WRITTEN REMARKS OF ROGER L. PAGE
National Director – Washington National Tax Practice
Deloitte & Touche LLP
Aba Commission On Multidisciplinary Practice
March 11, 1999
My name is Roger Page, and I am the National Director of Merger and Acquisition Services and of the Washington National Tax Practice at Deloitte & Touche. My formal education and training is both that of a lawyer and a Certified Public Accountant. I am a member of both the American Bar Association and the American Institute of Certified Public Accountants. However, like the other 900 plus lawyers at Deloitte & Touche within the United States, I do not practice law or hold myself out as a lawyer. Deloitte & Touche is today a multidisciplinary professional services firm with over 82,000 employees serving clients in 130 countries.
While there are a number of issues that are relevant to your deliberations, today in my prepared comments I would like to focus on three areas of concern that I understand have been raised by previous witnesses. These issues involve the perceived incompatibility between the lawyer's duty of confidentiality and the role of the CPA with respect to disclosure of information in financial statements of public companies; the potential advantages to lawyers in participating in integrated services firms; and the perceived threats to a lawyer’s public service responsibilities from participation in an integrated services firm.
Prior witnesses have expressed concern that the professional duties of lawyers and accountants offering attest services cannot be reconciled. Mr. Fox argued that "the core value of the attest function . . . is the public disclosure of material information". He goes on to say, "Just when a legal client may most want to preserve a confidence, [an auditor in] the accounting firm will be compelled to disclose it." Even the potential for this matter to be an issue would only arise where a public company received both its audit and legal services from the same multidisciplinary firm. Further, this argument demonstrates a fundamental misunderstanding of the obligations governing accountants and the relationship of the auditor and client management in the preparation and disclosure of financial information to the public.
Management of a public company, and not the outside auditor, bears the ultimate responsibility to prepare and disseminate accurate financial information about the company to users of financial statements. The auditors’ role is to examine, on an independent and objective basis, that financial information for its completeness and conformity with generally accepted accounting principles. In fulfilling that role, the CPA is guided by a set of standards of practice that include the requirement to maintain the confidentiality of client information. [Rule 301--AICPA Rules Of Professional Conduct]
The duty to render an informed, objective audit opinion does not override the duty to keep client information confidential. Despite Mr. Fox’s assertions to the contrary, CPAs may not disclose any confidential information without the specific consent of the client, even when the preparation of audit opinions is involved.
Of course, a CPA cannot attest to a financial statement that he knows is false or misleading or is not prepared in accordance with generally accepted accounting principles. Even in these circumstances, the CPA cannot disclose confidential information himself. Instead, generally accepted auditing standards provide a path to properly deal with such matters.
If the client initially believes that certain information, because of its confidential nature, should not be disclosed in its financial statements but the auditor deems that such information is required to be disclosed under generally accepted accounting principles, the auditor may not disclose the information. Instead, the auditor must, either render some type of modification of his opinion on the financial statements, disclaim an opinion or withdraw from the engagement. The first two of these consequences serve to focus on the fact of the omission without its disclosure. Such reports by auditors, which are deemed curable by additional disclosure, are not acceptable to the Securities and Exchange Commission and withdrawal sends its own special message to the capital markets. However, even in this circumstance it will be the client and not the auditor that must make the decision to disclose the information to the public or deal with the consequences of a modified opinion on the financial statements.
There is one instance in which an auditor would be required, in the absence of appropriate action by the client, to disclose information that may be confidential. Under the Private Securities Litigation Reform Act of 1995, if an auditor, in the course of his audit of an SEC registrant, uncovers evidence of fraud or other illegal acts, the auditor is required to immediately report his concerns to the audit committee or full board of directors. The audit committee, or board, is required by law to inform the SEC within one business day. Only if the client fails to make notification to the SEC, would the auditor then be required by law to contact the SEC directly and inform them of his concerns. Even in this circumstance, the communication is not a public filing, but rather a private communication with the SEC. In this instance, Congress has determined that the interests of the public and confidence in the capital markets override the auditor’s duty to keep confidential information regarding client affairs.
With respect to matters involving the federal securities laws, the lawyer also has his own obligation not to knowingly participate in any violation by the client of the disclosure requirements of the securities laws or to further fraudulent conduct of his client. Moreover, the lawyer has a responsibility to advise his client of his obligation to disclose relevant information and urge his client to disclose such information to the auditor. These obligations run to the lawyer no matter where he or she practices. While the lawyer is not required to breech the confidence to make disclosure in these circumstances, as I understand the ABA Statement of Policy Regarding Lawyer’s Responses to Auditors’ Request for Information and various state laws governing lawyer conduct, the lawyer would be required to withdraw representation either with or without giving details in the event that the client rejected his advise to disclose. The withdrawal of representation by the lawyer serves as a "red flag" for CPAs who are auditing the client’s financial statements.
