Accountants Really, Really Want Privilege...

(Thanks to Colin and Accountancy Age)

The accountants are desperate to have some form of accountant-client privilege and the Institute of Chartered Accountants of England and Wales have applied to be intervenors in the Prudential case before the Supreme Court. The Law Society has already been given permission to intervene.

Laissez les bons temps rouler!

Accountants Really, Really Want Privilege...

Culpable COLPs?

(thanks to toonpool.com)

Following on from my previous post on general counsel and compliance officers, it's worth reading Michelle Garlick's post on what can happen to compliance officers when things go horribly wrong...as they will.

In the case she describes a brokerage firm, ActivTrades plc, failed to put into place proper client money protection procedures. The Financial Services Authority (or if you prefer Private Eye's name: the Fundamentally Supine Authority) fined the compliance officer £3,000 for the breaches even though no client money was actually lost. The fine was reduced from £20,000 because the CO settled early.

Moreover, according to one commentator on the post, the firm was also fined £85,750 for, among other things, the co-mingling of clients' monies.

Since the philosophy and principles of the SRA in outcomes-focussed regulation are taken from the FSA, one can see how this might apply. Both COLPs and senior management will be culpable for breaches. The fact that the CO in ActivTrades didn't seem to know much or been trained properly did not excuse him nor did it exempt him from punishment.

Future COLPs will have to think very hard about their positions especially in relation to the SRA and their firms. They could easily be hung to dry.

Culpable COLPs?

From Father Confessor to Compliance Officer

Risk management in law firms will soon be a tortuous task. At the 2nd Annual Law Firm General Counsel & Risk Management Forum today a group of law firm general counsel discussed their roles and how they thought they might change when the Solicitors' Regulation Authority (SRA) new handbook rules come into play.

The concerns arise because the SRA will require law firms to appoint COLPs (or Compliance Officer for Legal Practice). COLPs will be quite different to general counsel, and they will come into being at the end of 2012.

General counsel are often described as confessor type figures to whom lawyers can go when "sins" need to be discussed. Or as one participant said, "I got a call from a partner who told me he was being indicted the next day." For more academic discussion see Fortney and Chambliss. They are not, however, compliance specialists--their role is more diffuse and varied.

There are a range of questions over whether discussions with general counsel are privileged or not. In Europe the ECJ says not: and in the US the matter is before several courts.

The COLP--deriving from Head of Legal Practice in the Legal Services Act 2007--will be the main conduit between law firms and the SRA. But not just a conduit. COLPs will have to develop compliance and reporting policies and persuade the firm to follow them. So the COLP has to be someone of seniority and a lawyer. The COLP is supposed to record failures and report material breaches to the SRA.

What does it all mean? No one knows as guidance is sketchy. What will the liability of COLPs be? How will firms treat them? One thing is clear: the consensus from the panel today was that no general counsel wants to become a COLP. It would destroy the role general counsel have taken on themselves. So will COLPs be selected from risk directors, managing partners, or will they be a new free-standing role?

The SRA chief executive has been trying to allay fears:

...the SRA’s chief executive said the new requirement should not cause major changes in well-run practices.
“COLPs and COFAs will not be sacrificial lambs for what goes wrong in firms,” he said. “The new rules are about making sure there is somebody in the firm who ensures that there are systems in place to comply with the new principles.”
Answering a question from the audience, Townsend said COLPs and COFAs would be responsible for making decisions such as whether to refer a compliance concern to their firms’ managers but would not, in ordinary circumstances, be expected to report such matters to the SRA.
He also sought to reassure the profession that outcomes-focused regulation would not increase reporting requirements. The regulator had been cautious about not imposing further reporting requirements, he said before adding: “We’ll be looking at collecting additional information in relation to the soundness of the business but this will not be huge reams because we’re aware we shouldn’t be asking for too much.”

Testing times ahead for senior managers in law firms and ABS. I'm sure the sheep dip will be working overtime.

From Father Confessor to Compliance Officer

Time to Take Your Law Firm to Market?

