US Bar Association endorses MDPs

The onset of multidisciplinary practices in the UK and US took a dramatic leap forward last week with the announcement that the influential American Bar Association has recommended that lawyers should be permitted to deliver legal services though an MDP.

Although cynics can point out that the ABA, which represents US lawyers, does not have the regulatory authority of the Law Society, many see this as the trigger for the UK law profession to lift its ban and allow MDPs as early as this summer. To those in favour of MDPs, the move is a crucial boost.

‘America is seen by many as the last bastion of legal supremacy, and the views of the ABA will come as a pleasant surprise to those who are interested in transatlantic MDPs,’ believes Wilde Sapte partner Mark Andrews.

In many ways perception is more important than reality. The ABA is a highly respected body but has no real power and it is up to the Supreme Courts in all 50 States to decide. But the issue of client conflict could still kill MDPs before they are even born. The ABA recognises this danger.

‘In connection with the delivery of legal services, all clients of an MDP should be treated as the lawyer’s clients for purposes of conflicts of interest and imputation in the same manner as if the MDP were a law firm and all employees, partners, shareholders or the like were lawyers,’ according to last week’s ABA report.

But the biggest constraint remains the Securities & Exchange Commission which, according to Jones Day Reavis & Pogue partner-in-chief and US lawyer Stephen Fiamma, has perhaps the most rigorous rules on conflict anywhere in the world; rules that are only getting tighter. These mean that a single firm cannot provide legal and audit/consulting work to the same client, even when the duties are being carried out in different countries.

‘These rules were designed to preserve the auditor’s independence and the impartiality of his reports to the public. Accounting firms with associated law firms have effectively been ignoring their existence. The problem is made worse by the fact that most accounting firms would not be capable of identifying their conflicts, even if they were minded to comply with the rules,’ he says.

He adds that it is not just a case of establishing a database in which the information can be collected, but it would necessitate the creation of an entire culture to monitor, identify and deal with conflicts. Fiamma also questions whether accountancy firms should be thinking about spinning off their statutory audit functions if the barrier to MDPs were removed in order to protect this sensitive area of client interests.

KPMG head of tax and legal Ian Barlow rejects suggestions that accountancy firms would be unable to cope with conflicts should they be able to join forces with lawyers in the same practice. He maintains that his firm already operates under extensive regulation.

‘It is principally a commercial issue. Clearly we do not want to upset clients and wish to respect necessary confidentiality. This issue is at its most intensive in corporate recovery and forensic accounting where we have had to pass on work because of some prior involvement with the company. We are used to conflicts and we do not regard extending that to legal services as a big problem,’ says Barlow.

Ernst & Young corporate recovery partner and Society of Practitioners of Insolvency president Alan Bloom agrees. He points out that insolvency practitioners cannot take on work where the firm has had material involvement with that company in the preceding three years.

‘Even where there is the perception of a conflict, we have to leave it alone so you can see that this area is heavily regulated,’ Bloom stresses. ‘We have turned down millions of pounds worth of work.’

Nevertheless, both accountants and lawyers are well aware of the SEC rules, and they are a cause for concern.

One Group A senior source says that the current accounting systems would catch about 95% of conflicts and with new IT developments, that figure would be improved. But, he acknowledges, issues such as Chinese Walls could obscure the boundaries and overrule professional judgement.

Barlow warns against carrying the SEC rules to their extreme. ‘If this is pushed too far and put some sort of block on providing non-audit services to audit clients, it could cause big firms to think twice about these audits, and then who would do them?’ he asks.

The ABA’s support should make MDPs a reality and enable firms to market the legal services they already offer through associated law firms under a single brand. But issues over conflicts of interest will linger far beyond this summer’s Law Society vote and, ultimately, will determine whether pacts between accountancy and legal firms endure.