October 05, 2011

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




FEBRUARY 4, 1999


My name is Kathryn Oberly. I am the General Counsel and a Vice Chair of Ernst & Young LLP. I appreciate the opportunity to speak before the ABA Commission on Multidisciplinary Practice.

I have, I believe, a unique perspective on these issues. I have been practicing law for 25 years -- as a law clerk to a federal appellate judge, an attorney in the United States Department of Justice, a partner in a U.S.-based law firm with offices in many states and several countries, and now the General Counsel of a large professional services firm. As a result, I have a keen understanding of the core values of our profession, and believe those values should be preserved. During my 8 years with Ernst & Young, I have also developed a strong appreciation for the professional standards governing the accounting profession. I believe 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 while still preserving the values of both professions.

Many of the practice questions this Commission is addressing have been considered before -- nearly 20 years ago, the Kutak Commission urged the ABA to reform Rule 5.4. As Chairman Kutak wrote to the ABA,

"[t]here 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."

I agree.

1. Global Demand for Services. Globalization of the economy has increased opportunities for small and large businesses alike. Problems can no longer be classified as solely "legal" or "business." But it is not only companies with an international presence that face multi-dimensional legal and business 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. In short, clients today -- whether large or small, international or local -- need comprehensive solutions from a team of integrated professionals.

2. U.S. Professional Services Practice. In addition to our core audit and accounting practices, Ernst & Young meets client demand for advice on a wide range of issues with professionals trained in many different disciplines, including economists, MBAs, tax advisors, appraisers, financial managers, lawyers, estate planners, actuaries, doctors, nurses and human resources specialists.

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. Consulting on matters that have legal components does not necessarily involve the practice of law. In the United States, the 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. 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.

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 comprehensive, integrated professional services.

Consumers in the United States are denied the opportunity to obtain such integrated services because of various fee-sharing and partnership restrictions. Absent a change in the rules, I suggest that U.S. lawyers will find themselves at a competitive disadvantage.

3. Existing Regulatory Framework and Proposals for Change. I believe the world 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. This Commission has heard a great deal of testimony respecting client benefits from multidisciplinary arrangements. The challenge to the bar is preserving values that are central to the legal profession in practice structures not permitted by the current rules. How can this challenge be met?

I do not believe that the ethical issues raised by associations between lawyers and non-lawyers are insurmountable or very different from the issues that lawyers regularly face. The practice of law is no longer limited to the 19th century model. The bar recognizes that it cannot have separate rules to regulate different forms of law practice. 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. I believe the profession can do so while preserving core values of independence, confidentiality, and avoidance of conflicts.

a. Independence of professional judgment. The duty of a lawyer to exercise independent judgment has always been clear. Threats to independence cannot be regulated out of existence. In today’s economy, law firms are businesses, and partners and associates are expected to meet targets for chargeable hours and billing goals. But we do not bar lawyers from working in large law firms. 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 extremely skeptical of this assumption. I report to the Chairman of our partnership, who is not a lawyer, and my salary is not set by lawyers. However, my judgment has never been clouded by my employer. I think you would have to search long and hard to find general counsels who believe their ability to provide independent advice is somehow compromised by their employment arrangements.

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. 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. Several commentators have suggested that confidential attorney-client information could not be protected in a multidisciplinary firm, because a significant percentage of the professionals would not be covered by the attorney-client privilege. This suggestion, in my view, 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 non-lawyer professionals who assist the lawyer in rendering legal advice, the lawyer’s privilege should extend to all such professionals, provided 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. Our firm has developed procedures to safeguard information covered by this privilege. We established training programs to teach our employees the boundaries of the new privilege, so they can explain it properly to clients and so they can effectively maintain the privilege in a working environment where many professionals are not covered by the privilege.

One additional point has been raised with respect to maintaining client confidences in a multidisciplinary firm that provides both audit and legal services to the same client. Informal guidance provided by the SEC staff several years ago permits a non-U.S. law firm affiliated with an accounting firm to provide limited legal services to SEC registrants that are audited by the accounting firm. In a recent letter to this Commission, the Chief Accountant of the SEC expressed his view that audit independence would be impaired by an accounting firm providing legal services to an SEC registrant that it audits. The SEC has now asked the Independence Standards Board to address the scope of legal services that can be provided to audit clients in the United States. This is, of course, a very narrow subset of the potential universe of legal services that MDPs might offer. In any event, the Independence Standards Board is the appropriate body to study this issue, but that study should not be allowed to slow down this Commission’s work on the much broader issues surrounding MDPs.

