As the Big 5 become multi-disciplinary practices, opportunities abound for tax executives.

The transformation of accounting firms into multidisciplinary practices (MDPs) provides many opportunities for tax executives. The Big 5 are forcing more and more corporations to recognize that -- like cash management -- tax is a potential profit center. Because profit centers need to be managed, tax executives have increased opportunities to demonstrate the value of the tax department to their corporations.

Large accounting firms were the first to understand that tax work (that is, compliance work) needed to be complemented. Audit fees were fiat, in part because the consulting divisions of the accounting firms used audit fees as loss leaders. First, to obtain revenue the Big 5 pushed "outsourcing." Today, the Big 5 are marketing "products," "devices," or "black boxes" that offer their customers great savings, i.e., found money. With their ability to solicit clients, the Big 5 are spreading the word: Properly managed, tax can be a profit center.

Because of what is being sold by the Big 5 [on their own and in collaboration with investment banks), tax departments must spend more time on research and planning, offering managerial advice about the products being sold. This conjecture is supported by evidence. A 1991 survey of TEI members found that "the largest companies rely on their internal staff as their primary research and planning resource, whereas smaller companies are more likely to turn to outside advisers for assistance."(1) The size of the company was not, however, correlated with the percentage of department time spent on planning and research.(2) As a percentage of the work of the department, smaller companies had to spend as much time evaluating the outside advisers as the larger companies spent in making, rather than buying, research and planning. More aggressive marketing by external providers of research and planning services will only increase the need at both large and small companies for internal management.

The search for profit in tax -- the deals proffered by MDPs, as well as by law firms -- carries risk. These risks are not simply legal risks. They are business risks and they vary in size and kind. To decide for or against a particular tax deal is a classic executive decision: Should the company take this sort of risk?

At least one reason to question what the MDPs are selling lies in their search for increased revenues. Remember that, in 1993, the Big 6 paid 11.9 percent of their total audit fees in legal fees and settlements.(3) How hungry are they six years later? FORBES has already answered the question for us: They are ravenous.(4)

In the legal marketplace, the big story has been the numbers and quality of lawyers being hired by accounting firms.(5) Working in combination with accountants -- and in competition with them (especially with audit partners who wish to switch to the more remunerative consulting practice) -- these lawyers help provide advice on how a corporation can find tax savings. Their advice is so valuable to accounting firms that the Big 5 are doubling the salaries of what senior tax lawyers earned at large prestigious law firms. Their advice supposedly is so valuable to corporations that a tax lawyer who previously billed $400 per hour at a private law firm now bills $800 per hour at the Big 5. Even if a corporation renegotiates this hourly rate, the accounting firms are clearly signaling that what they are selling has been worked on not only by accountants but also by lawyers. They are marketing the products of a multi-disciplinary practice team.

As accounting firms become MDPs, so, too, must tax departments. The accounting firms are demonstrating that to search for, evaluate, and implement tax savings, a multi-disciplinary team is required. Having long-term, highly involved relations with the Big 5, many corporations will evolve isomorphisms, creating internal MDPs that can respond more efficiently to this change in their environment.

At a minimum, changes in the Big 5 suggest that this is the time to reconsider the roles played by the lawyers who report to the chief financial officer (CFO). The legal press mistakenly focuses on competition between lawyers and accountants. These two professions are, however, linked and what is happening is not just competition, but co-evolution.(6) As accounting firms are redirecting the relationships between lawyers and accountants, so, too, can corporations. As accounting firms are selling products with a significant legal component, corporations must have their own legal advice, both internal and external. And corporations can go beyond the Big 5, which need to separate auditing and consulting work, by capitalizing on the links between compliance and planning.(7) The transformation of the Big 5 into MDPs allows an observant tax executive or CFO to re-engineer their legal factor.

