Oral Remarks of Neil Cochran - Center for Professional Responsibility

Oral Remarks of Neil Cochran,

a partner in Dundas & Wilson CS

The next testimony presented to the Commission was from Neil Cochran, a solicitor who is a partner in Dundas & Wilson CS in Edinburgh, Scotland, an independent law firm in a network of almost 30 law firms associated with Andersen Worldwide. He explained that it was a misperception that most arrangements between law firms and professional service firms in Europe were partnerships. Partnerships, he maintained, were the exception rather than the rule in Europe. Dundas & Wilson is the largest and one of the oldest law firms in Scotland with offices in Edinburgh, Glasgow and London. The firm and its solicitors are regulated by the Law Society of Scotland, the rules of which do not permit a solicitor to share legal fees or profits with unqualified individuals. In September 1997 Dundas & Wilson entered into an association with Garretts, an independent English firm established in 1992 in London; he is also a partner in Garretts. When the two law firms work together on a client engagement they share confidences, otherwise confidences are not shared between the two firms as the firms have separate client files and accounting records. Because of a number of client engagements and dual partners in the two firms, conflicts are cleared through both firms. The international network, on the other hand, does not clear conflicts as its members are separate firms, separately managed and regulated by the local bar. They are mindful, however, of business conflicts and seek to avoid accepting instruction from one client that may lead to loss of business or material goodwill from another firm associated in the network. Screening for business conflicts is hampered by the ethics rules prohibition against disclosure of client identity without consent, although the law firms do check the Andersen network client list for business or audit/SEC independence issues as well as legal conflicts. The association with Arthur Andersen provides, for a fee, "back office" services to the law firms in the network such as computer systems and support, voice mail and training and they are able to market and make proposals for professional services. Each firm sends out a separate retainer letter and separately bills. He said they have taken appropriate steps to safeguard confidentiality of communication among lawyers and between lawyers and other Andersen professionals.

He does not believe that the teaming arrangements of professional firms jeopardizes the core values of the legal profession - loyalty, preservation of confidences and conflict avoidance. The client demand for teaming arrangements is driven by consumers and businesses that are more international, more mobile and driven by competitive pressures from new sources. Clients such as banks, insurance companies and other financial services companies need international and comprehensive advice from teams of professional advisers such as lawyers, financial planners, accountants, investment advisers and tax consultants. Such a team of advisers can establish common methodologies to deal with an issue and can generate stronger arguments, richer analysis and sounder advice than any one professional. The need for an integrated approach is not limited to engagements for international transactions as teaming arrangements allow a client to communicate with all professionals as a group, often through a single project manager, and produce a single, integrated work product, with little or no duplication of effort. Much has been made of the potential for conflict between the different obligations of lawyers and accountants, particularly as pertains to professional service firms that include lawyers and an audit practice. Of the Arthur Andersen clients who are also Dundas & Wilson clients most are not audit clients. Arthur Andersen audits approximately 2,600 SEC registrants although worldwide it counts more than 60,000 business organizations as clients. For those clients who use a professional services firm for audit services and an associated law firm for legal services, their lawyer - if he or she has information which calls for financial statement disclosure - cannot provide that information to the auditor without client consent. The lawyer would inform the client of the client’s duty of disclosure of material contingencies in the audit and the client’s decision would determine whether the lawyer can continue representation and, if so, on what basis. The impact on audit independence of performing legal services for audit clients varies based on the professional standards and laws of the country in which the client is incorporated or listed. In the U.S. the assessment depends, in part, on whether the company is private or public. If a private company, the audit firm cannot perform as general counsel or other quasi-manager role, but would be otherwise free to perform legal services. D & W complies with this restriction because of their network association with Arthur Andersen. He also explained the scope of legal services that can be provided to SEC registrants or their affiliates by a law firm outside the U.S. associated with an accounting firm that audits clients. According to SEC guidelines, reviewed by SEC staff in 1993, the associated law firm must, among other requirements, limit advice to matters that are not material to the consolidated financial statements of the SEC registrant which is an AA audit client. Though identifying himself as not well placed to interpret the U.S. Model Rules he questioned whether the affiliated/ network approach of D & W and Garretts would be sanctioned in the U.S. As the current structure in Scotland and England is not ideal, the Law Society of England and Wales now comments that the question is not if multidisciplinary practices will be introduced but how they will be regulated. MDPs are definitely on their way. Priorities were identified as: change Law Society rule to allow fee sharing with nonlawyers to enhance provision of integrated services, to work more efficiently in joint teaming arrangements; and permit joint proposals to clients at fixed fees, to permit negotiation of more flexible fee arrangements, to share risks among team members, and to group skills to produce joint products and services. His firm has told the Law Society they favor multidisciplinary partnerships as without these reforms lawyers in traditional law firms will find it increasingly difficult to compete as trusted business advisers to counsel clients in developing broad-based, cost-effective solutions to business problems.

