Remarks Of Richard Spivak, March 1999 - Center for Professional Responsibility

ARTHUR ANDERSEN

MARCH 31, 1999

REMARKS OF RICHARD SPIVAK

Thank you for this opportunity to speak with the Commission on Multidisciplinary Practice. My name is Richard Spivak. I am a partner in Arthur Andersen LLP, and I am responsible for the firm’s tax practice in North America. I hold a license to practice certified public accounting in New York and Texas and a license to practice law in Texas, and I have been with Arthur Andersen since 1971.

The bar is now engaged in a debate regarding whether to permit practicing lawyers to join multidisciplinary firms. I urge you to recommend changes to facilitate such practices. As this Commission recognized in its background paper, we live in an increasingly complex world that is undergoing rapid and profound changes. Consumers of professional services -- whether individuals, small businesses, or large corporations -- increasingly have problems with legal, financial, and business dimensions. Consumers want to retain professionals with the necessary skills to solve these problems. For years, many lawyers have recognized that they do not have all these necessary skills. They have reached out to other disciplines and created ad hoc teams, with individuals from different firms and with different training, to work together on client projects. Today, lawyers work with individuals in regulated professions, such as accountants and engineers, and individuals in non-regulated professions, such as economists and environmental consultants. In effect, client expectations and demands have forced lawyers to create multidisciplinary teams -- which is exactly how market forces should work.

Multidisciplinary practice within one firm is not a revolutionary concept. It is simply a natural evolution from multidisciplinary teams already a reality of today’s marketplace. However, multidisciplinary firms, rather than ad hoc teaming, are essential to permit efficient and effective integration, coordination, and delivery of services and competencies. MDPs provide the ability to assemble and deploy professionals rapidly and with well-defined project leadership and accountability to clients. Such firms are also essential to share knowledge and intellectual capital to provide the best solutions to clients. MDPs also enable the communication networks and common methodologies that are so important in commerce today.

Let me be clear and perhaps state the obvious. My perspective is not altruistic. I believe that businesses must cater to market demands -- we ignore them at our peril. But I strongly believe that the market can be served consistent with the highest professional standards. Indeed, to do otherwise would be short-sighted and equally as perilous.

Permitting multidisciplinary practice does not require wholesale, radical changes to model rules of professional conduct, nor will it sound the death knell to the core values of the legal profession. In my view, changes to the fee sharing rule and the imputation rule are substantially all that is needed.

Opponents of these changes -- and there always are people who cry that any change will lead to destruction of the profession -- contend that fee-sharing between lawyers and non-lawyers will harm the client. They maintain that such a change would impair the lawyer’s professional judgment, and would leave the client without an effective remedy in the event that non-lawyers in an MDP acted improperly. But the opponents of change have little evidence to back up their claims.

There is, however, ample evidence on the other side. My firm today is an MDP, although we do not offer legal services in the U.S., and includes both licensed and non-licensed individuals. Our clients have benefited, and have not been harmed, as a result of combining diverse competencies. Regulation of professionals in my firm, or other similar MDPs, provides a useful model for this Commission, which I will cover in some depth shortly.

But before I turn to regulation, I would like to take a few moments to comment on what my firm does and does not do in the United States today. You have heard several witnesses speculate about this in the tax area, and I would like to set the record straight.

Arthur Andersen provides tax services to clients. As you know, state statutes allow accountants to furnish advice or consult on tax matters. Similarly, federal regulations permit accountants to practice before the Internal Revenue Service. It is under this clear state and federal authority that we practice.

We hire individuals trained as lawyers and licensed to practice law to provide tax services to clients. Hiring individuals trained as lawyers is not a new practice for us -- we have hired them for decades. Let me give you a personal perspective on our hiring practices. I began my career with Arthur Andersen in 1971 after graduating from the University of Texas. At that time, about 15% of our tax personnel had law degrees. Many of these lawyers had accounting backgrounds or, like me, were also licensed CPAs. I don’t believe our hiring practices have changed significantly in the 25+ years since I began my career. Over this period, the size of our tax practice has grown many fold and the number of professionals with law degrees has increased accordingly. But the proportion of those with law degrees is the same or maybe lower. Our strategy has not changed significantly. We hire the most qualified people we can, irrespective of their educational backgrounds -- whether undergraduate accounting, business or liberal arts; graduate business or tax programs; or law schools.