So the decision to disclose confidential information can only be made by the client -- not the CPA and not the lawyer. CPAs who disclose client information without client consent may be disciplined for violation of AICPA professional standards as well as for damages caused by the disclosure.
In substance, from my point of view, CPAs and lawyers have the same duty to preserve client confidences. I recognize that, unlike a lawyer, a CPA may be compelled to disclose otherwise confidential information pursuant to a subpoena or other court order. But even this distinction is narrowing. Congress recently enacted an amendment to the Internal Revenue Code that grants federally authorized tax practitioners, including accountants, in non-criminal federal tax proceedings a limited statutory privilege that is equivalent to the attorney-client privilege.
Notwithstanding these similar obligations, some still maintain that the duties of confidentiality of a lawyer and an auditor could not be compatible were they to practice in one firm. Again, I must disagree. As I understand the rules relating to attorney-client privilege, a privileged communication exists between the client and the lawyer, not the client and the firm in which the lawyer practices. Adding the attest function to the range of services offered by the firm does not change the obligation of the lawyer to preserve client confidences. Should a client elect to obtain attest and legal services from the same firm, the lawyers in the firm would be required to honor all their professional obligations in the same manner they would if they practiced in another firm. Where a lawyer would have information that may be relevant to an auditor's inquiry respecting material contingencies, the lawyer could not disclose the information to the auditor without client consent. The lawyer would have the same responsibility to the client as exists today for a lawyer practicing outside the MDP.
One additional procedure used in my firm and other MDPs today to protect client confidential information is the use of firewalls between the different engagement teams. But Mr. Fox tells the Commission to beware of firewalls and argues that "there are no firewalls at any accounting firm." His flat assertion just has no basis in practice.
The marketplace has long accepted our procedures for maintaining effective firewalls as evidenced by the fact that we continue to serve major competitors in various industries. Since the five largest public accounting firms collectively serve as auditors for approximately 90% of all public companies in the United States, it is inevitable that multiple competitors in the same industry will often use the same audit firm and even separate engagement teams from the same office. My firm has a very substantial merger and acquisition practice in the United States and has often been involved in situations where separate engagement teams were serving multiple competing bidders for the same target company.
Every time these types of situations arise, we establish effective firewalls to ensure the confidentiality of client information and obtain the informed consent of all parties. I can think of no better market place validation of the effective use of firewalls than the trust expressed by the actions of these very sophisticated users of professional services to rely on the firewalls we put in place in these circumstances.
Let me add one other thought. This supposed conflict, which I do not believe exists, is more theoretical than practical. Most of our clients are not SEC registrants for whom we provide audit services. For our 2,330 SEC clients, each would need to make an independent determination whether to seek audit and legal services from the same firm. In making that determination the potential client would consider the issue of confidentiality of information. As well, the audit firm must consider whether in accepting an audit engagement from a client receiving legal services from the same firm would present any irreconcilable issues with respect to client confidences and other matters. Obviously, this entire discussion presumes that a client could receive audit services and legal services from the same firm without impairing the firm’s independence. Currently, the Independence Standards Board is undertaking a project to examine under what circumstances, if any, an audit firm or its affiliates could provide legal services for an SEC registrant. We are working with the ISB on this issue and will, of course, follow the guidelines developed.
I want to turn now to address the expanded opportunities that could be available to lawyers in practice structures outside of today’s traditional law firms. As this Commission observed in its background paper, the client demand for professional services is changing rapidly. Clients large and small are demanding comprehensive advice from teams of professionals. Today, my firm and many others offer integrated professional services to clients, with the exception of legal advice. We already have a long history of regularly teaming professionals from different disciplines to work together and develop a relationship of trust and cooperation and a range of knowledge and experience to deal with client problems. Our clients have found that the collective expertise of professionals means more efficient, value added service.
You heard last month from Abbie Willard, Associate Dean of Georgetown Law School, that young lawyers working at law firms are often dissatisfied with their work environment because of the competitive environment, the emphasis on billable hours, the lack of workplace flexibility, the shortage of training opportunities, and the absence of mentors. My firm believes that human capital is our most important asset and that providing a supportive workplace can improve retention as well as productivity of high talent professionals and give our firm a competitive advantage. The attitude of our people to these types of workplace issues is something we continuously monitor through independent surveys and mentor feedback.
