Oral Testimony of Roger Page,
National Director of Merger and Acquisition Services
and of the Washington National Tax Practice at Deloitte & Touche LLP
Roger Page, National Director of Merger and Acquisition Services and of the Washington National Tax Practice at Deloitte & Touche LLP, was the first speaker. There are over 900 lawyers at Deloitte & Touche in the United States. Mr. Page’s prepared remarks focused on three areas of concern: 1) perceived incompatibility between the lawyer’s duty of confidentiality and the CPA’s role with respect to disclosure of information in financial statements of public companies, 2) potential advantages to lawyers in participating in integrated services firms, and 3) perceived threats to a lawyer’s public service responsibilities from participation in an integrated services firm.
Professor Daly began the questioning by referring to the hypothetical alternative structures for multidisciplinary practice posted on the Commission’s website, specifically Model 4 which is the contract model. A professional services firm contracts with an independent law firm, sometimes referred to as a captive law firm, and the contract between the two might include terms such as: the law firm agreeing to identify its affiliation with the professional services firm on its letterhead and business cards, the law firm and professional services firm agreeing to refer clients to one another on a nonexclusive basis, and the law firm agreeing to purchase services and goods from the professional services firm. One variant on that model might be a professional services firm contracting with a single law firm, with the law firm having one location or multiple locations. Another variant might be the professional services firm contracting with a series of independent law firms around the globe. Mr. Page identified the contract model as what exists today in Europe for his firm and other Big Five firms. He said the separation between the firms with no profit sharing would only partially achieve the benefits of the fully integrated, seamless service that could be delivered by a Model 5 firm. He said Professor Daly’s proposed hypothetical that assumes the provision of back office services but no fee sharing creates automatically a lot of transfer pricing issues that have to be resolved, and he questioned why the profession would want to raise these types of regulatory issues. Adding facts to the contract model Professor Daly asked where the accounting firm has done work for the husband’s business and the wife goes to the captive law firm for a divorce whether the lawyer in the captive law firm must do a conflicts check in accepting the wife’s representation. Mr. Page said where there is a contractual relationship between the law firm and the accounting firm there is no basis to impute the knowledge of the clients of the accounting firm to the law firm. He said the ABA rejected such an analysis in 1994 and it is clear that the accounting firm could only share client information with the law firm when they teamed together and the client consented. There is no imputation within a law firm network. Professor Daly probed regarding the situation of Accountant Daly teaming up on a different matter with the same lawyer who was handling the divorce and Mr. Page concurred that there would need to be a wall between the professionals precluding them from discussing any details of the divorce. Professor Daly asked the outcome if the same facts were applied to Model 5, the fully integrated firm hypothetical Mr. Page said that under the rules of the accounting profession today there is imputed disqualification of the firm if the clients are directly adverse. The difference in the accountant’s rules is that every conflict is waivable with full disclosure and consent of the parties. Despite waiver, he said the confidentiality rules require that the individual who was involved in the prior financial matter would have to be walled off from any involvement in the divorce matter. He agreed with the characterization of the accounting rules that said an accounting firm would be precluded from going to a client to seek consent if doing so would reveal confidential information. He explained the firewalls used in an M & A transaction where the accounting firm represented competing bidders for the same target as follows: the disclosure to the clients would typically include a full description of the firewalls; the engagement team leaders would report directly to him alone as director of the M & A practice to ensure the appropriate allocation of resources and complete and continued separation of professionals; as all files would be secured; passwords would be used on all computers: code names would be used to identify the clients; and the engagement teams would be encouraged not to discuss even the fact of the engagement outside the team. He said self-preservation drives the creation of firewalls as there is a lot of liability exposure in the event of a breach of confidentiality because of the access to sensitive information in a competitive situation. He doesn’t believe physical proximity matters. Mr. Page wasn’t aware of instances where his accounting firm used advance waivers. Asked by Professor Haddon for more information on the mentoring process, Mr. Page said partner mentoring would involve a manager (a four to seven year employee) selecting a partner as mentor based usually on career interests. The manager and his or her mentor meet at least twice a year to review how the manager is doing (evaluations) and to jointly develop a career plan that may involve additional educational opportunities. In addition , the mentor coaches the manager on speaking and presentation skills or computer skills, and review of client assignments. He explained that ethical and independence matters are usually referred to a professional practice director located in each practice office who deals with these issues on a full-time basis, with a group at the headquarters office in Wilton, Connecticut serving as the ultimate arbiters. Mr. Mundheim asked why the contract model provides more difficulty in providing an integrated set of services to clients (than Model 5). Mr. Page responded that an ad hoc affiliation doesn’t provide