October 05, 2011

Statement Of Kathryn A. Oberly, February 1999 - Center for Professional Responsibility




FEBRUARY 4, 1999

My name is Kathryn Oberly. I’m the Vice Chair and General Counsel of Ernst & Young LLP.

I understand that the Commission is examining the demand for integrated professional service firms and considering what rules should be adopted to protect values of confidentiality, conflict-free advice, and loyalty that are central to the legal profession. I have, I believe, a unique perspective on the issues your Commission is considering. I am trained as a lawyer and have been practicing law for 25 years - first as a law clerk to a federal appellate judge, then as an attorney in the United States Department of Justice, next as a partner in a U.S.-based law firm with offices in many states and several countries, and now as the General Counsel of a large professional services firm. As a result, I have a keen understanding of the core values of the legal profession, and believe that these values should continue to be preserved, in any setting where lawyers are practicing law.

During my 8 years with Ernst & Young, I have developed a strong appreciation for the professional standards governing the accounting profession and its practitioners. My collective years of practice have also led me to believe strongly that there is common ground between the two professions, and that existing rules should be modified to focus on the individual rather than the organization in which the lawyer practices. A change in the rules will permit a number of different practice structures that can provide integrated, comprehensive professional services and preserve the values of both professions.

The multidisciplinary dialogue is not a new one for the ABA. Many of the practice questions this Commission is addressing have been considered by predecessor ABA Commissions, including the Kutak Commission in the early 1980s. Nearly 20 years ago, the Kutak Commission urged the ABA to reform Rule 5.4. As Chairman Kutak wrote in his transmittal letter to the ABA,

"To the extent the Rule removes restrictions on the development of nontraditional forms of organizing a law practice, it has aroused substantial opposition. Nonetheless, there is a demonstrable need for expansion of the means of making legal services more available * * *. The Commission believes the Rules in this area should focus on the actual potential for abuse in such developments rather than the particular form of law practice."

The Kutak Commission’s recommendation was defeated on the floor of the House of Delegates. As one delegate forcefully argued against the recommendation, "How will you explain to the sole practitioner who finds himself [in] competition with Sears why you voted for this? How will you explain to the man in the mid-size firm who is being put out of business by the big eight law firm? How will you explain that[?]"

But economic protectionism was not a legitimate justification for maintaining ethical restrictions surrounding lawyer and nonlawyer affiliations, and surely cannot be the justification for continuing these restrictions today. There is a greater sense of urgency for change of these rules today because of the dramatic changes that have taken place in our world

1. Global Demand for Services. We are all aware that the globalization of the economy, combined with instant, inexpensive communications, has eliminated barriers to entry and increased opportunities for small and large businesses alike. Companies that wish to capitalize on these increased opportunities face complicated legal and business problems. We have also witnessed a tidal wave of mergers among large, multi-national corporations. For example, the planned $81 billion merger between Exxon Corporation and Mobil will force the new entity to confront regulatory authorities worldwide over its global holdings, from Venezuela to Japan. And it is not only companies with an international presence that face multi-dimensional problems. Businesses operating solely on a local level must comply with ever-increasing government regulation and must act defensively to protect against the threat of litigation. Problems can no longer be classified as solely "legal" or "business." Where once a legal advisor with expertise in contracts and property law would have been retained to negotiate and close a real estate transaction, today’s complexity often demands professionals with different expertise in environmental liability, engineering, zoning issues, insurance, tax and financing.

In short, clients today -- whether large or small, international or local -- need comprehensive solutions from a team of professionals. The global trend is decidedly toward multidisciplinary professional services practices, where lawyers, accountants, and other professionals are partners in one firm.

2. U.S. Professional Services Practice. Ernst & Young and other Big Five accounting firms have been attempting to meet growing client demand for integrated services. In addition to our core audit and accounting practices, we have professionals trained in many different disciplines, including economists, MBAs, tax advisors, appraisers, financial managers, lawyers, estate planners, actuaries, doctors, nurses and human resources specialists, to advise clients on a range of issues. In the United States, where rules governing legal practice currently preclude us from practicing law, we adhere to these rules. We do not hold ourselves out as a law firm, and our professionals educated and trained as lawyers do not hold themselves out as providing legal services. We do not prepare legal instruments, and, except as expressly authorized by federal or state law -- such as the Tax Court rules or IRS Circular 230 -- our professionals trained as lawyers do not appear in court or provide advice on legal rights or duties respecting specific factual situations. And we make it clear to our clients that we are not acting as lawyers and that the clients should seek legal counsel if warranted.