What do the individuals with law degrees do for clients? They perform the same services as individuals trained as accountants and CPAs. We help clients achieve their business objectives with minimum tax costs. Our advice is based on our professionals’ interpretation of federal and state tax codes, tax regulations, rulings, revenue procedures and relevant court decisions.

Even the preparation of tax returns involves numerous judgments about the tax law. It is more than a mathematical exercise in which the preparer checks certain boxes and inserts dollar amounts. The tax preparer must interpret the tax law in numerous areas to determine, for example, what receipts are includable in income, what expenditures are allowable deductions, the applicability of special provisions, and on and on. If you pay a non-lawyer to prepare your return, do you doubt that they are interpreting the tax law to accurately prepare your return? Is this the unauthorized practice of law? Certainly not.

To be sure, many of the tax consulting services performed by Arthur Andersen professionals -- including individuals trained as lawyers and as accountants -- are also performed by attorneys with tax expertise in law firms. Lawyers do not now have, and have never had, a monopoly on providing tax advice. The overlap between the tax services offered by a law firm and by an accounting firm does not mean that the accounting firm is engaged in the unauthorized practice of law. Put differently, being a lawyer is not a necessary precondition to providing these tax services. As I mentioned earlier, state and federal statutes are clear on this matter.

We recognize that existing ethical restrictions bar lawyers from practicing law in a partnership with other professionals, and we insist that our professionals adhere to these rules. We have adopted express written policies forbidding our professionals from practicing law. We dedicate substantial resources to training our professionals, and our training emphasizes the scope of our practice. We explain to our professionals that they may not prepare legal documents, such as wills, trusts, articles of incorporation, and corporate bylaws; they may not appear in court, unless expressly authorized by federal or state statute or regulation; and they may not hold themselves out to clients as offering legal services -- for example, they cannot place "J.D." or "Esquire" after their names on their business cards or in correspondence. Our engagement letters regularly caution clients to retain legal counsel to provide legal advice on non-tax matters, to prepare legal documents, or to appear in court.

Notwithstanding these practices, you have heard testimony to the effect that our professionals hold themselves out as lawyers and prepare legal documents for clients. You have also heard that the Texas UPL Committee investigated these allegations but simply lacked the resources to prosecute a UPL claim. I believe such testimony reflected rumor, hearsay speculation, and innuendo, rather than facts.

The Texas UPL Committee investigated these and other allegations for almost a year. It investigated rumors and reports brought to its attention by third parties. It obtained a written response from my firm and responsive documents. It also obtained materials through subpoenas directed to our clients. In the end, the Committee determined that there was not sufficient evidence to proceed -- the hallmark of a fair, deliberative process. This is exactly how the fact finding process in this country is supposed to work.

What I took away from the Texas investigation is the importance of being guided by the facts, not by the rhetoric of those seeking a particular result. Several witnesses have argued to this Commission that fee-sharing between lawyers and non-lawyers will compromise the values of the legal profession and harm clients. Of course, the public interest and client protection are the primary interests that regulation should protect. But, as you wrestle with how a multidisciplinary practice might be regulated, it is important to look behind the rhetoric of those witnesses who say your task is futile and determine what the facts really show.

As an individual with dual licenses in law and in certified public accounting, I believe that the values of the accounting profession are substantially similar to those in the legal profession. Both professions take seriously their duties to maintain public confidence and trust, and both enforce their respective codes of conduct. Those issues are vital, but I do not believe there can be any serious disagreement at this juncture about them. As a result, continuing to focus on them is only a distraction from what I believe is the more central issue before us.

In this consumer-driven economy, many users of professional services demand integrated, comprehensive services. The question, then, is how to regulate the individual service providers in such firms so that this demand can be met and clients and the public protected.

