May 2000

Society Raises Concern About Legal Services to Audit Clients

Responds to ISB Discussion Memorandum

On May 1, the NYSSCPA responded to the Independence Standards Board's discussion memorandum on legal services and recommended that CPA firms should not be permitted to offer legal services to audit clients.

The ISB issued the memorandum last December in recognition that the multidisciplinary practice, or MDP, is a growing phenomenon. The memorandum presented the pros and cons of an auditor offering legal services and sought input on how such services would affect audits.

"Our comments recognized the challenges currently posed by the interworking of the CPA and the legal professions' ethics codes," said former NYSSCPA President Francis T. Nusspickel, who serves on the MDP team that drafted the comments approved by the Society's Executive Committee. "The main thrust of the legal profession's ethics code is the zealous advocacy of clients' interests whereas the CPA profession's ethics code, at least as it relates to attest services, advocates protection of the public interest by the auditor's independence from the client."

MDP, where CPAs partner or shares fees with attorneys or other professionals, has gained increased attention since a special commission of the American Bar Association issued a report in June 1999 that would permit such practices. The ABA's governing house of delegates rejected the report last summer but will address the issue again at its annual meeting in July. Other city and state bars also have examined MDPs. (See the related story on this page about the Philadelphia Bar's recent action.)

Since 1993, the largest auditing firms have provided legal services to their audit clients' foreign subsidiaries and foreign audit clients subject to Securities and Exchange Commission rules. This practice has grown significantly in a number of European countries, where large auditing firms are closely affiliated with law firms.

NYSSCPA Vice President and incoming President-Elect Nancy Newman-Limata cited SEC rule 602.02.e.ii. as precluding auditing firms from offering legal services generally. That rule states:

A legal counsel enters into a personal relationship with a client and is primarily concerned with the personal rights and interests of such client. An independent accountant is precluded from such a relationship under the Securities Acts because the role is inconsistent with the appearance of independence required of accountants in reporting to public investors.

"Although ethics rules do change over time, currently it is clear that auditing and certain legal services don't mix," Newman-Limata said. "As a result, our comments advised the ISB that for the present, auditing firms should not be allowed to offer litigation services to audit clients. 'Litigation services' here means representing clients before adjudicatory bodies and not litigation support services, which many CPA firms are now calling simply litigation services and which do not ordinarily present independence issues."

The ISB's Discussion Memorandum on Legal Services (ISB DM 99-4) and the Society's comments are available online at www.nysscpa.org. For more information contact NYSSCPA Director of Ethics and Regulation Ann E. Spaulding at (212) 719-8348 or aspaulding@nysscpa.org or NYSSCPA Counsel James A. Woehlke at (212) 719-8347 or jwoehlke@nysscpa.org. *