(thanks to greentech media)

Is it worth floating a law firm on the stock market? Peel Hunt, a broking house, thinks it can work. In a briefing note, it lays out the attractions and possible drawbacks.

Some of the key points are a continuing need for legal services with a growing regulatory state--ie. more red tape, more need for lawyers and other professionals. Good steady income streams (if partners bill properly, I assume). One of the most important reason given is

Flotation simplifies many of the problems associated with partner transition – equity is transparently valued and incoming partners need not provide capital. This can ease the recruitment of young partners, who rarely have built up their own personal wealth to be able to afford to buy in from their own cash resources. Equally, rewards above normal remuneration and after loan interest and loan capital repayments are, in some cases, only achieved by partners in their late forties. The best young partners, particularly those with a marketing mindset, are likely to want a visible reward and, in particular, the possibility of capital reward in their thirties.

 On the downside is a crucial factor. I've written about managing cultural risk in firms and Peel Hunt identify "the risk of culture change" as a clear risk of flotation

The biggest risk, but the most difficult to analyse objectively, is the extent to which
a public flotation may cause partners to change their behaviour in a way that damages their “trusted advisor” status. The intrinsic pressure of meeting market expectations may change the behaviour of partner/directors. If this causes them to market more aggressively the firm’s specialist services then this may be positive. If however it leads to a more “churn and burn” mentality then, even though this may take years to feed through, this would severely undermine goodwill.

  This is one area where I would say the vast majority of professional service firms, frankly, don't have a clue. If they mess it up then this is where they will do it. Without cultural mediators they are lost. The example Peel Hunt cites is Slater & Gordon in Australia which seems to be a financial and cultural success.

Lawyers would do well to read pages 13 to 15 of the briefing which detail how salaries and dividends would need to be handled. Some middle-range partners might not be entirely pleased with what's on offer: the senior partners will be laughing, however.

The biggest question is how do you value a law firm? I'm not going into detail here but most lawyers will have to learn something called financial reality. It's rather different from Wonderland. (See page 18 for more.)

Using Allen & Overy as a case study, the value of the equity comes out "at £1.48bn, equal to £4.0m each per full equity partner...Those closest to retirement are the most likely immediate beneficiaries of a listing."

Standby for internecine warfare...?

PS. I should mention a fascinating post by Mark Brandon at Motive Legal on "Would you buy shares in a law firm?" which delves into some of the dangers of law firm flotations.

Time to Take Your Law Firm to Market?

Exactly Who Should Be Able to Claim Privilege?

When the Australian Minister for Financial Services refers to accountants and tax professionals as "the consiglieri of suburban prosperity", you know a good argument is brewing.

The argument is over who should be able to claim privilege over communications with clients and third parties. At the moment we recognize legal professional privilege. But for a long time accountants have bristled resentfully at their being outside this charmed circle.

During the negotiations over the Legal Services Act 2007 accountants lobbied for the extension of privilege to cover them. Resistance by the legal profession was far too strong and the accountants were forced into retreat. Yet help may be at hand.

The Australian government has issued a discussion paper which considers whether some form of privilege ought to be extended to cover tax practice--tax advice privilege. The Australian Law Reform Commission (ALRC) has suggested privilege should be so extended.

The paper notes that a very limited form of tax advice privilege exists in the US in relation to non-criminal matters. New Zealand has codified some form of privilege also. The UK appears to be in an anomalous situation. At the moment Prudential is appealing to the Supreme Court claiming that tax advice it received from PwC was privileged. The Court of Appeal rejected Prudential's claim after hearing arguments for and against by the Institute of Chartered Accountants for England & Wales and the Law Society.

Arguments for and against seem to take place on multiple levels. There is the security of the tax system which is essential to the mature functioning of the developed state. Tax authorities will have to go beyond the taxpayer's willingness to cooperate. But ideally compliance should be voluntary.

