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Crossing the line: what CPAs need to know about the unauthorized practice of law.

Accountants are indeed a multi-talented group. Clients use CPAs for various services because CPAs have vast knowledge in many technical areas. However, CPAs need to be aware of just how far they can go with--and what kind of services they can provide to--a client. Venturing too far into some areas can constitute the practice of law, and that will get a CPA into serious trouble.

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Bar associations are very protective on this topic, and are watching to ensure that CPAs do not step over the line into the practice of law. The Supreme Court of Ohio is also stepping up enforcement, and has issued a substantial number of new opinions imposing sanctions for the unauthorized practice of law (UPL). The Supreme Court issued 16 UPL opinions in 2005 in which it imposed sanctions, compared with one opinion in 2004 and two opinions in 2003.

Although UPL enforcement may look like a turf battle between CPAs and attorneys, UPL provisions and enforcement are ultimately designed to protect the public. "CPAs and attorneys are charged with the responsibility of policing the practice of their professions," says Steven A. Martin, JD, CPA (inactive), partner of Blaugrund, Herbert & Martin and legal counsel for The Ohio Society of CPAs. "Attorneys and CPAs have an ethical duty to assist the Supreme Court or the Accountancy Board, respectively, with the prevention of the unauthorized practice of their professions. This includes reporting unauthorized practice."

"The purpose of the UPL provisions, whether in statute or by rule, is for the protection of the public," says William K. Weisenberg, assistant executive director for public affairs and government relations with the Ohio State Bar Association (OSBA). "The provisions ensure that the public receives legal services by those who are trained, qualified and competent, and who have been tested and are subject to regulatory mechanisms. The beneficiary is the public--the client. That's who we serve."

Although few CPAs openly profess to practice law as part of their accountancy practice, it is not unheard of for CPAs to provide services that fall within the practice of law. Things can become fuzzy in everyday practice, and CPAs can cross the line if they are unaware of the types of services that constitute the practice of law.

What is the practice of law?

Rule VII, [section]2(A), of the Governance of the Bar prohibits UPL, which is the "... rendering of legal services for another by any person not admitted to practice in Ohio under Rule I and not granted active status under Rule VI, or certified under Rule II, Rule IX, or Rule XI of the Supreme Court Rules for the Government of the Bar of Ohio." Ohio case law attempts to define the practice of law as "not being limited to appearances in court, but also includes giving legal advice and counsel and the preparation of legal instruments and contracts by which legal rights are preserved."

Despite this definition, knowing exactly where to draw the line can be elusive. "Nevertheless, the unauthorized practice of law is very serious," says Martin, who has represented the Society for 18 years. "Bar associations around the state of Ohio have been watching this issue very closely, and will file complaints against CPAs who do in fact undertake activity that constitutes practicing law."

Weisenberg agrees. He suggests that CPAs closely study Supreme Court rulings and Ohio case law for guidance on what's defined as practicing law. "The decisions by the Supreme Court in the past few years clearly define what constitutes the practice of law and what would constitute UPL," he says. "CPAs and attorneys work on many projects together, but when it comes to practicing law, CPAs have to be careful.

"Be aware of the Supreme Court rulings, and what it is CPAs can do in serving their clients as distinguished from what attorneys do to serve their clients. Often the client works with an attorney and a CPA, and both are aware of what they can and cannot do. If you're unsure, seek counsel and use your resources at The Ohio Society of CPAs to know where the line is."

Martin noted that the line between everyday accounting and law practice can often be a very thin one. He cited a specific example of how an accountant could get caught trying to tiptoe along that line. "There's been a lot of recent enforcement against non-lawyers forming business organizations for clients, which--according to the Ohio Supreme Court--is the practice of law," he explained. "CPAs should not be forming business organizations, such as corporations or LLCs, on behalf of their clients. That means, do not prepare or file articles of organization or incorporation documents, agreements between owners, and other things of that nature. It's clearly the practice of law.

The issue recently made headlines when the Ohio Supreme Court fined a Piqua tax services company $20,000 in December 2005 for the unauthorized practice of law. The court ruled the business organization forms Wyandt & Silvers completed constituted the unauthorized practice of law.

"CPAs may advise clients on financial and tax issues that go closely along with forming a business, and that's fine. Those things are crucially important, and they dovetail very closely with the organization of the business. However, the CPA should not be forming the organization on behalf of the client. That's between the client and legal counsel," Martin adds.

Crossing the line

So how would a CPA get "caught" practicing law?

"Eventually, a client will consult a lawyer for one reason or another, and the lawyer will ask for certain documents," replies Martin. "The lawyer might ask who prepared a certain form--perhaps because it's not the way he or she would have prepared it. The client will tell the lawyer that the CPA did the work, and the lawyer is then required by professional ethical duties to report the CPA to the Bar Association. Even though the attorney had nothing to do with the CPA's unlawful act, the Ohio Supreme Court can sanction the attorney for failure to report UPL. That can put an attorney in a tough spot, especially if there is a longstanding professional relationship between the attorney and CPA."

CPAs can look to case law in which such an incident occurred in the matter of the Columbus Bar Association (CBA) v. Verne, decided by the Ohio Supreme Court in May 2003. The case involved CPA Leonard P. Verne Jr., who in 1997 drafted articles of organization on another's behalf to establish a limited liability company.

When the business owners had a conflict and separated in 2000, one of them consulted an attorney about how to structure the company's future transactions. The attorney, also a CPA, discovered several problems with the business' documents, and filed a grievance with the CBA against Verne.

