Reforms spur attorney exodus from PwC

by Roger Russell

In the latest accounting profession fallout from Sarbanes-Oxley, six attorneys have left the PricewaterhouseCoopers’ tax practice.

Some speculate that this may signal a broader exodus of lawyers from accounting firms because of SOX restrictions on tax litigation services that accounting firms can provide to public companies.

The group of six, led by Michael Solomon, left PwC to start a tax controversy practice in the national tax practice of Washington-based Shaw Pittman. They had worked for PwC for less than two years.

For Stephen Huttler, Shaw Pittman’s managing partner, the move by the group is the beginning of a broader move to beef up the firm’s tax practice. “I believe the arrival of Michael Solomon and his team from PwC represents just the first step,” he said.

“Sarbanes-Oxley’s position on the provision of tax litigation services made it difficult for Solomon to succeed here,” acknowledged Bob Morris, managing partner of PwC’s national tax services. “For PwC, having a tax litigation practice was a project that didn’t work out because of the Sarbanes-Oxley Act.”

Elizabeth Askey, one of the group of six and now a partner at Shaw Pittman, believes that other attorneys may follow suit. “I suspect it could be the beginning of a trend,” she said. “I think companies are increasingly concerned about complying with these rules and are concerned about the appearance of independence and the other issues Sarbanes-Oxley was designed to address.”

Whether or not a trend has been started is up in the air. “The jury is still out as to the beginning of a trend,” said Steve Nelson, managing principal of the Washington-based McCormick Group, an executive search and consulting firm. “In past years there was a rapid exodus out of law firms to accounting firms, which seems to have stopped.”

“There are some complicating factors, such as non-compete agreements, which affect the situation,” he added. “Any law firm they go to has to figure that they are big names and have client contacts, but business doesn’t automatically come with them.”

The group has taken some clients with them, according to Askey. “We worked out our noncompete issues with PwC,” she said. “Many of the clients that Mike worked with, he had prior to joining PwC. He already had a relationship with them, so we haven’t really taken them away from PwC, which is why they’ve been gracious in dealing with these issues.”

Prior to joining PwC, Askey was in the office of tax policy at the Treasury Department.

“They generally do have a noncompete agreement,” said Paul Heldenbrand, an executive search consultant with McCormick. “There is always the concern with whether an accounting firm might seek to enforce it. The problem, of course, is that if the agreement covers legal work, then they have to admit they’re practicing law - which they’re not allowed to do.”

David Hardesty agreed. “These people were tax litigators, and theoretically accounting firms are not supposed to provide legal services,” he said. Hardesty is the author of RIA/Warren Gorham & Lamont’s “Corporate Governance and Accounting Under the Sarbanes-Oxley Act of 2002,” and a partner at Larkspur, Calif.-based Wilson Markle Stuckey Hardesty & Bott CPAs.

“In some fashion they were doing litigation,” he said. “Sarbanes-Oxley prohibits legal services, but the other part added by Sarbanes-Oxley is expert services. These are really litigation-related services, not necessarily limited to services in connection with a court proceeding.”

“If you’re an accountant or a lawyer and you represent your public audit client before any tax authority, that would be prohibited under SOX,” Hardesty continued. “That’s the kind of thing that is becoming a problem for attorneys at accounting firms - not legal services per se, but the expert services.”

“A board needs to approve the performance of certain tax services by the same firm that’s doing audit work,” explained Askey. “In addition, if you’re performing audit work for the company, you’re precluded from litigation on behalf of the client. What that meant for us was we were unable to take on litigation for audit clients of PwC, and companies didn’t want to have to go to their audit board every time they wanted our services.”

“Now we’ll be able to do more for our existing clients and take on additional clients that we couldn’t have if we had stayed at PwC,” she said.

“When the Securities and Exchange Commission proposed regs back in 2002, there were a lot of comments from CPA firms that wanted some guidance on whether or not they could represent clients before the IRS,” said Hardesty. “The SEC gave no guidance one way or another. They stuck with the regulation that says you can’t represent a client in an adversarial proceeding. I would interpret that broadly to prohibit representing clients before the IRS.”

PwC interpreted the area differently, according to Askey. “Their interpretation was that representation before the IRS was permissible but they drew the line at litigation. Our understanding was that representation before the IRS was not advocacy for the client, and - with the approval of the company’s audit board - those services could be performed.”

Heldenbrand noted a number of factors in addition to Sarbanes-Oxley that have strengthened the desire of attorneys to return to law firms. “Even before SOX, many attorneys who went to accounting firms just weren’t happy, and a number did go back to private law practice. The issue is that accounting firms want people to be highly specialized in a particular area.”

“Former law firm employees say they miss the client contact they enjoyed at law firms, and they’re not involved in as much cutting edge work as at a law firm,” he said. “However, the accounting firms tend to pay quite well for top people, and that’s the reason they went from law to accounting in the first place - they were able to make more money.”

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