Let’s start with individuals trained as lawyers. As I discussed earlier, we hire individuals with law degrees, along with accountants and others, to provide tax services to clients. These individuals do not hold themselves out as lawyers or as offering legal services. These individuals do not offer services that have been traditionally considered to be legal services: they do not draft documents, they do not interpret or give advice regarding non-tax statutes, they do not appear in court (except in situations where non-lawyers may do so), and they do not maintain that communications with the client are privileged (unless such communications are covered by the new tax practitioner privilege). In almost 28 years of practice, I am not aware of a single situation where one of our clients believed our communications were privileged except where we worked for lawyers. There can be no client expectation that our professionals are offering legal services. The bar has never attempted to regulate, under client rules of practice, individuals trained as lawyers who are not holding out as practicing law. Today, these individuals are not governed by the legal profession’s ethics rules governing client relationships.

If we assume that the Rule 5.4 restrictions on partnerships and fee sharing were to be modified, there are many alternative practice structures that MDPs could consider. Whatever the nature of any such structure, I expect that individuals trained as lawyers will be a part of it. Individuals educated and licensed as lawyers should be regulated by the bar only when they create a client expectation that they are practicing law. To eliminate client confusion, individuals educated as lawyers who hold out as practicing law should be grouped in a law department, and should report to, and be supervised by, a lawyer in the law department. Individuals in this law department would be bound by professional rules of conduct and subject to bar regulation, and clients would have a reasonable expectation that an attorney-client relationship would be created, and attorney-client protections attach, to communications with lawyers in this department. A client could elect to assemble a team of professionals within one firm, or could use non-lawyers from an integrated services firm and bring in outside lawyers. No client would be required to use lawyers in a MDP simply because it has retained other professionals in the firm.

But I do not anticipate that all individuals trained and licensed as lawyers will elect to practice in a law department of an integrated services firm. With reference to my earlier comments, a tax consultant trained as a lawyer may wish to continue what he had been doing: giving tax advice to clients. I would not expect that modest changes in the rules would compel him to join a law department and inform clients that he is engaged in practicing law. That does not mean that an individual trained as a lawyer who does not hold out as a lawyer cannot be regulated. When such an individual engages in client misconduct, there are significant consequences, in the form of civil liability and in diminished reputation of the individual and the firm.

Were the bar to determine that an individual licensed as a lawyer would be required to join a law department in order to provide tax advice, I would expect that many would turn in their law licenses or go on inactive status because they do not seek to create a client expectation that they are practicing law. For those individuals who elected to join a law department and give tax advice, their communications with clients would, of course, be protected by the attorney-client privilege that would attach to communications between lawyers in a law firm and their clients.

Now, let’s turn to other licensed professionals, such as accountants, physicians, and engineers. How should they be regulated in an MDP? Any person trained and licensed by one of these professions would be regulated by the licensing authority of his or her profession and would face appropriate disciplinary action if professional standards were not followed. I do not believe these individuals should be subject to any additional regulation because of the particular entity in which they practice. It would not make sense to subject them to another, different licensing authority. Similarly, I suspect that lawyers would not be happy to find themselves regulated by a state medical board simply because they shared fees with a doctor licensed by that state. If participation in an integrated services practice presented new regulatory problems, the licensing boards could respond with appropriate solutions.

Finally, how should we regulate individuals who are not licensed by a state -- for example information technology specialists or investment bankers. Historically, each regulated profession has only directly regulated the professionals that it licenses. That is, medical societies regulate doctors, but not the nutritionists and physical therapists with whom they practice. My firm today includes many unlicensed individuals. To the best of my knowledge, the state boards of accountancy directly regulate only CPAs but not the unlicensed professionals with whom they practice, such as management consultants, economists, and appraisers.

Again, this does not mean that unlicensed individuals are not regulated. Long-standing legal principles impute the actions of these unlicensed professionals to the firms in which they practice. Based on our experiences, a firm can be found responsible, and can be held liable, for any misconduct by partners or employees, whether or not they are licensed by a state. Civil monetary liability that can be imposed on a firm for misconduct by its employees is at least, if not more, significant than any penalty a state disciplinary authority can impose on any one individual. Simply put, potential civil liability, and diminished firm reputation, is a significant regulatory force.