The only issue for this Commission, then, is the potential for conflict between a lawyer’s need to protect privileged information and an 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 handled by separate firms. But this theoretical conflict is hardly ever realized. Lawyers often have confidential information that may impact their clients’ financial statements, but may not disclose the information without the clients’ consent. As they are professionals, we would presume that lawyers would counsel their clients to disclose the information to the auditors. Companies recognize that they have independent obligations to disclose material information to the auditors. They understand that if auditors cannot get the information necessary to render an opinion, the auditors must qualify their opinion or resign from the engagement — options that corporate clients cannot tolerate.

c. Avoidance of conflicts. Some have contended that there is no sensible method to resolve client conflicts in a multidisciplinary firm. Conflict 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.

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 the time has come for the bar to re-examine and to alter Model Rule 1.10, the rule governing imputation of conflicts. Again, the model rules should focus on the individual lawyer rather than the organization in which the lawyer practices. During my time as a partner in a large, multinational law firm, we found ourselves faced with conflicts from matters handled by lawyers in our offices around the country and even around the world. I suspect this problem is even larger today, given the growth of law firms. The same 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. I understand that some might contend that client advocacy in a judicial forum should create a limited exception where conflicts would need to reach beyond the individuals working on the matter.

4. Alternative practice structures. 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.

Not to advocate a specific structure, but in an effort to advance the debate, I offer the following possibilities:

A first step could involve an alliance between an accounting firm partnership 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 is made to the client before the engagement commences. 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. 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 all conflicts would 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.

Professor Daly took Ms. Oberly up on her offer to compile for the Commission a list of similarities and distinctions between the AICPA and ABA ethics rules. In response to a takeover hypothetical with E & Y clients on both sides Ms. Oberly answered that the initially contacted engagement partner would take the issue up the chain of command and determine whether it’s possible to handle the situation through disclosure and client consent, if not, the new engagement would be declined. She said engagements are declined more often on business, rather than ethical, grounds. If the proposed work were less adversarial and the clients were informed and consented, firewalls would be set up and the engagement would proceed. Her response framed the issue as whether objectivity was impaired. In response to Ms. Lamm’s conceptualization of the conflict standard as a case-by-case balancing test premised on a mix of ethical analysis and business judgment Ms. Oberly acknowledged that, although a small subset, the 2,500 SEC registrants are E & Y’s larger clients. Ms. Oberly said any ISB and Commission dialogue on independence and providing legal services would be preliminary as concerns with the audit function are really the job of the SEC to resolve. Dean Powell asked which rules Ms. Oberly would change and she said the imputation rule, MR 5.4 and the referral rule in MR 7.2. In response to Dean Powell’s inquiries she advocated flexible rather than absolute rules whereby the individual and those working under her would remain subject to her own professional rules. If the engagement is primarily legal the lawyer’s rules would govern, if the engagement is primarily accounting the accountant’s rules would govern. Mr. Nelson asked how ethics rules could be applied if the engagement melds legal and financial parts so these cannot be sorted. Ms. Oberly said that if a showing can be made that the individual is practicing law legal ethics should apply; however, she doesn’t accept the fact that just because someone is a lawyer everything the person does is practicing law. She considers whether advice is legal or business to be like the privilege question that would have to be sorted through in each particular engagement. She concurred that a ‘no imputation’ rule would also apply to law firms. She maintains that imputation goes beyond what is necessary to protect a client and that it need not be automatic as the client could determine the need on a case-by-case basis. Commenting that the conflicts checking rule really requires disclosure so the client can consent on an informed basis Mr. Nelson questioned, if no conflicts checking system is maintained, what does the professional know that she can disclose to the client? Ms. Oberly said the professional would say she doesn’t know and it would be up to the client to decide whether to proceed with the engagement; the client could say if you find out an adverse relationship let me know or could ask for carve-outs by which the lawyer client relationship would be structured. Mr. Mundheim questioned, somewhat hypothetically, whether the Commission needed to distinguish who partnered with the lawyer or supervised the MDP. Ms. Oberly asked whether a Blockbuster’s video, a Sears or a H & R Block in that role might not improve access to legal services for those otherwise lacking, and posited that the Commission should consider both the small and the sophisticated client. Mr. Mundheim questioned whether more complex disclosure would trigger a need for policing in order to enforce mandates? Ms. Oberly thought the current regulatory scheme was sufficient and did not favor a new or a national regulator for multidisciplinary practices.

