October 05, 2011

Written Remarks of Sam DiPiazza, Jr. - Center for Professional Responsibility

Written Remarks of Sam DiPiazza, Jr.

Managing Partner, Tax Services-Americas
PricewaterhouseCoopers LLP

Good morning, Mr. Chairman and members of the Commission. My name is Sam DiPiazza, Jr. and I am leader for Tax Services of PricewaterhouseCoopers LLP. PwC has over 140,000 professionals worldwide, delivering a broad range of professional services to our clients. We have over 8,000 professionals in the practice of tax in the America’s, with over 6,000 of those professionals within the United States. Included among our tax ranks at this time are well over 1,000 lawyers. In my role I oversee all of the tax- related operations within PwC in the America’s. I also have responsibility for our delivery of Legal Services in the America’s Theater outside of the U.S. I appreciate this opportunity to appear before the Commission and hope that my remarks will be helpful to you in your deliberations.

I should note, at the outset, that I am a certified public accountant with a career in tax consulting that spans 25 years. I am not a lawyer. Nevertheless, I believe I can make a useful contribution to the Commission’s work, in part because the ethics and practice questions now before you are important to me from both a personal and professional perspective.

PwC is pleased to be able to participate in the Commission’s work. As you know, my colleague Gerard Nicolaÿ, the chairman of the network of correspondent law firms related to PwC, testified at the Commission’s first hearing in November concerning our experience with MDPs in Europe.

You heard a great deal of testimony from Gerard and others about the experiences in Europe with affiliations between providers to offer integrated services, including multidisciplinary firms. This testimony highlighted the demand of clients, both large and small, for integrated services. You have also heard from many of your own members about market demands for broader and more integrated services.

I was fortunate to be able to attend most of your January hearings in Los Angeles. We at PwC are committed to providing whatever assistance we can in supporting your important work. Consequently, I was pleased when Chairman Simmons asked me to appear today to share PwC’s views on the issues before you.

My purpose today is to describe some of the principles that PricewaterhouseCoopers believes might guide the operation and regulation of multidisciplinary practices involving lawyers and non-lawyers. I also want to focus on a few of the changes that we think should be considered to the ABA’s Model Rules of Professional Conduct that would allow firms such as mine to respond to the market demand for seamless integrated services. I should note that my comments are made in the context of a fully integrated MDP organization – that is the fifth model set out in the Commission’s recent paper on "Hypotheticals and Models" – because that is the MDP model that we strongly prefer.

As you will quickly see from my comments, I am proud of my own profession and of the high ethical standards that are imposed on CPAs and chartered accountants in the United States and elsewhere. Indeed, I have been somewhat puzzled by the apparent suggestions of some witnesses who have appeared before this Commission that permitting affiliations between lawyers and accountants would inevitably lead to the serious degradation of ethical standards among lawyers.

The fact is that the rules governing our two professions are very similar. We share a commitment to objective and independent advice, to loyalty to our clients, and to the preservation of client confidences. Indeed, our core values are identical. We may implement these values in somewhat different ways, but the differences are minor in my view. As both of our professions strive to add value and provide better service for our clients, I am sure that we share the common goal of preserving our core values while adjusting to the demands of the new, global economy.

In an effort to provide some clarity on this issue, I understand that my colleague from Ernst & Young, Kathryn Oberly, will be providing the Commission with a side-by-side comparison of the requirements of the Model Rules and the rules of the AICPA. I will also highlight some of those comparisons in a few moments as I describe the principles that we believe you should consider as you deliberate this issues involving the operation of MDPs.

As to such principles, in our view it is essential that MDP arrangements be structured so as to accomplish our shared goals:

  • To preserve the independence of the lawyer’s professional judgment;
  • To protect client confidences;
  • To protect against conflicts of interest so as to assure the undivided loyalties of practicing lawyers to their clients; and
  • To assure that lawyers, when "holding themselves out" as being engaged in the practice of law, are subject to the rules and discipline of the legal profession.

The last point is particularly important, as noted by my colleague, Mr. Nicolaÿ, during his testimony before the Commission in November. In many countries – including the United States – overly rigid rules governing the "practice of law" have resulted in more and more lawyers pursuing their professional interests outside the regulation of the legal profession. By forbidding lawyers from sharing "legal fees" with non-lawyers and operating in any organization in which a non-lawyer has any ownership interest or management control, the rule effectively forces lawyers wishing to work in non traditional settings outside the regulation of the profession.

In PwC’s view, this is a highly undesirable result – both from the standpoint of the legal profession and in terms of the public interest. We believe that all lawyers who "hold themselves out" as engaged in the practice of law and therefore "create the client expectation that naturally follows" should be subject to the rules and discipline of the bar regardless of the nature or ownership structures of the organizations for which they happen to work.

In considering how the basic principles I have described should be applied to the operation of a fully integrated MDP, I would like to start by focusing on two of the most critical areas of concern: conflicts of interest and the protection of client confidences. Speaking from the standpoint of the accounting profession, I must again observe that our core values and those of the legal profession on these issues are the same. We both provide client service, and if we operate in a manner that fails to deal consistently and appropriately with issues of conflict or fails to protect client confidences, we will not remain in business for long.

