Are Accounting Firms Still Practicing Law?
LACBA Update, April 2003

By Teresa Schmid, Esq., member, LACBA Professional Responsibility & Ethics Committee. Schmid is the director of LACBA’s Professional Services Department. The opinions expressed are her own.

On January 28, 2003, the Securities and Exchange Commission issued a final rule on auditor independence. This provision makes it unlawful for any public accounting firm that performs an audit of the issuer’s financial statements to provide to that issuer, contemporaneously with the audit, any of nine prohibited non-audit services. One of the prohibited non-audit services is legal services. “Legal services” are defined as “any service to an audit client that, under the circumstances in which the service is provided, could be provided only by someone licensed, admitted, or otherwise qualified to practice law in the jurisdiction in which the service is provided.” As a result, defining what constitutes the practice of law in California has taken on a new urgency.

The American Bar Association recently appointed a Task Force on the Model Definition of the Practice of Law, which is scheduled to report to the Board of Governors by August 2003. The Task Force’s first draft, dated September 18, 2002, proved to be too expansive for some tastes. Negative reactions came from quarters as close to home as the ABA’s own Standing Committee on the Delivery of Legal Services, and its Section of Antitrust Law. However, one of the most formidable oppositions arrived in a jointly executed letter from the Federal Trade Commission and the Department of Justice. In 12 strongly worded pages the agencies recounted their recent actions against similar initiatives in individual states. It is unlikely that the ABA will have a working definition by August, or even sufficient support to continue the effort after that date.

However, the controversy surrounding the ABA’s draft is focused on consumers, competition, and access to justice. In contrast, the SEC’s rule on auditor independence presents an opportunity to the legal profession that is also framed in terms of a definition of practicing law — the opportunity to reclaim areas of practice that have been occupied by accounting firms for many years. The State Bar of California always has viewed the ABA’s Model Rules with a critical eye, and like most other states, it has long felt the lack of a definitive rule in this area. The State Bar will not, therefore, be deterred by the ABA’s negative experience. In February 2002, the State Bar re-appointed the Commission for the Revision of the Rules of Professional Conduct to begin a five-year evaluation of all of the Rules of Professional Conduct. Defining the practice of law is now back on the front burner, along with the related issues of multidisciplinary practice (MDP) and multijurisdictional practice (MJP).

Lawyers already may be benefiting from the SEC’s action. Accounting firms are moving quickly to terminate non-audit services to their audit clients. This may create new opportunities for law firms whose billable hours have been eroded by the incursion of accounting firms into the legal services market.

It is becoming increasingly clear that the Sarbanes-Oxley Act of 2002 and the regulations flowing from it are impacting lawyers that serve clients other than publicly traded companies.