Accounting-legal tie-ups: managing the conflict

THIS week, we reported that the Big Four accounting firms in Singapore are beefing up their legal services through partnerships with boutique law firms (BT, July 24). While not a wholly new development, it's a trend that seems to come in waves, with the latest crest making itself felt in just the last couple of weeks or so.

The reason such tie-ups continue to be favoured and attempted by both parties is that they seem to make good business sense for the large accounting networks and specialised law practices involved.

But news of such collaborations also tends to spark concern among clients and other stakeholders in the marketplace about how the inherent conflicts of interest in such a set-up will be managed.

And so, how these firms deal with such conflicts will be closely watched - with their integrity at stake, on the one hand, and the economic rationale for their tie-up, on the other.

To recap, the latest wave of such tie-ups began a fortnight ago, when PwC announced that veteran corporate lawyer and deputy chairman of WongPartnership, Rachel Eng, would be leaving her firm to join a Singapore law firm that is part of PwC's global legal network. EY said this week that Evelyn Ang, previously a senior partner at Dentons Rodyk & Davidson, has set up Atlas Asia Law Corporation, which will join EY's global network as an independent member firm.

BT also reported that Deloitte Singapore is looking to add a senior lawyer from Allen & Overy to its legal network as well, though the accounting firm declined to confirm this.

For the Big Four accounting firms, such structures allow them to offer targeted legal services, giving them an alternative revenue stream at a time when margins for their core audit and tax services are getting squeezed. For the small law firms, this enables them to be part of a well-organised and established global network, possibly giving them access to clients and work that they may not have had hopes of snaring before.

Such tie-ups also appear to be a winning proposition for clients, offering them a one-stop shop for both accounting and legal services.

But the issue of the potential conflicts of interest arising from such set-ups also almost immediately follows. In BT's report this week, Stefanie Yuen-Thio, joint managing partner of TSMP Law Corporation, was quoted as saying that she knows of at least one law firm which turned down a tie-up opportunity with an accounting firm because the latter was insisting that the law firm dump all its clients who would pose a conflict. Managing conflicts is going to be the largest challenge for a multi-disciplinary practice's (MDP) sustained success, she said.

The reason the issue needs to be well-managed and the perception of a conflict of interest avoided is this: the value of an audit, which assures stakeholders of the truth and fairness of a company's finances, comes in part from the perception of independence of the public accounting firm performing the audit. If that same public accounting firm provides other services to the same client (thereby earning alternative sources of revenue), be it legal advice or business consulting, for example, that semblance of independence - and the value of the audit - gets compromised.

David Mason, a former Big Four audit partner here, now working as a business communications consultant in the United Kingdom, underlined the importance of maintaining the integrity of an audit in his commentary (BT, July 24): "There is one significant difference between the provision of statutory audit to any business and the provision of all other accounting and advisory services. The statutory audit is a contract between the shareholders and the auditors. All other services are contracts between the management of the business (representing the shareholders) and the service providers."

Audit failure, as a result of a failure of independence, can have devastating consequences. One of the most infamous examples occurred in the early 2000s, when then-Big Six accounting firm Arthur Andersen compromised its audit work ethic for the sake of its lucrative advisory relationship with its American energy client, Enron. It was a scandal that destroyed the accounting behemoth and hurt the public's perception of the integrity of an audit for years to come.

(It's worth mentioning that, just two years before the Enron scandal erupted, Wharton School's online business journal, Knowledge@Wharton, debated if accounting firms and law firms ought to be allowed to merge, raising the same concerns over the potential conflicts of interest that would arise. Ah, if only they had been heeded.)

In the present time, watching how MDPs walk the line between managing such conflicts and realising the economic potential of their tie-ups should prove interesting.

MDPs should, at the very least avoid the appearance of conflicts, through the establishment of "Chinese walls" between business lines; though I would argue that they ought to aim higher and strive to avoid the actual conflict itself, by parting ways with clients or businesses that would place them in such a position.

The resulting impact to business would, however, make this the less attractive option for MDPs - and it remains to be seen how far some will go in one or the other direction.

Perhaps The Economist said it best, in an October 2010 article: "If there really is synergy between providing these (non-audit) services and an audit, there is cause for concern about the auditor's independence. If, however, 'Chinese walls' successfully separate audit and everything else, then the case for getting everything from one firm shrinks."