Professions are discriminated against if tax lawyers appear to have an unfair advantage over tax accountants. It can be seen to stifle competition and give monopoly powers unfairly. If you want to see something that bears comparison, have a look at Barak Richman's paper on Rabbinical cartels over the appointments of Rabbis--absolutely fascinating. The arguments adduced by Rabbis are the same as most professions use to claim why there should be no change to their monopolies. It comes down, in large part, to the Rabbis having the expertise which the congregations don't have.

A strong argument put to counter extension is the position of the lawyer as officer of the court who has undergone ethical training. The ALRC believes this can be dealt with by accountants having heightened sensibilities to ethics. They should be ethically trained and continually trained.

There are many other arguments which are covered in the paper. This is a paper worth reading for those concerned with ethics, professions, and globalization.

We know from experience that much Australian thinking has been exported elsewhere, especially in the forthcoming ethical regime in the UK with outcomes focussed regulation. Moreover, the Legal Services Act introduction of alternative business structures will bring this issue to the foreground as multidisciplinary practices grow.

So, maybe now is the time to pull out those DVD sets of The Godfather so nascent consiglieri can learn how to do that intimate and obsequious murmuring into the ear....

Exactly Who Should Be Able to Claim Privilege?

Managing Cultural Risk in Professional Service Firms

"We'd like you to talk about culture," the caller said, "Over breakfast."

Why not? I thought. I've almost got to the stage where I'll talk about anything. A friend once cracked the lame joke that he'd set up a stall with me, the notice announcing The Prof Is In. Only I'd do it for free instead of charging 5 cents and in this case I was getting fed too.

The Managing Partners' Forum asked me to talk about managing cultural risk along with another social scientist from Holland, Candida Snow, a student of Geert Hofstede.

Two pieces of writing influenced my thinking for this presentation. One was Jordan Furlong's post Why do law firms exist? It helpfully goes back to first principles. The second was a paper External Agency Relationships and Agency Problems in Professional Service Firms: A Multilevel Study by Michael Lander, J. Van Oosterhout and Pursey P. M. A. R. Heugens, which examines in detail the effects of the deployment of soft versus hard controls in professional service firms. I should also mention Emmanuel Lazega's fascinating book The Collegial Phenomenon: The Social Mechanisms of Cooperation among Peers in a Corporate Law Partnership (OUP 2001).

Given that Candida and I had at best a vague brief, we wondered what we ought to say and how it would be received. We only had 15 minutes or so each. Our audience was a mix of lawyers, accountants, consultants among others. So we did what we would like and I think it went over well since the discussion ran ten minutes over time before the moderator called a halt.

I've made my presentation with fuller notes available for download.

And if you want to know how I imagined a professional services firm or law firm might look like, then it's like this

And here's what you have to do to manage one...

Managing Cultural Risk in Professional Service Firms

Philosophical Foundations of Law & Finance 76th Session (Friday 13 May, from 6-8pm, Room 516, Regent Street, London)

Dear All,

For the 76th session of the Philosophical Foundations of Law and Finance, we will presume to apply Plato's theory of law as found in Book I of The Laws to the latest inconvenience of the US senate, namely, the hunt for blame in the 2008 financial crisis. For the record, see: http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf. It is noteworthy that the crusader against Goldman Sachs, Mark Taibi, will have his summary of said report posted in the archives of Rolling Stone on May 13th, and therefore, not in time to contribute to our eloquent rage against insolent chrematistics. 

Afterwards (circa 8:30pm), we shall dine at the Galleria restaurant, at 17 New Cavendish Street. For reservations, please text me at 07748186880.
------
As a side note, The Journal of the Philosophical Foundations of Law & Finance is currently being prepared by Dr. Laura Niada and myself. We are seeking submissions of articles and scholarly notes mainly from LLM and PhD candidates. So far we have selected 6 articles and 1 note for publication. We hope to print a "sample" of the first issue in August 2011. Our ideal is to encourage and assist aspiring talent find a means to share their knowledge and to grow a community of professionals and scholars.

Ciao
Joe

Philosophical Foundations of Law & Finance 76th Session (Friday 13 May, from 6-8pm, Room 516, Regent Street, London)