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Lawyers in CPAs' clothing.

How can practitioners respond to lawyers' increasing diversification into services traditionally offered by CPAs? Robert J. Warth, CPA, and Francis E. Kearns, CPA, PhD, both assistant professors of accounting at the College of Business, Rochester Institute of Technology, Rochester, New York, offer some suggestions. Imagine a client faced with having to structure a leasing arrangement to receive operating rather than capital treatment under Financial Accounting Standards Board Statement no. 13, Accounting for Leases. After struggling with the professional accounting literature for a few hours, he finally realizes he needs some professional help, so he picks up the phone and calls--his lawyer.

Farfetched? Not at all. Some recent developments in the legal profession have major implications for the way accounting services will be provided in the decade ahead. It is imperative that CPAs be aware of the competitive challenges for accounting services.

LAW FIRM DIVERSIFICATION

Lawyers traditionally have worked in tandem with CPAs (and other professionals, such as physicians, architects, investment bankers, financial planners, economists, lobbyists and brokers). Complex nonlegal areas required the assistance of CPAs and others to bring the necessary interdisciplinary skills to client problems.

However, during the 1980s, law firms increasingly began to supply new services by hiring CPAs or other professionals to provide the expertise necessary for complex nonlegal issues affecting their clients. Some examples already in operation include one law firm with an established investment banking operation, another with an architectural and design consulting service, and others with financial planning centers and even accounting services. Lawyers who favor diversification assert it allows them better control and greater efficiency if these services are maintained in-house. Others, even within the legal profession, have suggested the trend toward diversification is primarily profit oriented. As the number of lawyers in the United States grows (from 220,000 in 1950 to a projected 925,000 in just four more years), the legal profession faces an economic squeeze. To provide adequate compensation (from new hires to senior partners), law firms must seek revenues from other sources, such as nonlegal services. Law firms usually begin to expand into new areas in two stages.

ADDING NEW SERVICES Stage one. The first step usually focuses on services that complement current services. The rationale is to provide better client service at a lower cost to the client. The marketing focus is on existing legal clients.

Stage two. The second stage targets nonclients for diversified services. Clients for these services ultimately may use the firm's legal services.

In some instances, firms hire other professionals and establish in-house consulting departments to provide a new service. In other cases, services are structured as separate partnership subsidiaries. They also may be provided through affiliates, in which law firm partners also are partners of the ancillary businesses.

GROWTH OF DIVERSIFICATION

It is difficult to assess precisely the extent of law firm diversification and its competitive threat to CPAs without any formal mechanism monitor such activities. One organization that has tried to compile national statistics is the Practice Development Council, a New York-based consulting firm for lawyers. Exhibit 1 on page 122 lists nonlegal business activities by geographic area. The Washington, D.C., Mid-Atlantic and West Coast regions show the greatest number of firms. This is not surprising, as it appears law firms in metropolitan areas are spearheading diversification.

Exhibit 2 on page 123 provides some idea of the scope of services law firms offer. Consulting in financial services, economics, employee benefits, financial planning and health care are all areas in which CPAs now face law firms as direct competitors. Just as CPA firms diversified when profit margins on audit services declined, so law firms are finding lucrative consulting specialties, many of which overlap some traditional CPA services.

ABA RESPONSE

While opposition to diversification within the legal profession has been vocal and organized, the American Bar Association is having difficulty deciding whether or not to limit ancillary business activities. In 1990, it endorsed these activities but required new ethics rules on confidentiality, conflicts of interest and disclosure of lawyer's relationship with the entity performing ancillary services. In 1991, it decided to prohibit the use of separate business entities, such as separate partnerships, to render anciliary services. It permitted such services in connection with and concurrent to the law firm's legal representation of the client. The issue remains unresolved at present.

IMPLEMENTATION PROBLEMS FOR LAW FIRMS

When law firms hire CPAs, they do face implementation problems.

* Law firms have no career path for accountants. Without the potential for partnership in most jurisdictions (with the exception of Washington, D.C., which allows nonlawyer partners), how do law firms retain top talent who want both the status and financial rewards of ownership participation? Even if that problem is solved, it's difficult to prevent accountants from feeling like second-class citizens in an environment in which the practice of law is of highest importance.

* Some accounting services offered by law firms are most suited to entry-level personnel, but it's difficult for law firms to hire staff accountants because frequently the most talented students want to obtain their CPA licenses. However, most jurisdictions' experience requirements won't recognize work in law firms as appropriate audit experience. Entry-level staff may not be willing to forgo a CPA license to work for a law firm.