Some might argue -- and the increasing numbers of those legally trained among TEI members might suggest -- that to operate in a world of MDPs, the tax executive must be multi-disciplinary, holding both a J.D. and a CPA. Managing a legal or an accounting function, however, does not depend solely on formal education. Non-lawyers who are capable of evaluating legal advice can hire their own lawyers. It is not the degree that counts, but the ability to manage the business risks associated with what the MDPs are selling. Management is not the work of an individual. With a legal staff that has properly responded to the changed environment, a non-J.D. tax executive can manage a department that includes lawyers.

Evaluating proposals suggested by MDPs -- not to mention generating other options -- requires a company to have a knowledgeable and capable tax executive who can communicate all relevant factors to the CFO and other executives. "Without an ability to communicate and communicate well, the tax executive is limited in his or her ability to answer the question and, therefore to serve his or her clients."(8) "[T]o be successful, tax people must first and foremost be business people who can talk in business language ... not only good communication skills, but also a good knowledge of his or her company," including building "information networks" throughout the organization.(9) With the Big 5 becoming MDPs, we can add that good communication skills require properly integrating lawyers into the tax executive's information networks.

Managing a profit center requires evaluating proposals not only in their own terms but in terms of corporate character. "The knowledge that internal tax professionals have of the ... culture, strategic direction, and driving values of the organization is critical."(10) Given corporate goals, risk preferences, culture and politics, a tax executive has to decide which proposals should be pushed, and which ones may be clever but don't make sense for their corporation. As Martin A. Levine and Herbert J. Lerner put it:

   Technical knowledge alone, however, is not what makes the in-house tax
   professional invaluable. It is such knowledge in combination with an
   understanding of the corporation's goals (and the particularized goals of
   the operating groups), ongoing experience with the myriad personalities
   involved, knowledge of the company's practices (including past and present
   accounting), and appreciation for the corporate culture that enables the
   tax executives to bring more to the table than the outside consultants.(11)

Best practices for a tax department, in short, require empowering tax executives. In many corporations, especially those served by members of the TEI, tax executives are already respected as powerful corporate actors. At others, they are not. In 1996, a survey in The Tax Executive reported that "[m]any tax departments appear to be taken for granted."(12) At TEI's 1992 Annual Conference, members were asked, "Do you feel appreciated? Do you have adequate resources? Are you well compensated for your efforts?" According to Messrs. Levine and Lerner, "Many tax executives answer these questions `No.'"(13) And Stephen A. Moore concluded in 1994 "that tax departments need to do a better job of educating management on just what a tax shop can do if it is given the proper tools and opportunities."(14)

The current situation of tax executives resembles that of general counsels almost a generation ago. In some corporations, the general counsels were (as they have now become almost everywhere) sophisticated purchasers of outside legal talent and respected managers of a profit center. In others, they were weak, depending on the favor of outside consultants (i.e., private law firm partners) who had management's ear. It was the resulting rise in legal budgets that propelled companies almost universally to seek strong managers of the legal function.

The Big 5 are now creating a similar opportunity for tax executives. Instead of the paring of the legal budget, there is the paring of the tax bite. And this paring is not costless. The fees being charged by the accounting firms -- like those charged by outside law firms -- demand internal purchasing executives. The 1980s saw the increase in the status and stature of general counsels.(15) Today, tax executives are poised to make a similar move.

The role of the corporate legal department changed when corporations recognized that "[e]xecutives need answers. They need decisions. They need lawyers who are truly accountable for their influence on decisions."(16) Members of the legal department became "an integral part of the management team ... fulfilling the wider need for involvement in corporate planning, strategy, and the setting of objectives."(17) Like general counsels, tax executives can sell their need to buffer outside consultants because they are better able to discern and create corporate decisions. Tax executives are required to manage an important potential profit center. To do that, they need to be "member[s] of the strategic business team."(18)

With opportunity comes responsibility. A corporation takes risks, but it chooses which ones to take. A decision to push a tax product is as important as a decision to push any other business product. Companies choose their product lines and they require the best advice about how a product fits in their portfolio. Tax executives must exercise control over what their corporations seek from vendors of tax advice, at the least because MDPs operate on a time-line different from the corporation's.

