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The Big Four accounting firms’ moves into legal consulting services are capturing the attention of law firms wary of stronger competition and U.S. regulators keen to prevent such services from violating auditor independence rules.
The announcement last month that PricewaterhouseCoopers LLP launched its own branded law firm, ILC Legal LLP, has focused attention on the newer, bulked-up players, according to Bloomberg Tax interviews with attorneys, accountants, and corporate consultants.
The Public Company Accounting Oversight Board said it is monitoring the accounting firms’ expansion into legal services to ensure it doesn’t compromise the independent audits of their clients’ financial statements.
PwC’s ILC Legal in Washington won’t practice U.S. law. It plans to focus on foreign legal consulting for U.S.-based multinationals, managing partner Richard Edmundson said.
The continued expansion of Deloitte LLP, Ernst & Young LLP, KPMG LLP, and PwC “into legal services has the possibility to transform the global legal market,” according to a September report by ALM Intelligence, a management consulting and research company.
“The Big Four’s approach of packaging lawyers alongside accountants and consultants is attractive to clients,” wrote Nicholas Bruch, ALM senior analyst and the author of the two-part ALM report on the accounting firms’ advances into the business of law. Coupling the accounting firms’ tax services with legal consulting has proved to be one of the biggest draws for companies, Bruch told Bloomberg Tax. Similar joining of legal services with help on mergers and on finance also has gained favor among companies, he said.
The Sarbanes-Oxley accounting and corporate reform law of 2002—and subsequent auditor independence rules—generally bar accounting firms from providing non-audit services to their audit clients, with the exception of restricted tax services.
However, nothing prevents the Big Four from marketing such legal and other non-audit services to non-audit clients, “which they all now aggressively do,” Harvard Law School professor David Wilkins and Maria Esteban Ferrer, both of Harvard’s Center on the Legal Profession, wrote Sept. 26 in the Columbia Law School Blue Sky blog.
The Securities and Exchange Commission declined comment when asked about Big Four firms’ growth in legal services, but the PCAOB, which operates under the aegis of the SEC, is watching developments.
“Existing independence requirements would preclude an issuer’s auditor, or affiliates of the auditor, from providing legal services to that issuer or any of that issuer’s affiliates,” PCAOB spokeswoman Colleen Brennan said. “The PCAOB monitors for compliance with that requirement and other independence requirements.”
The regulatory lines seem to be somewhat blurry in defining what services are allowed, including services for audit clients. Harvard’s Wilkins said in the ALM Intelligence report that practice in the U.S. “has allowed the Big Four to offer some legally-related services,” such as in tax, regulatory compliance, financial management, and merger due diligence, “even to their core audit clients.”
Linda Griggs, a former partner at global law firm Morgan, Lewis & Bockius LLP, questions whether an accounting and consulting firm such as PwC, in diving deeper into legal services, isn’t further complicating the job of abiding by auditor independence rules.
“I think the monitoring of independence is difficult as it is without their also providing legal services that have to be monitored” for proper separation from any work with audit clients, said Griggs, who once served as counsel to the SEC’s chief accountant.
ILC Legal’s Edmundson, who also is PwC Legal’s chief of international business reorganizations, said the accounting firm is fully aware of auditor independence requirements and closely monitors attorneys’ adherence to the rules.
The PwC-branded ILC Legal will provide legal consulting only “to non-restricted and non-audit clients” of the Big Four firm, he said.
Catherine Allen, a long-time consultant on auditor independence and professional ethics, told Bloomberg Tax Oct. 11 that accounting firms that provide varied non-audit services, including legal, have to guard against non-audit clients becoming audit clients.
The Big Four accounting firms are sprawling, complex international organizations, said Allen, head of consulting firm Audit Conduct. An accounting firm providing non-audit services to foreign affiliates of U.S. audit clients can pose problems.
“You’ve really got to have proof that the policies and procedures that you have are actually working in practice,” Allen said.
In Bloomberg Tax interviews, Bruch cited ALM’s recent polls of law firm leaders to buttress his conclusion that law firms see the Big Four as rivals that could make significant inroads into the domain of traditional, full-service law firms—especially in non-litigation areas.
Sixty-six percent of those law firm partners and managing partners surveyed by ALM over the summer declared they were either “very concerned” or “somewhat concerned” about their law firm’s ability to compete with “alternative legal service providers” and accounting firms.
CPA firms moving into legal services was cited by 64 percent of law firm respondents as the biggest threat to traditional law firms’ share of the legal services market, according to Bruch’s study.
The numbers of attorneys in the legal arms of the giant global accounting/consulting networks have increased over the last several years, Bruch said Oct. 13.
EY Law Alliance, for example, employed 1,850 attorneys in 2001, according to ALM and the Harvard Center on the Legal Profession.
Today, Ernst & Young has more than 2,000 attorneys in EY network member firms operating in 80 countries, EY global law leader Cornelius Grossmann and Americas law leader Carolyn Libretti told Bloomberg Tax in a joint statement Oct. 12.
EY’s legal arm counts in its stables lawyers based in New York and California, “including attorneys who have been providing foreign legal services in the US since 2007,” Grossmann and Libretti said.
According to ALM Intelligence’s statistics for 2016, PwC’s legal arm employed 2,500 lawyers in 85 countries; KPMG’s legal affiliate, 2,200 attorneys in 53 countries; and Deloitte, 1,800 in 69 countries.
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