Let me first address conflicts of interest. The AICPA Code of Professional Conduct addresses the problem of direct adverse conflicts under Rule 102. That rule requires the individual CPA to "maintain objectivity and integrity and be free of conflicts of interest." Our rules explain that a conflict can be created if the individual CPA or his firm has a relationship with another client that could be viewed by the client as impairing objectivity.

Some witnesses appearing before the Commission have expressed the concern that the AICPA rules would permit two CPA’s within the same firm to advise separate clients on opposite sides of a single matter while the Model Rules would not allow such representation. This concern arises from a misunderstanding of the AICPA rules. The rules of the accounting and legal professions on the issue of direct conflict are essentially the same. They differ in that the AICPA rules, only upon full disclosure and informed consent of the clients concerned, permit a direct conflict to be waived. In effect, we simply do not impose a blanket prohibition but instead allow our clients, with full disclosure, to make the judgment. If either client objects, we do not accept the engagement. The key is transparency to the client so that the client can make an informed and rational choice. Where the conflict is waived by both clients, our Code, through Rule 301, requires the individuals working on the engagements to maintain confidences.

We believe that the same approach to direct conflicts should be used in MDPs offering legal services. Thus, where both clients are fully informed of a conflict and agree to waive it, the Model Rules should not prohibit the firm from representing both clients simultaneously. It would, of course, be understood that such representations would be undertaken by different engagement teams that would be insulated from one another by appropriate screening mechanisms.

Let me give you an example to illustrate the conflict rules in fact apply to my profession and that we believe should apply in MDP organizations. Suppose an MDP firm has represented two clients in the same industry for a number of years. For sake of the example – and because it is a particular specialty of PwC – let’s say they are both in the telecommunications field. Both clients ask different teams of professionals within the firm to assist them in preparing a bid for a similar frequency allocation from the FCC. Both clients come to the MDP for this service because the firm specializes in telecommunications matters and because the MDP is well familiar with each client’s operations and experience.

We all recognize this as a direct conflict. We have two potential clients. Each would like to hire the MDP. And representation of both clients would put the MDP in the middle of a direct conflict.

The Code of Ethics in my profession recognizes that, without full disclosure to the clients and informed consent by both clients, we would have to walk away from both assignments. We recognize that the client must make this decision.

To continue the example, let’s also assume, that it would be less effective and more costly for either client to seek representation from a new firm unfamiliar with its industry or its business operations. I would propose that the Model Rules continue to recognize that dual representation as a direct conflict, but be modified to permit the conflict to be waived by both clients, upon full disclosure and with informed consent, and the necessary screens. I submit that, in this case, permitting the dual representation might well be in each client’s best interests, and I can perceive little reason why there should be a blanket prohibition that would act to frustrate the informed decision of the clients.

As to indirect conflicts – that is situations involving advice to two clients that are not directly or adverse to one another -- there is a more fundamental difference between the AICPA rules and those of the bar. Unlike the ABA’s Model Rules, the AICPA Code does not impute conflicts to the entire firm where an individual CPA seeks to represent a client in one matter where another client, advised by a different CPA within the firm, may have an indirect adverse interest.

The AICPA approach is premised on the assumption that a broad prohibition is not appropriate in indirect conflict situations. We do not believe that there is a significant risk that the duty of loyalty owed by the individual professional will be compromised. The fact that two clients may have opposing interests in matters other than those in which they are represented by the firm does not, in and of itself, justify the conclusion that the judgment or commitment of the individual professional representing either of them would be compromised. The AICPA rules, like the bar rules, govern the individually licensed practitioner. It is the individual practitioner who is bound by the ethics obligations, and it is the individual who owes the duty of loyalty to the client. And remember, we are not talking about a direct conflict situation.

Accordingly, we believe that the ABA’s Model Rules should be modified to require imputation of conflicts to an entire firm only in cases of direct adverse conflicts. In all other cases, the potential disqualification of an individual professional would not be imputed to his or her entire organization.

Let me next turn to the issue of client confidences. Speaking again from the standpoint of the accounting profession, I think there is a fundamental misunderstanding of the requirements of the AICPA rules.

As I previously noted, the preservation of client confidences is as much a part of our core values as it is in the legal profession. Specifically, AICPA Rule 301, as well as all state codes with which I am familiar, requires that "[a] member in public practice shall not disclose any confidential information without the specific consent of the client."

In implementing these requirements, our firm – as well as all of the other accounting firms with which I am familiar – have well established safeguards to limit access to confidential client information to those persons having a "need to know" in connection with the delivery of the services. We routinely restrict access to hard copy files, password protect client files and client information on databases, and carefully segregate client teams. Even in a large global firm like ours, such screening mechanisms can and do work, every day.

We support the proposal that legal services delivered through an MDP be organized in a separate "legal services division" within the MDP organization. Management systems could then be put in place to restrict the flow of all client communications and information to those having a need to know such information in order to support the provision of legal services to the client. In this respect, client confidential information would be as safe as it is in any separate law firm today.