In the 1980s, corporations made their general counsel into purchasing agents of legal advice, giving them the corporate power to decide on when and how to employ outside legal consultants. In the outsourcing debate, accounting firms were careful to repeatedly claim they were used only as tax executives desired them to be.(19) Tax executives, like general counsel, need the power to say when and how to use outside experts, both accounting MDPs and private law firms. They need the power to say "no" to these vendors, or to re-work what is being offered to comport with their corporation's needs. Managerial authority is required over these vendors, and with that comes opportunities for managerial work and compensation.

Notes

(1) Weiland, Ralph J., Introduction at 1, 4 in TAX EXECUTIVES INSTITUTE, THE STRUCTURE AND SIZE OF THE CORPORATE TAX DEPARTMENT: AN EMPIRICAL ANALYSIS (1994).

(2) Id., Table 3-1, at 35. For the three size groupings, dividing the average number of personnel working in Research and Planning by the average number of staff produces 14.3 percent, 14.7 percent, and 14.2 percent.

(3) See sources cited in Carl Pacini & David Sinason, State Legislative Responses to the Call for Reform of Accountants' Liability to Nonclients for Negligence, 6 J. LEGAL STUDIES IN BUSINESS 45, 45 n.2 (1998).

(4) Janet Novack & Laura Saunders, The Hustling of X Rated Shelters, FORBES 198 (Dec. 14, 1998).

(5) "[T]he expansion of professional service entities, principally accounting firms, into the practice of law ... has been termed the most important issue to face the legal profession this century." American Bar Association, Commission on Multidisciplinary Practice, Background Paper on Multidisciplinary Practice: Issues and Developments 1 (Jan. 1999).

(6) Ralf Rogowski, German Corporate Lawyers: Social Closure in Autopoietic Perspective in PROFESSIONAL COMPETITION AND PROFESSIONAL POWER: LAWYERS, ACCOUNTANTS AND THE SOCIAL CONSTRUCTION OF MARKETS, 114, 124 (Yves Dezalay & David Sugarman, eds. 1995).

(7) See remarks of Bruce H. Barnett, quoted in Read Elsewhere, 47 TAX EXECUTIVE 95, 96 (March-April 1995).

(8) Martin A. Levine & Herbert J. Lerner, Outsourcing: Opportunities and Challenges for the Corporate Tax Executive, 45 TAX EXECUTIVE 375 (September-October 1993).

(9) Raymond F. Douglas, Patrick J. Ellingsworth & James P. McAndrews III, What Management Expects: Evaluation of the Tax Departments and Its Executives, 48 TAX EXECUTIVE 29, 30 (January-February 1996).

(10) Stephen A. Moore, Outsourcing the Tax Function: A Survey, 46 TAX EXECUTIVE, 157, 178 (May June 1994) (statement by Ernst & Young employee).

(11) Levine & Lerner, supra note 8, at 376.

(12) Douglas, et al., supra note 9, at 30.

(13) Levine & Lerner, supra note 8, at 375.

(14) Moore, supra note 10, at 176.

(15) Robert Eli Rosen, The Inside Counsel Movement, Professional Judgment and Organizational Representation, 64 INDIANA L.J. 479 (1989).

(16) Remarks of Karl D. Bays, Chairman of Baxter Travenol Laboratories, Inc., cited in Rosen, supra note 15, at 488 n.35.

(17) Remarks of Luther C. McKinney, Senior Vice-President, Law and Corporate Affairs, Quaker Oats Company, cited in Rosen, supra note 15, at 488 n.35.

(18) Paul Cherecwich, Jr., The Fast Changing World of Corporate Taxation, 48 TAX EXECUTIVE 178, 181 (May-June 1996).

(19) See, e.g., Moore, supra note 10, at 177 (statement by Arthur Anderson), 179 (statement by Ernst & Young), & 181 (statement by Coopers & Lybrand).

ROBERT ELI ROSEN is a Professor of Law at the University of Miami. His undergraduate and law degrees are from Harvard University. Professor Rosen also received a Ph.D. in sociology from the University of California-Berkeley, with a special emphasis on organizational sociology. He has written and consulted on the organization of corporate legal departments.