Come hide with us – bean counters raid big law firms

It is strange that none of the major law firms are kicking up a fuss about the exodus of senior lawyers to the Big Four accounting firms. It is a matter of significant public interest and, more to the point, the bean counters are pinching hundreds of millions of dollars of their business.

Aren’t lawyers meant to be special? Don’t they have super powers and privileges and extra obligations of loyalty, which set them apart from other professions? Like the priest with his confessional, a lawyer owes a special duty of confidentiality to the client.

On the face of it, the move by the Big Four global accounting firms seems merely another move to get even bigger in professional services of all kinds, but is there a more contentious motive? Could the incursion be designed also to allow the accounting firms to assert legal professional privilege over tax advice for their multinational clients so they can keep that advice out of the hands of the Australian Tax Office?

The cover of the July edition of the Law Society of NSW Journal promised a feature article “A Close-Up Look at Lawyers: Surprising Trends in the 2016 National Profile of the Profession”. Turning to page 28, it was disappointing to find the bland title “The State of the Profession”. Surely this turf war – the Big Four poaching spree – is the biggest story in the legal jungle at the moment, but it did not get even a passing mention. This writer is no lawyer but, having been promised a “close-up look” and surprising trends, I felt slightly deflated.

There has been no word on the subject either from the owners of King & Wood Mallesons, Ashurst, Freehills, Allens, Clayton Utz and the others. Perhaps they are misunderstood, perhaps they are kindly folk who are relaxed about sharing hundreds of millions in future revenue with the green-eyeshade fraternity.

Apart from a few shiny stories in the business press extolling PwC’s successful headhunting expeditions, the law firms have been strangely silent as PwC has led the charge, luring dozens of lawyers away from the law firms,

The carrots are high salaries and fast-track partnerships. Many senior lawyers in the major law firms have been biding their time at senior associate level for years, watching their hair turn grey while waiting to “make partner”. Some of them never will. Their frustration and the temptations on offer from the Big Four make them relatively easy targets to separate from the rest of the herd.

How is it that the Big Four can offer lawyers so much more money than they could make as a partner in a major law firm? The answer lies partly in the fact that accountants do not owe a “fiduciary duty” to their clients and believe, rightly or wrongly, that they can act for multiple clients on the same transaction.

There is the matter of sheer profitability too. The big law firms don’t publicise their revenues but the Big Four do, just the revenue number. Collectively they posted a humongous A$7 billion in revenues in 2017 in Australia: EY up 10% to $1.63 billion, Deloitte up 15% to $1.76 billion, KPMG up 10% to $1.5 billion and PwC up 10% to $2.12 billion.

Globally, PwC recently posted US$37.7 billion. This lawyer-hunting is a global thing too. The firm now has more than 3,500 lawyers in 90 countries.

The Big Four even have a panellist on ABC TV’s Gruen Transfer, Russel Howcroft, who is chief creative officer at PwC.

These are not just accounting firms any more. Their menus are riddled with words like “our multi-disciplinary approach” and such. They provide multiple professional services including audit of financial statements, non-audit assurance, management consulting, tax advisory, tax compliance, economic advice (especially to government), insolvency, mergers and acquisitions support, actuarial, private wealth advisory, financial modelling and now legal services. The latter are by far the most highly regulated.

From a public interest perspective, the dangers are obvious. Between them, the four picked up $2.6 billion in fees from government for giving advice. This was over a ten-year period and represents federal government fees alone and excludes the states, which may account for another $2 billion.

Although these firms are not explicitly underpinned by the taxpayer, like the Big Four banks, they have become too big to fail. And conflicts of interest abound. Traditionally, the most obvious conflict has been between audit – which has become something of a “loss leader” – and tax.

This has now been magnified. The latest conflict is that legal professional privilege might be used to hide documents in transactions. It may work along these lines: if the client of the firm wishes to minimise risk in a transaction, let’s say it is in tax structuring, risk that documents might later be used against them in a court case – documents which might be subpoenaed or sought in the discovery process for a trial – the Big Four may get a lawyer involved to ensure documents remain privileged.

If the firm instructs the lawyer to sign the letter of engagement at the outset of the process, then subsequent documents, the firm may well claim privilege.

The prospect of a regulator bringing any action for “rubber stamping” is remote, so the potential for abuse and the temptation to “rubber stamp” are considerable.

The fewer documents that are available for, let’s say the ATO, when prosecuting a case, or in any sort of enforcement action, the better it is for the firm and its clients.

Therefore, we now have a situation where Big Four firms such as PwC may actually sell legal professional privilege as a product. Come hide with us.

So it is that we await with considerable interest for the response of the major law firms. They have remained uncannily meek so far while having their talent raided.