seamless activity because the parties don’t have the same communication system. Separate profit pools miss the economic link that get the parties totally on the same page. He said it’s a continuum and whether activity can get sufficiently seamless with less than a hundred percent integration would depend on the bells and whistles added. Mr. Page said Deloitte & Touche would comply with the conclusion of the Independence Standards Board regarding the impact on the Independence Rule of a professional services firm with an audit assignment taking on a legal assignment, acting as an advocate, for the same client. Judge Friedman asked what the 900 lawyers at Deloitte & Touche would be doing differently if the lawyer regulatory rules were changed. Mr. Page said some would do exactly what they are doing today as most are in the tax practice and give tax compliance advice to clients, render tax opinions, work on IRS exams and write protests. Others, who from prior law firm background have substantial tax litigation experience, might expand the scope of their practice to include tax litigation. When recruiting at law schools Mr. Page mentions the above list of tasks and explains to law students that at Deloitte & Touche they won’t draft documents such as contracts, and wills and trusts. He thinks in his firm they stamp documents ‘privileged’ rather than ‘attorney/client privileged’. Asked by Ms. Garvey what additional things a multidisciplinary firm would do when they add lawyers Mr. Page said that decision hadn’t been made but that it would make sense in the merger and acquisition practice to add the type of corporate and securities and tax and creditors’ rights lawyers that comprise a takeover team. She questioned whether with more players and more conflict there shouldn’t be more concern about malpractice and further civil suit; Mr. Page said the only way to regulate these types of issues is to regulate the individual. Ms. Garvey questioned whether that was realistic and whether one didn’t have to enforce all that surrounds the person. Mr. Page said the easy net to go to in accounting firms with these issues is the professional practice group as they are advocates for enforcement of independence obligations, also the professional’s license is on the line for the conduct of those working under them. Asked by Mr. Traynor whether the lawyers in professional service firms tell their clients up front, in a non-tax situation, that they do not have the attorney-client privilege Mr. Page said the lawyers do not hold themselves out as lawyers so the client typically never asks whether it’s a lawyer they’re dealing with and they don’t necessarily expect that person to be a lawyer. Though the client may, upon meeting, have seen that person’s resumé that says he or she went to law school the business card doesn’t indicate a lawyer status. He said accounting firm lawyers don’t give the expectation that they are providing legal advice and therefore the client does not expect the communication to be privileged. When they are providing tax advice they do communicate to clients the existence of the new federal tax practitioner privilege and describe how it works. Although they don’t usually point out that they don’t have the privilege protection, if there is a hint of a criminal tax matter the accounting firm lawyer will tell the client to seek legal advice because their communications are not privileged. In response to Mr. Rosner’s client confidences question, Mr. Page said that when a lawyer left an engagement team he or she did not take the client confidential knowledge as well as technical information and techniques with him or her to the next engagement. Acknowledging that there is a nondisclosure obligation, other than the SEC statutory one, when an accountant learns about a violation of law and an obligation to resign the assignment if the client refuses to authorize the auditor to disclose, Mr. Rosner asked what, if any, obligation the withdrawing auditor has to share the reason for the withdrawal with the successor auditor. Mr. Page cited the 8k requirement that requires the auditor to disclose the reasons for the resignation, but the SEC provision only applies to public companies. Mr. Page wasn’t sure the AICPA Code of Conduct included an ethical rule on the subject. He said it’s firm procedure, right on the checklist, that talking to the prior auditor is one of the first things done. He said under the AICPA Code direct adversity, representing both sides of a merger/acquisition or different bidders for a target company, would be permitted only with client consent and disclosure. Asked if Deloitte & Touche would accept a regulatory regime that imposed rules on the firm he said they would not favor that approach. Dean Powell asked why it is better to have confidentiality rules that impose the obligation on the individual as opposed to the firm, the collective. Mr. Page responded that in a multidisciplinary environment regulation of the individual is the only way that makes sense, that is, each discipline should regulate its own. He thinks a rule that says whichever professional rule gives the most protection to the client ought to govern would be unworkable because it would be totally impossible to figure out the right answer most of the time. In response to the Chair, Mr. Page said Deloitte & Touche would make its attorneys available (and give them billable hour credit) to contribute thousands of hours as well as support staff to a death penalty case or to assist hurricane victims. He said holding out with a business card that says CPA is holding out to practice accounting and he thinks the same approach should apply for lawyers. He thinks it’s a gray area to assemble a team and introduce a member as a former dean of a law school or having 35 years of law practice experience; he said Deloitte & Touche introduces team members by their function, their specialty area such as tax or audit partner, rather than what they did when they practiced law three years ago. The question, he believes, has two elements, one is holding out and the other is client expectation. He said clients come to Deloitte for advice about tax matters, accounting matters, financial matters - they don’t expect to receive legal advice.