The VSB/VBA Joint Commission on Multidisciplinary Practice met in the Library of the Eighth & Main Building in Richmond, Virginia, on Tuesday, December 19, 2000, commencing at 10:00 a.m.

Commission members in attendance were:

John A. C. Keith, Chair
Theodore I. Brenner
John D. Epps
Donna D. Lange
Heman Marshall *
Leigh B. Middleditch, III *
James S. McNider, III
Robert C. Nusbaum *
Craig L. Rascoe
Thomas E. Spahn
James M. White, III
Robert C. Wood, III

Unable to attend were:

Ann T. Burks
Brian V. Ebert
Paul E. Fletcher
Jeffrey G. Lenhart
Howard McElroy
Nina E. Olson
Frank A. Thomas, III
Clark H. Worthy

Also attending were:

Thomas A. Edmonds, VSB Executive Director
James M. McCauley, VSB Ethics Counsel
Larry Samuel, Deloitte & Touche, Chair of VSCPA Task Force on MDP
Tom Barry, President/CEO, VSCPA
Stephanie Peters, Public Affairs, VSCPA
The Honorable Walter Stosch
Richard Miller, General Counsel, AICPA *

* Attended by phone

This meeting was coordinated by Craig Rascoe. Representatives of the accounting profession were invited to speak to the commission about MDP. These speakers represented VSCPA (Virginia Society of Certified Public Accountants) and AICPA (American Institute of Certified Public Accountants).

Comments by Tom Barry. Mr. Barry indicated that the VSCPA has just recently organized a task force on MDP. MDP is only a small part of the accounting profession's vision for the future. He stated that the accounting profession's old ways were not focused on the market, and market forces have compelled the profession to reshape its future. Technology, globalization and regulatory pressures have forced the accounting profession to rethink its role for the future. The core values of the profession include integrity, objectivity, public protection, competence, staying attuned to business issues and continuing the learning process.

Mr. Barry observed that during the past 10 years there has been a 50 percent decline in the number of students entering the accounting profession. The old accounting practice included tax, attesting, auditing and compliance, but non-traditional and non-audit services have now come to the forefront. MDP involves financial planning, insurance, actuaries, banking, brokerage, etc. The convergence of personal services into a one-stop shop are a way in which CPA firms can move up the value chain.

Mr. Barry notes that for quite some time CPA firms have included attorneys as employees. However, in order to attract the brightest and best professionals, the CPA firms must be enabled to offer such professionals an equity interest in the firm, which makes an alternative practice structure necessary. Recent developments have brought this to the forefront, including the activity of American Express in buying up CPA firms. Also, H & R Block acquired McGladrey Pullen. These financial services firms intend to provide management consulting, financial planning, performance measurement, information technology and internet services, assurance and information integrity.

However, the accounting firms do not want to become law firms. In the accounting profession's view, the phenomenon of MDPs involves non-CPA ownership in the firm. Sixty percent of the members of the AICPA are not CPAs. They serve as officers in corporate America, as CEOs or CFOs all over the country.

Statement by Larry Samuel. Mr. Samuel indicated that as a general rule clients of accounting firms are not demanding legal services. However, in certain areas, such as securities, the clients do not want to pay fees to both a law firm and an accounting firm. With increased globalization, clients expect accounting firms, such as Deloitte and Touche, to be the eyes and ears for the corporate client. With technology comes increased global credentialization. An important aspect of their work involves assurance and information integrity. Clients want real time information and expect a fast turn-around, continuous auditing engagements, information technology expertise, etc. With increased globalization, the accounting firms cannot conduct audits of a world wide organization without taking difference approaches to deal with increased complexity and increased speed. Mr. Samuel reiterated that the number of CPA exam candidates has drastically declined. New account professionals are looking for more attractive services rather than traditional public accounting work.