In addition, most codes of professional responsibility hold the licensed professionals responsible for the conduct of the individuals that they supervise if such conduct fails to comply with applicable professional standards. I expect that licensing authorities would continue to supervise and discipline the licensed individual for actions taken by others under his or her supervision or control.

One last point. Some have argued that the model rules should be amended to permit the discipline of law firms and integrated services firms. I do not agree. Rules of professional conduct obligate only the individual licensed to practice the profession. Similarly, state bars (with the exception of New York), and all other licensing authorities with which I am familiar, directly regulate and discipline only the individuals that they license. In my view, state regulation should remain focused on the individual lawyer. That is not to suggest that an MDP would not be regulated. Like a law firm, an integrated services firm would continue to be regulated by the external forces of the market. If individuals in the firm commit a wrong against a client, the firm can be held responsible, either through actual damages, or damaged reputation, or both.

Some members of the Commission have explored whether state-imposed regulation could strengthen institutional commitments to professional standards. My firm is strongly committed to the highest standards of professional conduct, and has voluntarily established firm-wide procedures to achieve and maintain these standards. These procedures include mandatory continuing professional education for every professional of 120 hours every three years; annual local audits of work product; reviews of work product every three years by review teams from other offices; formal mentoring of professionals to provide continuous assessment of expectations and results; and institutional risk management by non fee-earners regarding conflicts of interest and scope of practice issues. These procedures have worked well for us in maintaining firm-wide excellence. I can envision rules that could require all organizations offering legal services to certify periodically that they provide training and support to their professionals of the type that I have described.

Much attention has been focused on whether an integrated services firm can properly manage conflicts when lawyers and licensed and unlicensed professionals offer comprehensive professional services. In my view, conflicts can be readily managed in such an integrated services firm, provided that the bar relaxes its conflicts and imputation rules in some measure. Let me start with directly adverse conflicts. These can include situations where our firm is asked to simultaneously advise two clients directly adverse to each other, such as the buyer and seller in a single transaction, or when we are asked to represent a client in the same matter where we had previously represented another client with adverse interests. The AICPA rules, like the bar rules, impute such conflicts to the entire firm. We cannot simultaneously counsel current, or current and former clients, who are directly adverse. However, the AICPA rules, unlike the bar rules, do not impose an absolute prohibition on all such representations, but allow clients to decide whether or not to waive the conflict. Where both clients are fully advised of, and consent to, the simultaneous adverse representation, we can proceed. Conversely, where either client objects, or will not permit us to disclose the potential representation, we must, and do, decline the representation. In my view, the bar should revise its conflicts rules to permit the client to decide, in the first instance, whether to waive the conflict.

Most of the conflicts that we deal with today involve "indirect" conflicts. That is, a professional in the firm advises Client A on one matter, and another professional in the firm advises Client B on an unrelated matter but Client B may also have an interest adverse to Client A in the first matter. For example, Client A seeks assistance from the firm in its bid to acquire an asset held by Client B, but Client B is advised by another firm in connection with the potential sale. Unlike the bar rules, the AICPA rules do not impute the representation of one client in this instance to the entire firm, and do not require us to disclose the representations to both clients and seek consent. In my view, there is no justification to automatically impute conflicts to the entire firm when clients are not directly adverse in the same matter, and the bar ought to consider eliminating imputation in this context. Our rules, like the bar rules, regulate the individual practitioner, who is bound by the ethics obligations, and who owes the duty of loyalty to the client. The substantial experience of the accounting profession makes clear that a professional’s duty to his client will not be compromised in one matter because other professionals in the firm represent another client in an unrelated matter that may also have interests adverse to another client of the firm.

The practice of law in America has never been static. It has always responded to the changing needs of the society that it serves. We live in a consumer-oriented, global economy that demands professionals who can join together seamlessly to solve multi-faceted problems. Permitting lawyers to practice in MDPs is the next step in the development of the profession as it continues to respond to, and better yet, anticipate, the needs of its clients. Meeting market demand while maintaining strong professional values will promote a vibrant and relevant legal profession -- a legacy you can have an important role in securing.

Thank you for allowing me to speak with you today.

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