Oral Testimony of Richard Spivak - Center for Professional Responsibility

Oral Testimony of Richard Spivak,

Partner, Arthur Andersen LLP’s tax practice in North America

Richard Spivak, the partner in charge of Arthur Andersen LLP's tax practice in North America, was the next speaker. With Arthur Andersen since 1971, he is licensed to practice certified public accounting in New York and Texas and licensed to practice law in Texas. He presented his comments to the Commission.

Professor Daly started off the questioning. She asked Mr. Spivak how Arthur Andersen was providing legal services in those jurisdictions in which it was allowed, that is, what mechanisms were in place to protect the lawyer's exercise of independent professional judgment. He said they observe the rules in each jurisdiction. In some countries, where multidisciplinary firms are permitted, that’s how they are structured. In other countries, the structure is more akin to a contract relationship (Model 4) with the independence of the separate entities respected. He pointed to the testimony of Neil Cochran of Dundas Wilson, a firm with whom Arthur Andersen has had a contract relationship for a number of years. The lawyers in that 300-400 year old firm express no concern about domination by others. He thinks the concern about impairment of professional judgment is more fear of that happening. Professor Daly then asked about the adjustment of revenue at the end of the year that the captive law firm is asked to give, upstream, to the parent entity, and the concern that there’s a ‘club' in the financial arrangements between the lawyers and the Big Five. She asked what he thought of a rule of transparency with respect to the financial arrangements between the Big Five and their captive law firms, like that under consideration by the Paris Bar (the requirement that the contracts between the captive law firms and the accounting firms be deposited with the bar). Mr. Spivak responded that Model 4 doesn't go far enough. The rationale for multidisciplinaries is the same reason why U.S. law firms choose to open an office in London rather than contract with some other firm on a lesser basis or joining some type of network. He said the overarching philosophy ought to be profit sharing, not only in the bottom line oriented economic sense, but as a concept that matches both risks or losses and upside potential. "The beauty of profit sharing is that it fosters the uniform, consistent common shared values that promote adherence to professional standards. Because when you're my partner and we share profits, then we have the exact same objective, which is to adhere to standards so we protect ourselves against risks." He said it's a cultural issue that promotes adherence to the highest standards; issues of dominance and impairment of judgment are not consistent with being partners. It is not management imposing its judgment or will in an uncomprehending or insensitive way on a professional. Profit sharing promotes a fabric, a mutual dependence and teamwork and collaboration that is much different than the casual or indifferent approach of the contract model or some type of network that has no binding culture. Another key difference is that by focusing on the contract model the focus will be on the contracts. He thinks it encourages complicated, involved approaches, artifices, devices, and form over substance. He sees an inability to achieve regulatory peace because someone will constantly want to review the documents and audit the relationship to see what is actually being done and how the money is flowing. He thinks Model 5 has transparency, and independence is promoted by that transparency.

Assuming that the ethos and aspirational positions of the accounting profession are as high as those of the legal profession, Dean Powell asked how accounting firms structure themselves to assure that those aspirations are met. Specifically, he asked, are CPAs allowed to enter into arrangements where they are minority owners of CPA firms. Mr. Spivak believes there is currently a 50% CPA ownership requirement for a firm that holds itself out as a CPA firm. At one time the requirement was 100 percent. He thinks that the ownership requirement is partly historical, dating from when most of the people in the firm were CPAs, as compared to today when there are a number of other competencies. Therefore, he considers the decline in the ownership requirement appropriate. He thinks the ownership requirement also derives from the concept of audit work as a third party beneficiary task with the third party being the investors and the public etc. (Other services offered by accounting firms, such as tax counseling, involve only two-parties.) The view was there needed to be an ownership requirement for the firm that would support or protect the audit function. The trend today, however, is that the function rather than the firm should be regulated. For example, appropriate regulation would be applied to the attest or audit group within the MDP or accounting firm instead of relying on an ownership requirement. The CPAs who work on the tax side are no more oriented toward the audit than is an information consultant or a lawyer. Dean Powell asked whether the CPA percentage ownership requirement for accounting firms is designed to assure there is somebody in control who understands the ethos and ethics of the accounting profession. Mr. Spivak said perhaps that was why the ownership requirement had been imposed in the first place (there probably is an element of that), but that the trend is away from such a requirement because of a recognition that the requirement is not essential to accomplishing the objective.