Comments by Walter Stosch. Mr. Stosch stated that every state's laws create a state board of accounting to regulate the profession. In the late 1980s the public accountancy statutes developed to address some issues relating to unlicensed accountants. However, public accounting became more narrowly defined, i.e., as audit and review. By statute the rules and regulations governing CPAs also apply to unlicensed professionals if they hold themselves out as CPAs, even when performing non-audit services, e.g., preparation of a tax return. Consulting, compilations and other non-audit services can be done without restriction or regulation as long as the services provider does not hold himself out as a CPA or use terms of art such as "generally accepted accounting principles."

In 1999, Senate Bill 926 provided for non-CPA ownership of accounting firms, but ensured that licensed CPAs controlled a majority ownership of a firm. Mr. Stosch described this as a reaction to threatened consolidations such as the acquisitions by American Express and H & R Block. These consolidations by large financial services firms are motivated by their interest in the tax and consulting bases of the CPA firms. However, there is no ownership requirement in a firm that does not do attest work.

Regarding the regulation of CPAs, Mr. Stosch indicated that you if you are a CPA you are subject to professional conduct rules even if performing non-audit work. That is, the requirements of due care, objectivity and integrity apply to CPAs irrespective of the nature of their service and even if they are not performing such services within a CPA firm. Regarding the legal profession's fear that lawyers working in MDPs would be less likely to adhere to professional conduct rules, Mr. Stosch stated he did not think CPAs are more likely to violate conduct rules when working in a non-CPA firm. Thus, he questions why lawyers would be less likely to adhere to their professional conduct rules when working in a setting other than a traditional law firm.

Mr. Stosch spoke briefly about how accounting firms handle client conflicts. Accountants could be on both sides of an engagement with the consent of both clients. Accounting firms implement fire walls to separate and protect information from being shared between the two engagement teams. Thus, it is possible for an accounting firm to be on opposite sides of a particular client matter.

Mr. Stosch also spoke about the AICPA rules of conduct in contrast to state rules and regulations. The AICPA has the power to expel a member for misconduct and publish the expulsion to the board of accountancy for the state where the accountant is licensed. The state board could then consider investigating the misconduct. The AICPA and the state societies have a Joint Ethics Enforcement Program (JEEP) in 49 states. This program provides joint enforcement through one investigation and disciplinary action. This does not impact, however, on the CPA's license issued by the state. It is up to the state to take action independently against the CPA's certificate. The VSCPA and the AICPA are voluntary organizations. Sixty percent of the CPAs in Virginia are members. Membership in these organizations is more important to those in the CPA sector.

Comments by Richard Miller. Attorneys hired by accounting firms do not practice law or hold themselves out as attorneys. CPA firms are hiring law school graduates, but are not always requiring that they be licensed to practice law. Regarding client confidentiality, Mr. Miller explained that 15 states have privilege statutes for CPAs. Section 7525 of the Internal Revenue Code provides for a federal tax preparer privilege. Confidentiality is also a requirement by rules promulgated by each state board of accountancy. Mr. Miller explained that some lawyers have mis-analyzed an accountant's duty regarding disclosure of client information. Even if a client is engaged in fraudulent conduct, a CPA cannot disclose such client fraud to anyone. Rather, the CPA is ethically required to resign from the engagement or file an adverse or qualified opinion. Accounting firms which do audit work for publically held corporations are subject to the SCC's rules. The SCC has recently issued new rules concerning "auditor independence," which impose a direct prohibition to an accounting firm providing both consulting and auditing services for the same client. Also, these auditor independence rules require the accounting firms to disclose fees paid to them for both auditing and consulting services as well as other non-audit services for the principal auditor.

Mr. Miller agreed with Mr. Keith's observation that conflicts and confidentiality issues are more aggravated when the firm represents clients in court and litigation. As a result, Mr. Miller agreed with Mr. Keith's suggestion that lawyers working in an MDP probably should not serve as advocates representing clients in court. While it might be possible to do so in the future, permitting MDP with this restriction is a good place to start.

The commission adjourned until its next meeting which is scheduled for January 20, 2001, in conjunction with the VBA Annual Winter Meeting in Williamsburg, Virginia.