Professor Haddon asked what would replace the imputation rule? Ms. Oberly said disclosure at the commencement of the engagement that the professional doesn’t know if there are any conflicts within the firm and that if any are identified a firewall will be maintained. If the client considers this information not sufficient the client could go elsewhere. Ms. Oberly thought the sophistication of the client would be a very big factor in determining whether the disclosure was adequate for the client to make an informed decision. Mr. Wander asked who determines whether disclosure is adequate and, thus, consent is informed - is a lawyer or chief financial officer (second opinion) needed? Ms. Oberly said the client herself would decide and it would be cumbersome to suggest the client confer with counsel. Asked if the accounting firm, when it has lawyers on both sides of a merger transaction, discloses and obtains written informed consent, Ms. Oberly said they do whereas Mr. Wander said that in his experience they do not. She also said that Ernst and Young, by practice and custom, does not share information within the firm beyond the need to know and that they would get client consent before complying with a subpoena duces tecum unless there was a court order. The panel seemed wary of this response as in their experience subpoenas were simply obeyed. If information were inappropriately disclosed (for instance, one client’s SEC ruling put into other clients’ files, unredacted) Ms. Oberly said the accounting firm would discipline the individual. When Mr. Wander questioned whether the wrongdoer’s supervisor would also be disciplined for failure to supervise she said it was a possibility. Judge Friedman presented the inability to determine ‘what is the practice of law’ as the dealbreaker because allowing the individual lawyer to disclaim she is practicing law in the MDP forecloses any subsequent inquiry. In a law firm or as in-house counsel there is a presumption that the lawyer is practicing law. In a business consulting engagement Ms. Oberly doesn’t consider a lawyer providing a side piece of advice to be the practice of law. She again raised the privilege example to say that if it’s mixed business/legal advice a lawyer is giving, it doesn’t matter what the form of business organization, the discussion may be privileged or it may not. Although the practice of law doesn’t have a clear answer she would tilt toward things that look like lawyers advising clients on the application of particular laws to particular factual situations as constituting the practice of law. Ms. Oberly agreed with Ms. Garvey’s model that lawyers be grouped in a separate division and that they and the nonlawyers working under them abide by the Model Rules and institutional safeguards be built around this unit (which would also facilitate application of malpractice and discipline tenets). Professional service firms could then have 4 major lines of business - audit, tax, consulting and legal services. Ms. Oberly thought the exclusive or quasi-exclusive alliance between independent law firms and accounting firms, where support services or back office services were shared, was a possibility. However this 1 st step, 2nd step approach did not address the whole integrated services question. Mr. Rosner proposed the notion of using the client’s perception as the guide to what ought to be treated as legal services for client protection purposes - does the client think he or she is receiving legal services? Asked if E & Y has two major clients and one wants to acquire the other how does the accounting firm even inform its existing client/takeover target, Ms. Oberly said the accounting firm would have told the client in advance (presumably at the time the firm was retained) that the accounting firm doesn’t know or won’t tell the client about conflicts of interest that may come up later. She said Ernst & Young wouldn’t take such a takeover engagement but would continue to represent the clients with respect to other matters. Ms. Oberly said the current AICPA rule says the AICPA member has the obligation to ensure objectivity not only in the professional’s but also the client’s eyes. Even though the accountant might think it’s okay the accounting firm may conclude that disclosure and client consent is not adequate for the client to perceive that objectivity is not impaired. She said she thinks the AICPA should also be assessing whether its rules fit today’s service delivery models. The Chair asked if Ms. Oberly might comment about the government’s failure to enforce Tax Court Rule 201 or Practice Rule 24g.