Many witnesses have asked, "what do the lawyers employed by accounting firms do?" Let me answer that question. Our lawyers work with our other professionals in providing advice and consultation to clients on tax and business matters. Of course, in our highly regulated world, virtually all forms of advice, discussion and consultation provided by nonlawyer professionals have legal components. But consulting on matters that have legal components does not necessarily involve the practice of law. The ABA has long recognized that a lawyer may work with a nonlawyer professional to carry on any activity "which does not constitute the practice of law by a layman * * * ." ABA Formal Op. 239 (1942); ABA Formal Op. 318 (1967). That opinion is currently reflected in Model Rule 5.7, as well as in many state ethics opinions.

As this Commission noted in its background paper, the regulatory environment outside the U.S. is different. Where permitted by applicable regulation, Ernst & Young professionals work closely with lawyers to render legal advice to clients. In many jurisdictions, Ernst & Young member firms have developed strong alliances with independent law firms, and lawyers in these firms team with Ernst & Young professionals to provide the comprehensive, integrated professional services that our clients demand.

From my perspective, consumers in the United States are denied the opportunity to obtain such integrated services. Because of various ethical restrictions, lawyers have been unable to share fees and profits with professionals in other service firms, and have not been permitted to practice law in partnership with other professionals in one multidisciplinary firm. Absent a change in the rules, I suggest that U.S. lawyers will find themselves at a competitive disadvantage, because they will lack the "bench strength" and depth of resources to service client needs. This may explain the rush to mergers among large law firms in the United States, and the vigorous merger discussions between U.S. and European law firms.

3. Existing Regulatory Framework and Proposals for Change. I believe that the market requires us to rethink our existing regulatory structure so that lawyers can partner with other professionals and offer clients the integrated services that they demand. The client benefits from multidisciplinary arrangements are obvious, and you have heard a great deal of testimony on this issue. The challenge to the bar, then, is preserving values central to the legal profession in practice structures not permitted by the current rules.

I do not believe that the ethical issues raised by associations between lawyers and nonlawyers are insurmountable or very different from the issues that lawyers regularly face. The practice of law, of course, is no longer limited to the 19th century paradigm of two or three partners in one office. Lawyers in multi-city, multi-national law firms, in-house company counsel, lawyers in pre-paid legal plans -- all have different practices and each face different threats to the core values of the profession. The bar recognizes that it cannot have separate rules to regulate different organizational forms of law practice and, accordingly, regulates the individual lawyer. It is the individual lawyer who is obligated to satisfy the core values of the profession. It seems reasonable to me that changes to the model rules must focus on the individual lawyer, rather than the organization in which the lawyer practices. Let me explain what I mean.

a. Independence of professional judgment. The duty of a lawyer to exercise independent judgment has always been clear. The more difficult question is what restrictions, if any, should be imposed on lawyers to ensure independent judgment. At present, the model rules prohibit a lawyer from sharing fees or profits with a nonlawyer and do not permit partnerships between lawyers and nonlawyers, presumably to protect the lawyer’s professional independence. But these prohibitions, if they were ever justified, can no longer be justified on this ground.

Threats to independence cannot be regulated out of existence. In today’s economy, law firms are businesses, and partners and associates have business targets for chargeable hours and billing goals that they are expected to meet. But we do not bar lawyers from working in law firms that have multi-million dollar net profits. Model Rule 5.4 is premised on the assumption that supervision of a lawyer by a non-lawyer undermines the lawyer’s independence. Based on my years at Ernst & Young, I can’t help but be skeptical of this assumption. I report to the Chair of our partnership, who is not a lawyer and is not, strictly speaking, the "client" to whom I am charged with providing legal advice, and my salary is not set by lawyers. However, I have never found my professional judgment to have been clouded by my employment. I think you would have to search long and hard to find general counsels who believe that their ability to provide independent advice is somehow impaired by their employment arrangements.