In response to Professor Daly’s inquiry Mr. Cochran explained there was a service agreement negotiated between Dundas & Wilson and Arthur Andersen and costs were paid at the time incurred or anticipated, but no other payments. He thinks arrangements in the Arthur Andersen network may differ because there are different lawyer rules in different jurisdictions. He answered Mr. Rosner that they are unable to quote a flat fee to a client and apportion to each professional provider as they are unable to fee share. Because of D & W’s business (corporations and institutions) practice and the relatively small jurisdiction of Scotland conflicts often arise and client consent is solicited based on the mandates of the ethics rules. He clarified to Ms. Lamm that the firm pays for back office services by Arthur Andersen at a market rate but AA offers exceptionally good technology. When the firm acts with AA on a matter there are separate engagement letters and confidentiality is maintained. When the firm advises Arthur Andersen the firm does not offer its services at a discount. In response to Professor Hazard he agreed that, much as a collaborative proposal for the firm is worked up, were there no MDP prohibition Dundas & Wilson and Arthur Andersen could present a collaborative proposal to a client. The difference is that with a MDP proposal there would be a single project manager and saving of skill, time and resources because there would be an international rather than a domestic proposal. Mr. Nelson asked for an example of the greater efficiency offered by a MDP. Mr. Cochran talked about the work of privatization of certain infrastructure of Scotland such as health services, housing, schools, roads and airports that require law and accounting services; if fees and confidences were shared it would produce efficiencies. To the follow-up question of whether the efficiency is primarily information sharing he responded that the integrated approach allows quick response, avoids duplication and avoids competition in the sense of clarifying who is running the show. Since the real client benefit is the providers acting together Mr. Mundheim raised the question whether putting the fees in a pot yet maintaining separate entities wouldn’t address the issue. Although that’s a possibility Mr. Cochran felt there was no real client benefit - he felt the more the providers move toward partnership the more the client will benefit. Judge Friedman asked how professional legal values - confidentiality, loyalty and conflicts avoidance - can be maintained in a multidisciplinary practice. Mr. Cochran said it would be up to the individual lawyer to maintain them, much along the lines that he, as the Practice Director of his 55 partner law firm, now oversees quality, ethics and risk management. The Law Society and the Accountants Regulator would continue to regulate those professions and the marketplace would have an impact. The Chair asked if Dundas & Wilson was a MDP in formation and Mr. Cochran said ‘no’ as the Law Society rules forbid it. Clarification of the UK rules in the area are likely as the Lord Chancellor and the Office of Fair Trading are looking at them and the current Labor Government made their relaxation a campaign manifesto in order to facilitate delivery of legal services to consumers in a friendly, cost-effective way. Submissions in response to the Law of England and Wales’ MDP consultative paper are due by February 1, 1999. The Law Society of Scotland has a work in progress on MDPs but the working group will likely hold publication for the paper of the Law Society of England & Wales. The Commission requested a preview copy. In Scotland there is no restriction on law firm name as long as it doesn’t bring the profession into disrepute, but in England and Wales a law firm cannot identify itself as or with an accounting firm name. Dundas & Wilson uses its own name as it is probably the best professional service brand in Scotland. From anecdotal accounts lawyers in accounting firms cannot practice law in an association which posits control in the hands of nonlawyers and consequently they do not have client-getting responsibility, can go home on weekends and get paid more money; however, they are told to increase revenue from each existing client and this creates a kind of pressure. Mr. Cochran felt fees grow by allowing professionals to take initiatives and develop practices and to think of new ideas. Other MDP issues include malpractice and in the UK it means partly discipline and partly liability for professional negligence from which damages flow. Mr. Nelson asked, in the instance of a MDP accountant’s advice on a matter of corporate finance violating company law, whether the lawyer’s or the accountant’s standard of competence would be used? Mr. Cochran felt the court might find the client of an MDP entitled to enhanced advice covering law and accounting.