In order to prepare for today’s testimony, I reviewed a series of interviews that we conducted in 1998 with lawyers who had joined our firm after having practiced in a law firm. The reasons given for leaving the law firm environment were consistent with the prior testimony of Abbe Willard. More importantly, the positive experiences of these lawyers after a year with our firm included the satisfaction of being able to bring a variety of experience to bear on client problems, a flexible work environment, a more horizontal management structure that empowers professionals to be creative and more entrepreneurial, the ability to specialize and be supported by specialists in other disciplines, and financial rewards. Our personnel with legal backgrounds tell us that they value our collegial atmosphere that emphasizes and rewards teamwork in serving clients and believe they are more valued for their individual contribution. In a multidisciplinary services firm there is greater opportunity for multiple career paths better matching individual needs and goals. We take great pride in fostering an appropriate work life balance in our firm.
We believe, based on feedback from our lawyers, that the environment and culture of our firm is substantially more collegial than that of their former law firms. This belief is confirmed by the inclusion for the second year in a row on Fortune magazine’s list of the 100 Best Companies to Work For in America. We are currently ranked eighth on the list because of the high level of satisfaction among our employees and our progressive human resource programs. The primary basis for selection in the Fortune list is not what we say we do, but how our employees rate our human resources practices. The proof in the selection is not what the slick recruiting brochures say, but rather what our own people, chosen at random, say about their work environment.
In order to provide the kind of environment that fosters teaming and creative approaches to client matters, we have found it to be a business imperative to make sure that our firm fully embraces opportunities for women and minorities. Our human resources programs include the Initiative for the Retention and Advancement of Women, which was launched in April 1993. As a result of the Initiative, which is aimed at retention and advancement of high talent women, we have more than doubled the number of women partners at the firm, and more than doubled the number of women in key leadership positions. We have increased awareness of gender issues throughout the firm and made career planning and assignment reviews for high talent women and minorities a formal part of our operations. We offer flexible work arrangements so our professionals can better balance their work and the demands of their families. This has been so successful that, for each of the past four years, we have been selected by Working Mother magazine as one of the 100 best companies for working mothers. In September 1997, our Chairman, Mike Cook, received the Family Champion of the Year Award from Working Mother magazine.
We seek to improve the quality of the professional lives of all of our employees. We invest heavily in professional development and training. We pair young managers with senior partners in a mentor program. We require each of our professionals to obtain more than 40 hours annually of continuing professional education, which can be met through hundreds of classes that we offer internally.
Lawyers at law firms regularly complain that their work is narrowly focused and crisis driven, and that they are only called upon by clients to resolve disputes or to help close a deal. That is not the experience of professionals in our firm. We work closely with clients to develop innovative, practical and high quality solutions to complex problems that add value to their business. Clients view our relationship as an asset and seek our independent, objective advice to help them become more efficient, more competitive, and more profitable.
Of course, an integrated services firm may not be the answer for every lawyer. But the ethics rules should not restrict lawyers in their practice options. Different practice structures outside of traditional law firms can provide lawyers with immediate access to knowledge, resources and technology that may not be readily available to them today and a more meaningful role as client advisor. The opportunities for a lawyer to practice in a multidisciplinary environment should not and would not in any way diminish the core values of the legal profession.
Lastly, several witnesses have urged the Commission to repudiate integrated services firms because such firms would have no commitment to public service. As Mr. Fox put it, "Can we expect Arthur Andersen to take a tolerant attitude toward a death penalty representation?"
Lawyers have always had an admirable commitment to public service. But lawyers have no monopoly on public service. Giving back to the community is a significant part of my Firm’s culture and the accounting profession. One of the founders of our firm, Philip Ross, was celebrated by the Montreal Herald: in its words, "[n]o good work in the way of church, charitable, or educational interests ever came his way which failed to enlist promptly and largely his time, energy, and money."
We continually strive to honor Philip Ross’s legacy. In this regard, our Chairman, Mike Cook, leads by example. For instance, he recently served as Chairman of the Board of Governors of the United Way of America. Our firm policy on public service is clear - we expect our personnel to volunteer in the community and we recognize them for doing so. And we support the efforts of our people with substantial charitable contributions to community-based activities and programs. If practicing lawyers were added to our firm, our expectation would be for them to continue to provide pro bono services in the same manner as currently required by the various bar associations. In fact, by working in a multidisciplinary environment, a lawyer should have greater resources to draw upon in fulfilling his or her professional responsibilities.
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Several witnesses have likened the accounting firms to barbarians at the gates of the legal profession. But the core values of the legal profession -- confidentiality, independent judgment, and conflict-free advice -- are also central to the accounting profession. Modest changes to the model rules to permit lawyers to share fees and partner with non-lawyers will not compromise these values, but will allow lawyers to function more effectively in this multidisciplinary world and offer the comprehensive, integrated services demanded by clients.
Thank you for allowing me to participate at these hearings.