Similarly, during my tenure at the U.S. Department of Justice, I was urged, at times, by nonlawyers in government agencies to reach a particular decision. I recognized that, at all times, I had to resist such pressures and exercise independent professional judgment.

I find offensive the suggestion that a nonlawyer professional in an integrated practice would be less sensitive to the need for independent professional judgment. The accounting profession, with which I am most familiar, imposes on its professionals the obligation to exercise objective judgment on behalf of clients, through AICPA Rule 102. The purpose in protecting a lawyer’s independent judgment -- to best serve the client’s interests -- is as readily understood by nonlawyer professionals as by lawyers. I think that all professionals in a multidisciplinary organization could be bound by a rule that required them to exercise their own professional judgment.

In my view, the presumption contained in Model Rule 5.4 that fee and profit sharing between lawyers and nonlawyers has a direct relationship on a lawyer’s independence has no validity, and should be eliminated.

b. Protection of client confidences. This Commission has heard several witnesses express concern that confidential attorney-client information could not be protected in a multidisciplinary firm, because a significant percentage of the professionals in the firm are not covered by the attorney-client privilege. Respectfully, I must disagree. I suggest that this notion is driven by a misguided view of the privilege. The attorney-client privilege runs between the individual lawyer and the client, not the law firm and the client. Where a lawyer works in a multidisciplinary partnership, the lawyer’s communications with the client are covered by the privilege. To the extent the engagement involves teaming with nonlawyer professionals to assist in the rendering of legal advice, the lawyer’s privilege could extend to reach all non-lawyer professionals who participate in advising the client about privileged matters, provided that these professionals keep the information confidential.

We have experience in implementing the recently enacted statutory privilege that protects communications between clients and federally authorized tax professionals concerning tax advice. We employ numerous professionals who are not covered by this privilege. Our firm has developed procedures to safeguard information covered by the new privilege. For example, our professionals are required to clearly identify all papers containing privileged information as "privileged and confidential"; we restrict access to electronic databases to federally authorized tax practitioners, and limit access to the privileged information to those involved in giving tax advice. We have established training programs to teach our employees the boundaries of the new privilege, so that they can explain it properly to clients and so that they maintain the privilege in an environment where many are not covered by it.

A concern has been raised with respect to conflicts between the obligations of a lawyer and of an auditor for the same client in a multidisciplinary firm. This concern needs to be put in its proper perspective. Ernst & Young has approximately 87,000 clients in the United States. Only a fraction of these clients – less than 2500 – are SEC registrants for whom we provide audit services. With respect to these clients, informal guidance provided by the SEC staff several years ago permits a non-U.S. law firm affiliated with an accounting firm to provide certain limited legal services. The SEC has now asked the Independence Standards Board to determine the scope of legal services that an accounting firm can provide to an SEC registrant that it audits. The Independence Standards Board is clearly the appropriate body to consider these issues in the first instance. In the meantime, however, there is no reason for this Commission to defer action on long-overdue changes to the model rules simply because a very, very small subset of situations might be under consideration by another body.

The only issue, then, is the potential for conflict between the lawyer’s need to protect privileged information and the auditor’s duties in rendering opinions for non-public companies. This potential for conflict exists today when the legal work and the audit are necessarily performed by different firms. But this potential for conflict is hardly ever realized. As matters now stand, auditors routinely seek information from counsel for their clients respecting matters that may be material to financial statements. Lawyers often have confidential or privileged information that may impact the client’s financial statements, but may not disclose this information to the auditor without the consent of the client. We would presume that lawyers would counsel their client to disclose the information to the auditor. Clients recognize that auditors need information to do their job. They understand that if auditors cannot get the information they need, regardless of the reason, the auditors will have no choice but to qualify their opinion or resign from the engagement — options that clients cannot tolerate.

