E&Y first of big five in U.S. market to ally with law firm.

Ernst & Young LLP broke new ground for U.S. accounting firms in November by forming an alliance with a Washington, D.C., law firm. (See Highlights, Dec.99, JofA, page 4.) The newly formed law firm, McKee Nelson Ernst & Young, will be a separate entity and independent of the Big Five accounting firm.

Whether it is practical for lawyers and accountants to offer their combined services in multidisciplinary practices (MDPs) is a matter of controversy. For example, opponents of MDPs are concerned about conflicts of interest they say would arise if lawyers shared fees and practiced law with nonlawyers, a practice prohibited under the American Bar Association's model rules of ethics, upon which state bar associations base their standards. In the United States, a lawyer can practice law only in a law firm. But MDP supporters argue that the accounting and legal professions must find ways to offer clients integrated professional services while saving time, effort and money--something, they say, MDPs make more possible.

For some time, Europe has been the setting for pacts between the Big Five firms and law firms that want to offer their clients one-stop shopping for tax and legal services. However, primarily because of the fee-sharing arrangements implicit in their structure, MDPs are effectively prohibited in the United States. E&Y's move is the first by an accounting firm to convert de facto cooperation between itself and a U.S. law firm into a fully integrated, lawful entity. And, E&Y says, because it is financing the new firm by means of a loan, not an equity stake, the firm is independent of E&Y and cannot be considered an MDP. Under this arrangement, the firm is exempt from current U.S. restrictions and positioned well in the event the restrictions are repealed.

William J. Lipton, E&Y vice-chairman of tax services, said E&Y has about 1,000 bar- admitted attorneys in the United States who do not practice law but do give tax advice. Although the other Big Five firms are estimated to have close to that number as well, accurate statistics are hard to come by; a spokesperson for the ABA admitted it does not know how many lawyers are working for accounting firms.

Lipton said one of the new law firm's goals is to show that lawyers can work together with nonlawyers and remain true to the core values of the legal profession. "We think they've already demonstrated that from day one," he added.

Paul J. Sax, an attorney with Orrick, Herrington & Sutcliffe LLP, a San Francisco law firm, supports the legalization of MDPs and says they already exist in the United States in fact, if not in name. "Once the bar understands the reality of today's legal market--that thousands of lawyers are practicing law in the Big Five firms--the ABA house of delegates and the state bar associations will begin to address it meaningfully," he said. According to Sax, some onlookers vainly hope the MDP issue is a problem only for tax lawyers and not for the entire legal profession. "It takes quite a bit of data to change that predisposition," he noted. "And a number of us are trying to get the facts distributed to the bar so the ABA can understand how law is practiced in a multidisciplinary firm."

Sax said many lawyers in MDPs assume they are not practicing law and therefore are not subject to the legal profession's client confidentiality and conflict-of-interest rules. "That's just not so," he said. "And it's not right to be constrained in your practice by rules that are burdensome when lawyers down the street practicing the same kind of law in an accounting firm are not so constrained."

Professor Mary C. Daly of Fordham University Law School may be interested in the evidence-gathering efforts of Sax and others who support the relaxation of the legal profession's regulations prohibiting fee sharing by lawyers and nonlawyers. The author of a January 1999 ABA background paper on MDPs, Daly told the JofA it would be nice if, as proponents claim, MDPs could save time and money for lawyers, accountants and their clients. "But," she added, "no empirical data have been offered in support of that position."

Daly is also the reporter for the ABA commission on multidisciplinary practices, which issued a July 1999 report that failed to budge the ABA from its negative position on fee sharing. In August, the ABA resolved to "make no change, addition or amendment to the Model Rules of Professional Conduct [that would] permit a lawyer to offer legal services through a multidisciplinary practice unless and until additional study demonstrates that such changes [would] further the public interest without sacrificing or compromising lawyer independence and the legal profession's tradition of loyalty to clients."

Lawrence J. Fox, a visiting professor at Cornell Law School, said in an interview with the JofA that he failed to see why MDPs should be permitted. "Their benefits are ephemeral at best. What we're talking about is a lot of vendors who would like to provide legal services and expand their businesses. MDPs are not client-driven; they are vendor-driven." Fox offered two examples of how the legal profession's ethics would be compromised if lawyers share fees with nonlawyers, such as accountants:

1. "If a lawyer had two clients applying for a single license before the Federal Communications Commission, under the legal profession's rules, the lawyer could represent only one of them. Even if both would consent to that arrangement, a lawyer could not ask them to. It would be forbidden as a conflict of interest; it would not be consentable. As I understand it, accountants also would treat that situation as a direct conflict of interest, but one that would be consentable. If both clients would consent, the conflict would be waived.

2. "Once I legally represented company A on a real estate transaction, I could never take a position adverse to A--even on the smallest matter--without seeking its consent. We lawyers call that a direct conflict of interest. The accounting profession would call it an indirect conflict and say a CPA could take on a representation adverse to A as long as it's not directly related to the matter he or she is working on.

"So, what accountants call an indirect conflict of interest lawyers call a direct conflict. What accountants call a direct conflict and waivable lawyers call a nonwaivable, nonconsentable conflict of interest." A source familiar with the accounting profession's ethical standards confirmed Fox's observations regarding them and added that "since lawyers are advocates for their clients, but accountants aren't, lawyers are held to the stricter standard on conflicts of interest."

Fox concluded by saying that, based on the anecdotal evidence he's heard, any popularity MDPs enjoy in Europe seems to him to be due more to the successful offering of accounting services to CFOs--offers that are received not nearly as well, Fox said, when made to general counsels.

E&Y's Lipton said, "There is some doubt at the ABA about whether the demand is manufactured by the Big Five firms or whether it's real. We think the answer is a resounding `yes.' There is a significant demand on the part of the customer for multidisciplinary practices in the United States."

As E&Y's new creation finds its place spanning the American legal and accounting landscapes, members of each profession are discussing the benefits of such departures from tradition. One such gathering took place in November, when lawyers, judges, legal specialists and bar officials from the United States and around the world met in Phoenix to consider the future of the legal profession. During the Seize the Future conference, cosponsored by the ABA law practice management section and Lotus Development Corp., attendees explored a variety of scenarios aimed at ensuring the survival of the law profession in light of the changing needs of consumer and business clients. Among them was lawyers' use of the Internet to facilitate communication with their clients in ways that give clients greater control over the timing, relevance and cost of legal services.

Business analysts Tom Peters (co-author of In Search of Excellence) and Gary Hamel (co-author of Competing for the Future) urged conference attendees to support the creation of new, enhanced roles for lawyers, including those possible in MDPs, which they characterized as an appropriate response to the evolving business environment.

AICPA President Barry Melancon echoed that message. Focusing on similar challenges facing CPAs, he described the revitalization of the accounting profession in the last three years by the CPA Vision Project, through which CPAs can develop new ways to help their clients flourish and also fulfill their own potential. Melancon recommended this strategy to the legal community as an effective way to lay out its own integrated plan for the future.

[GRAPH OMITTED]