Dean Powell asked about the consequences within the accounting firm (what would happen to the decisionmaker) if a CPA did not handle a conflict of interest properly, such as by failing to disclose all the relevant facts. Mr. Spivak said failure in a responsibility would trigger some type of punishment within the firm such as reduction in income or dismissal; if it's a violation of professional standards the person would be subject to appropriate discipline. He was not aware of any cases involving sanctions against his firm for breach of confidentiality or violation of conflict of interest, or of other civil liability in court. He said the fact that the case cited by Professor Cone was in court shows that there is a remedy for a breach of fiduciary duty. Dean Powell asked whether those in an MDP who hold a law license should operate within the segregated office and those trained as a lawyer but not holding themselves out as a lawyer should either give up their license or go inactive and simply operate with others who have some professional standard. Mr. Spivak said that those with a law license who are not doing anything close to practicing law (i.e., audit work) are an easy case and for them the stated options are reasonable but the closer question is the people who are providing tax services as what they do and what lawyers in law firms do is very similar. By moving those with a law license who are providing tax services into a law department they would get the advantage of privilege. If they did not want to move and were forced to give up their license or go inactive one consequence would be a reduction in ABA membership. Nonetheless, such a possibility should be considered and could be acceptable.

Mr. Rosner mentioned that in addition to New York enunciating law firm discipline in its rules the New Jersey Supreme Court, under implied powers, has recently imposed discipline on a law firm. He asked whether Mr. Spivak thought that law firm discipline was appropriate. Mr. Spivak responded that Arthur Andersen is not a novice in dealing with regulation of a firm. He thinks how Arthur Andersen addresses professional standards far exceeds what is done in law firms. For example, Arthur Andersen has mandatory CPE, mandatory training, a peer review program for tax practitioners - internal every year, external every three years (partners and the senior people under them are reviewed), significant mentoring policies, and a significant investment in risk management (performed by highly compensated and seasoned professionals who devote 30 to 100 percent of their time managing risk and professional responsibility). If one favors a regime where the firm is regulated and these sorts of requirements are imposed, Arthur Andersen is already there. Mr. Spivak believes that the law practice group within the MDP should be subject to the same rules as a stand alone law firm. He thinks limiting regulation to the law group doesn't involve the complexity or possible anomalies of disciplining the entire firm if a lawyer makes a mistake. Mr. Nelson observed that the issue of how lawyers hold themselves or don’t hold themselves out becomes a much more difficult proposition in the context of a multidisciplinary firm which holds itself out as a firm providing legal services. Mr. Spivak commented on the concern that client expectations are met. Mr. Spivak said there are two ways to handle the MDP situation: one option, as Dean Powell suggested, is those with a law license are swept into a group to which the lawyer rules apply. Those who were not in that group would have to relinquish their license. The other option is that at the beginning of each engagement it must be made crystal clear to the client who is providing service to them and whether he or she is practicing law. Mr. Nelson's second question dealt with conflict issues. He asked how an MDP with a separate legal division holding itself out as providing legal services should handle direct adversity between the law practice and the consulting practice. Mr. Spivak agreed that a directly adverse conflict would be imputed to the entire firm. Mr. Spivak was asked the converse question – if the legal division is handling a matter and the consulting division is approached by a party that is directly adverse and asked to take on a representation that if taken would put the lawyers in a conflict. He gave the same response, imputation to the entire firm and appropriate disclosure and consent on both sides. Mr. Nelson then asked whose rules would apply if a lawyers' rules would not allow the representation to go forward and a consultants’ rules would. Mr. Spivak said the principle which is the higher standard would apply in the entire firm. That is how Arthur Andersen handles things now, absent the lawyers.

He was asked by Ms. Lamm what types of professionals were at his firm to offer business consulting services (CPAs, MBAs, economists, PR people) and if there were any standards or definitions regarding the kinds of professionals. Mr. Spivak said Arthur Andersen has consistency in the services it provides and that educational backgrounds vary. The focus is on what services the people provide rather than their education – Arthur Andersen wants to provide services that are consistent with the image they want to project. Ms. Lamm then asked whether lawyers would have the same status as other professionals in the firm – i.e., could they become partners or directors of the MDP. Mr. Spivak said the firm's managing board is elected and its governance rules require a form of geo-functional cell representation, so the different functional capabilities are represented (he had been on the board of partners of the firm from 1989 through essentially 1990 with one year out). The firm respects its constituencies for the simple reason that if it didn't they wouldn't want to be there. Ms. Lamm asked about the 50 percent rule applied to the managing board or the CEO. Mr. Spivak said he was not an expert on the point, but he believed there was a time when the chief executive had to be a CPA. That has changed. The focus now is on the function, so the head of the audit group needs to be a CPA. He thinks the ownership issue is somewhat anachronistic.