This issue does not change when the lawyer is part of a multidisciplinary practice. The privilege runs between the client and the lawyer, not the client and the organization in which the lawyer practices. Whether or not affiliated, allied, or in partnership with an accounting firm, the lawyer may only disclose privileged information with the consent of the client. We should not lose sight of the fact that the company itself has independent obligations to disclose material information to its auditor, and cannot defeat this obligation by claiming privilege.

c. Avoidance of conflicts. Some have contended that the legal profession and the accounting profession approach conflicts issues differently, and it would be impossible for a multidisciplinary firm to adopt a sensible method for resolving client conflicts. Rules governing the accounting profession are somewhat different from the ABA model rules, largely because conflicts between clients in a law firm typically arise in an adversarial setting, while the vast majority of services provided by accounting firms are not adversarial.

The AICPA rules are designed to ensure the objectivity of individuals while the ABA model rules impute conflicts to the firm as a whole. As a result, the AICPA rules do permit two separate engagement teams within a single firm to advise clients on different sides of a transaction. In such circumstances, we create two separate teams, separated by firewalls, to maintain client confidences and ensure objective judgment. Of course, like most large law firms, we turn down far more engagements for "business conflict" reasons than we would due to application of the ethics rules of either profession.

We could spend a great deal of time debating the differences between the rules governing the professions, but I do not think that is particularly profitable. I would like to make a more fundamental point. If all lawyers are to be bound by state versions of the model rules, wherever they practice, I believe that the time has come for the bar to re-examine and to alter Model Rule 1.10, the rule governing imputation of conflicts. During my time as a partner in a large, multinational law firm, I observed that the imputation rule significantly impeded our ability to attract and retain business. We found ourselves faced with conflicts from matters we never knew about serviced by lawyers in offices around the country and even around the world. The same is most likely even more true today in law firms, and is only likely to increase as law firms consolidate and grow. This issue would apply to lawyers in multidisciplinary firms. Changing the legal imputation rules, and creating firewalls between the engagement teams, would establish rules that all professionals could accept.

4. Alternative practice structure. To date, the debate over multidisciplinary partnerships has been dominated by extreme and opposite positions: maintain the current regulatory system, which effectively bars multidisciplinary organizations, or relax the restrictions entirely to permit passive, nonlawyer investments in law practices. Debating extremes is never useful. With modest changes in the existing rules -- the changes I have outlined above, as well as conforming changes to Rules 1.5 and sensible changes to Rule 7.1 -- there is much room in the middle for many different forms of interdisciplinary practice structures.

In order to advance the debate, I offer the following possibilities:

A first step could involve an alliance between a professional services firm and a law firm owned and managed by lawyers who are admitted to practice. The accounting firm could provide support services, for a reasonable fee, and the law firm and the accounting firm could jointly market services as strategic allies. Joint proposals to clients could be offered at a fixed fee for services, with the firms sharing the fee, provided that disclosure of the relationship between the firms was made to the client before the engagement commenced. Of course, the law firm would continue to provide legal services directly to those clients seeking such services. The law firm would clear conflicts only against its client list. The financial, business and management relationships between the two firms would not affect the independence of the lawyers’ judgment.

Another model could involve an integrated multidisciplinary professional services firm offering a range of services, including auditing, tax advice, business consulting and legal services. The lawyers would be organized into a law division that would provide legal services to clients of the firm, sometimes as part of an integrated engagement and sometimes as the only service provider. In rendering legal services, the lawyers would express their professional judgments without interference from non-lawyers. Each lawyer in the firm would be responsible, on a project-by-project basis, for maintaining client confidences. Clients would be advised in advance of the integrated position of the lawyers within the firm, and of the facts and risks attendant to the firm’s providing integrated services. Potential conflicts would be waived in advance, following appropriate disclosure; and no conflict would not be waivable.

* * * *

As the Chair and Chair-Elect of the ABA Tax Section observed in their November 24, 1998 letter to President Anderson, "the present state of affairs is unacceptable, because lawyers who honor their profession by strictly observing its rules are rendered unable to effectively compete, and, in turn, lawyers who choose to join accounting firms in order to compete effectively suffer the uncertainty of having their conduct as professionals called into question."

I join their call to the ABA to reevaluate and reject "guild law" restrictions that do not advance the public interest. I welcome this dialogue, and hope that my comments prove useful as you continue to study these difficult issues.