Both of these problems provide competitive advantages to the CPA firms as they adjust to the heightened presence of law firms in their territory.

POSSIBLE CPA RESPONSES

There are several actions CPAs can take in light of increasing law firm diversification:

* Head-to-head competition. CPAs are well positioned to market a variety of additional accounting, tax and consulting services to existing clients. Success here depends on the quality of past performance, CPAs' expertise in client problem areas and a demonstration of sincere interest in the client's economic well-being.

For success in landing new clients with no previous connection to the accounting firm, factors to stress include CPA firm staff training, experience in dealing with the client's particular problem in similar engagements and independence from conflicts of interest.

* Anticipate the challenge with joint ventures. If lawyers aren't already actively soliciting clients, CPA firms might seek to form joint ventures with law firms before they do.

One reason attorneys diversify into other areas is to improve service quality by bringing it in-house. In a joint venture, the attorney is assured of the quality and control of accounting and consulting services without the problems of setting up a separate entity. For example, in Boston, a law firm collaborated with a large national CPA firm to consult on environmental issues. The law firm furnished legal and management advice while the CPA firm offered accounting and environmental expertise. Such cooperation allows each firm to flourish without duplication of services.

* Help the law firm develop its accounting practice. A CPA firm can help law firm staff accountants get the necessary audit experience for certification and receive benefits in the process. The law firm can lend accounting staff members to the CPA firm for six months a year so that over several years they receive enough experience to meet state board of accountancy requirements. This enables the CPA firm to increase its auditing staff during its busiest season without hiring fulltime staff. Meanwhile, close ties between the CPA firm and the law firm may lead to joint ventures and referrals of new audit clients.

* Do nothing. It is a big gamble to bet that the ABA will reduce attorneys' scope of services and that the Federal Trade Commission will allow ABA practice constraints. It also is unlikely attorneys will retreat from new practice areas. As lines between professions become hazier and business problems overlap many areas of expertise, it's best to be prepared.

A PRODUCTIVE CHOICE

In the 1950s, CPA firms hired attorneys to help develop tax practices.

Attorneys vehemently protested this intrusion into the legal realm. Today, law firms are hiring accountants to assist in estate and trust work, bankruptcies, taxes and financial planning. CPAs might be tempted to ignore or fight this competition. But we think a better strategy would be to develop creative ways to compete or cooperate with the new kid on the block so that both types of professional can flourish.

EXECUTIVE SUMMARY

* THERE HAVE LONG been overlaps in services provided by CPAs and lawyers, but law firms now are increasingly marketing client services traditionally offered by CPAs.

* MANY IN THE legal profession believe diversification can help them better serve clients and provide lucrative ancillary business. Law firms have diversified by hiring accountants, structuring separate subsidiaries and providing services through affiliates.

* PROBLEMS FOR LAW firms that hire accountants include a lack of career paths for them and the difficulty entry-level staff face in getting CPA certification.

* POSSIBLE RESPONSES for practitioners are head-to-head competition, joint ventures with law firms and helping law firms create accounting practices. EXHIBIT 1 How many law firms provide nonlegal business activities?
 Number
Region of firms
Northeast 10
Mid-Atlantic 17
Washington, D.C. 31
Southeast 4
Midwest 3
South-Central 1
Southwest 4
Rocky Mountain 1
West Coast 14
Hawaii 1


Source: Practice Development Council

EXHIBIT2

Types of nonlegal business ventures
 Number
 of firms
Advertising programs 1
 1
Architectural and real estate management consulting 1
 1
China business consulting 1
 1
Comprehensive asbestos management 1
 1
Computer software 1
 1
Consulting for financial services 6
 6
Economics--research consultants 3
 3
Educational consulting 2
 2
Employee benefits, labor relations consulting 4
 4
Environmental consultants 3
 3
Financial newsletters, videos and seminars 4
 4
Financial planning and tax services 3
 3
Health care consulting 2
 2
Information services re federal agencies 1
 1
International trade consulting 9
 9
Investment advisory services 3
 3
Lobbying and legislative services 7
 7
Management consulting for lawyers 1
 1
Marketing association 1
 1
Office supply, mail and messenger services 1
 1
Property tax consultants 1
 1
Public affairs, media relations 1
 1
Real estate brokerage 2
 2
Real estate development 1
 1
Satellite launching 1
 1
Thrift acquisition group 1
 1


Source: Practice Development Council
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:diversification into accounting services
Author:Kearns, Francis E.
Publication:Journal of Accountancy
Date:Oct 1, 1992
Words:1662
Previous Article:Academic and career development division seeks CPAs for the future.
Next Article:To expand - or not?
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