Ms. Katz asked what he thought about Judge Friedman's audit proposition -- an undertaking by the entity to follow the appropriate professional rules and an audit every five years. Mr. Spivak responded that it was interesting and, if he understood it correctly, he found a lot of it appealing. He raised the analogy to the firm’s attest SEC practice where an outside peer review (by one of the other Big Five firms) is mandatory, albeit it's for a different purpose and in a limited context. He disagrees, however, that the rules should only apply to MDPs on the reasoning that fee sharing impairs independent judgment. If specific requirements to get audited with respect adherence to professional standards are imposed on an MDP legal practice, he believes those requirements should apply to a stand alone law firm as well. Ms. Garvey offered the information that many prepaid legal service plans have special registration requirements because of the concern regarding the change in methodology of practice and asked whether special provisions regarding MDPs would be appropriate. Mr. Spivak responded that if the choice is between a categorical prohibition or dealing with the special issues, he favored the latter and mentioned cautionary language. Mentioning that the lawyer ethics rules give a somewhat broader application of the duty of loyalty than direct adversity as the only conflict, Mr. Mundheim asked whether Mr. Spivak thought the concept of loyalty as defined in the ethical codes governing lawyers should be applied to any client of the MDP receiving legal services (Mr. Mundheim wanted to make sure that Mr. Spivak clearly understood that the legal regulation applies within the firm and not only with respect to activity by the legal division). Mr. Spivak responded "yes". The Chair, acknowledging the accounting firms honorable traditions and core values as well as the likely concern regarding independence of the profession and protection of the public in the ABA House of Delegates and the 54 jurisdictions, asked if those who would like an MDP (Model 5) would accept something less without a fight. Mr. Spivak said that the bar has to ask itself what it does for the legal profession as it moves forward if it does not take the time to understand the issues and the facts and pay attention to market factors and instead bases its judgment on fears, anxieties and some parochial self interest. He thinks it would leave the legal profession in a more marginal position. Mr. Spivak understands that change does not come easy, but a categorical prohibition should be avoided. He urged that the Commission's objective be transparency, and that dealing with some of the more difficult issues is the preferable way to go. With the acknowledgment that the Commission received testimony and not evidence, Mr. Spivak was asked how the Commission could respond to the question >how do you know clients want this?' Mr. Spivak observed that when law firms joined Arthur Andersen’s network, he knows they did what anyone would do who was contemplating such a change - they talked to their clients about it. They would not have made the big change to affiliation without thoroughly considering what the views of their clients were. The feedback the firms got was uniformly positive, the evidence being they then joined the network. He further testified that he was amazed at the breadth and depth of testimony the Commission had received. He mentioned the American Corporate Counsel Association’s resolution in support of MDPs (ACCA resolution of February 6, 1999), as corporate counsel in the U.S. are important consumers of legal services. He also mentioned the various consumer interests that have supported MDPs, including AARP, Ms. Weber’s consumer organization centered in Texas and the largest consumer organization in California that submitted an article in support of MDPs. He said he did not know what kind of polling or surveying these witnesses did, but he would be astonished if, before they testified, they had not ensured they were on solid ground in ascertaining the views of those they represent. He heard Stef Tucker testify in L.A. and he can’t conceive that Stef Tucker would make a recommendation in favor of MDPs on behalf of the Tax Section if the Tax Section thought noone wanted it. The same is true for the Small Firm Section of the ABA. Professor Haddon inserted that most lawyers don't buy that the profit sharing approach perpetuates and supports the highest ethicals standard as Mr. Spivak contends, they believe more is needed. Mr. Spivak mentioned that the legal profession does recognize firewalls for lateral hires and lawyers who come from the government. He maintained disparaging firewalls as not working is an example of insufficient knowledge. The Chair asked whether lawyers who are holding themselves out as lawyers B either through J.D. or Esquire or writing articles B though they are doing something other than practicing law (such as lawyers in an MDP nonlegal division) should be subject to the discipline of the bar. Mr. Spivak responded yes, they should.