The Ohio Supreme Court determined that Verne had engaged in UPL and sanctioned him, stating:

"While we recognize that Certified Public Accountants perform a valuable function in advising on financial matters in the formation of a company, such as how best to structure a business entity for tax benefits, there are still many remaining issues that require legal analysis in choosing a business structure."

The Supreme Court further noted how the case highlights the dangers present when the lines between financial and technical legal matters are blurred, writing:

"In this case, the respondent helped his clients choose a business structure, a decision that ordinarily requires a significant amount of legal judgment in addition to tax and other accounting considerations. Clients need to know the legal differences between and formalities of available structures and then be advised according to their best interests, taking into account personal and practical concerns, not just tax consequences. Where there is more than one principal involved in the venture, the existing and potential conflicts also must be assessed."

Why take the risk? "With respect to forming business organizations, no CPA makes a lot of money doing that. Thus it is not an income generator; it is merely a trap for the unwary, especially since it's illegal," Martin comments.

Martin also notes another example. Several years ago, he explained, the Supreme Court ruled that non-lawyers, including CPAs, could not represent someone before the state's Boards of Revision. Those boards preside over appeals regarding property valuations for property tax issues and related matters. For years prior to that ruling, CPAs and others had been performing such tasks regularly.

"That case had widespread impact," Martin says. "A lot of non-lawyers used to do that kind of work, and they're now prohibited from doing it. Obviously, there is tension between the Bar and other professionals and practitioners as to what constitutes the practice of law. And, that case was used as an opportunity to re-set the line of what's allowed.

"The case had far-reaching ramifications, and the issue had been out there a long time. That had an impact, because representing clients before the boards was a substantial part of many CPAs' practices. Sometimes, they did it as a convenience for a client without even knowing it might be construed as the practice of law."

Civil fines

The Supreme Court of Ohio recently beefed up UPL Rule VII through an amendment on June 16, 2003. Until then, the Rule didn't have much bite, says spokesperson Dennis Whalen.

"Basically, up until now, the Rule didn't have sanctions in it," says Whalen. "The Court would order someone to not practice law, but there was no clear indication of what would happen. A person could be found in contempt, but that was an avenue seldom taken."

Whalen says the amendment, however, changes the rule to state that the Supreme Court of Ohio can now impose a civil penalty of up to $10,000 per offense, regardless of whether the Board of Commissioners or Bar Association recommends the penalty.

"There was nothing like this before," Whalen adds. "It certainly is a more threatening Rule than what we had in the past. What its effect will be remains to be seen. Clearly the goal is to put some teeth in the enforcement."

The Supreme Court has not hesitated to impose civil fines for UPL. On Dec. 21, in Miami County Bar Ass'n v. Wyandt & Silvers, Inc., the Supreme Court imposed a $20,000 civil fine against a CPA who prepared and filed business organizational documents on behalf of his business clients. The CPA unsuccessfully argued that his knowledge of corporate law, obtained in earning his accounting degree, qualified him to counsel clients as to the legal requirements and implications of the various corporate structures.

On Dec. 7, in Ohio State Bar Ass'n v. Allen, the Supreme Court imposed a $40,000 fine on a person who counseled clients on litigation matters and prepared legal pleadings. On Nov. 16, in Disciplinary Counsel v. Goetz, the Supreme Court imposed a $30,000 fine against a non-CPA who was preparing wills and living trusts for clients.

Online business formation

CPAs also should beware of Internet-based companies offering "business formation" or "filing services" that would constitute the practice of law. Such companies sometimes offer CPAs a discount to complete certain forms on behalf of the CPA's clients.

"If you ask the Internet-based service, they'll claim they're not practicing law, but are simply filing forms, and point a finger at the CPA," Martin explains. "The CPA will say the Internet service is doing the work, so the CPA is not practicing law either. However, somewhere in the process, a business organization was formed on behalf of a client, which is definitely the practice of law. If it's not the CPA or the Internet service, then who is it? If the Bar Association is given the choice of pursuing an out-of-state Internet company or an in-state CPA for UPL, the easiest target is the CPA. I'm concerned that this is another trap for the unwary CPA."

Other consequences

Martin went on to say that if a CPA is charged with improperly practicing law, there are other repercussions as well. For example, CPAs who knowingly--or unknowingly--practice law and make some type of error that leads to a client loss will have no insurance to cover the loss.

"The CPA's malpractice insurance will not protect the CPA in that case," says Martin. "Malpractice insurance covers mistakes incurred while practicing accounting. If you're doing something that is practicing law, it will not."

Martin pointed out that even though CPAs have made mistakes by technically practicing law, there is not a credibility problem within the industry because of the issue.

"For most CPAs, it's not an issue," he says. "CPAs' credibility comes from the fact that they are the most trusted adviser for most closely-held business owners. That's why the business owner ends up relying on the CPA for help. Since the CPA does have enormous credibility in this area, they need to advise the client as to where the line is drawn, so as to not fall into a trap.

"Clients think using their CPA in such ways saves money, because they don't want to go to an attorney. Granted, CPAs probably know more about business organizations than many attorneys do who don't regularly work with business owners. I'm an attorney, and I do what I know. There a lot of attorneys who are not any more knowledgeable than CPAs with respect to business organizations, but attorneys are the profession that's licensed to do this specific task. Again, there's a lot of gray areas, but with forming business organizations and drafting agreements, the law is pretty clear. That's the practice of law."

Todd P. McCollough has held public relations/communications positions for several Central Ohio businesses. He currently is corporate communications manager for a local private company. A former reporter for several newspapers in Ohio and Pennsylvania, he still periodically writes articles for specialty publications.

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Author:McCollough, Todd
Publication:Catalyst (Dublin, Ohio)
Date:May 1, 2006
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