I should also note that we believe the provisions of the Model Rules setting out a lawyer’s responsibilities regarding non-lawyer assistants (whether in-house or outside consultants) should be fully applicable to the lawyers practicing within an MDP’s legal services division. Accordingly, such lawyers would be responsible for taking steps to ensure that the conduct of all non-lawyers involved in providing legal services remained at all times compatible with the professional obligations of the lawyer.

I noted at the outset that my comments are offered in the context of a fully integrated MDP model. Obviously, to achieve such a model it will be necessary to modify Rule 5.4 of the Model Rules to permit lawyers to practice law in an MDP organization even if non-lawyers hold ownership or other economic interests in such organizations. Before closing, I want to make a few observations on this issue.

As I understand, the current prohibitions on fee sharing and partnerships with non-lawyers are explained on grounds of protecting the independence of the lawyer’s professional judgment. With all due respect, I simply don’t find the argument persuasive. Remember, our values in this regard are consistent. We both have a commitment to loyalty to the client and independent judgment. To suggest that the threat to independent judgment is unacceptably higher when a non-lawyer has an economic interest in a law firm than when a lawyer is under pressure from a long-standing client to take a particular position or is encouraged by a senior partner in his own firm to accommodate a client’s interests, strikes me as a doubtful proposition. It is certainly true that lawyers – like all professionals – face challenges every day to the independence of their professional judgment. But those challenges fundamentally having little to do with the ownership structure of the organization in which they work. The independence of lawyers ultimately must be maintained by lawyers themselves. In a fully integrated MDP model, the continued regulation of lawyers by the bar as well as the external regulation of the market place would provide support and incentive for such self-regulation. Ownership should not be the issue.

As Jim Jones, managing partner of APCO, testified before you in February, the Model Rules tolerate this "risk" in many other situations. For example, the rules allow a lawyer to take money from a third party, who may not be a lawyer, to represent another person, with the caution that the lawyer exercise independent judgment. Similarly, the rules permit a lawyer to accept referrals and fees from sponsors of for-profit legal service plans whose subscribers then become the lawyer's clients. The risk of non-lawyer influence clearly exists in these arrangements, but again, the caution to the lawyer is sufficient. So too, the rules permit a lawyer to be employed by a corporation as its counsel. We can all agree the lawyer is entirely dependent financially on non-lawyers, as Ms. Oberly explained in her testimony. The corporation controls the terms and conditions of the lawyer's position and the work that the lawyer performs. But the bar accepts the arrangement and trusts that the lawyer will exercise independent judgment

Moreover, in the case of any MDP organization in which non-lawyers hold ownership or other economic interests, each client retaining the organization to provide legal services should be advised of the fact that non-lawyers hold such interests in the organization. Just as in the case of ancillary businesses (governed by the ABA’s recently adopted Rule 5.7), it is important that clients understand the nature of the entity with which they are doing business. Clients would thus be able to judge for themselves whether they wished to retain the MDP – as opposed to a traditional law firm – for the legal services involved. This seems to us to leave the decision precisely where it should be – with the consumers of legal services.

Accordingly, we do not believe that the modifications to Rule 5.4 that we propose threaten the core value of preserving the lawyer’s independent professional judgment. Just as in the case of the accounting profession, we believe that participation by non-lawyers in the ownership or management of legal practices can be permitted consistent with the important principle of professional independence.

Finally, I would like to briefly address the regulation of lawyers who practice law within a multidisciplinary firm. PwC supports the concept that all such lawyers be organized within a legal services division and supervised by other lawyers with respect to their professional judgment. I should also note that, in our view, the general rules of the legal profession respecting advertising, reasonableness of fees, solicitation of business, conduct as advocates, transactions with persons other than clients, public service obligations including pro bono service should apply to the activities of lawyers "holding themselves out" as practicing law within the MDP organization.

By modifying the existing rules of the legal profession to incorporate the principles we suggest, we believe that multidisciplinary practices between lawyers and non-lawyers can be permitted in a way to assure that the lawyers providing legal services through such structures adhere to the high standards of ethics and professionalism traditionally required by the bar while, at the same time, having the flexibility to offer the full range of services that their clients increasingly demand.

Like law firms, our firm is invested only in providing the highest quality of services to our clients. I do not believe that permitting lawyers to join professional services firms will somehow compromise their values, because those values are common to both of our professions. Our experience in this country and abroad tells us that clients want the ability to retain one firm to provide a range of professional services, including legal services. Of course, not every client will elect to retain one firm for all its needs. Depending on the problem to be solved, some clients will chose an integrated services firm, and others will chose to obtain the same services from different providers.

We think that our shared values create the opportunity for our two professions to work successfully together in MDP’s. Our core values are the same; our approaches to implementing them are only slightly different. Equally important, the challenges that both professions face to provide efficient and cost effective services to our clients give us a common base on which to build a new kind of professional services organization that will honor and preserve the best of both of our traditions.

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Thank you for this opportunity to appear before you and share our views. I would be happy to answer any questions you might have.