PRICEWATERHOUSE-COOPERS has condemned the move of multidisciplinary rival KPMG to cease providing legal services as “an overreaction” to audit-independence concerns.
Australia’s first MDP law firm, KPMG Legal, last week announced it would stop trading under the banner of the Big Four Accountant pursuant to a directive from global partners.
KLegal, the multi-jurisdictional network that houses all of KPMG’s in-house law firms, will be disbanded, with members now examining the merits of establishing an alliance completely separate from the accounting firm.
“The announcement reflects changed market conditions, including the US Sarbanes-Oxley Act, which restrict the provision of non-audit services to audit clients, particulary legal services,” a worldwide statement read.
Once the decision became public, speculation immediately focused on the intentions of other Big Four operators: PwC, Ernst & Young and Deloitte — all of whom maintain legal branches.
While the latter two failed to respond to Lawyers Weekly enquiries, PwC tax and legal chief Paul Koenig was quick to hose down predictions of a domino effect at his end.
Confirming that PwC Legal would not follow KPMG’s lead, Koenig suggested that his rival had perhaps jumped the gun.
“Completely separating legal services is an overreaction, we think, and there’s no intention to do that here,” Koenig said. “It’s not in our best interests and we don’t feel we need to make that change.”
Koenig revealed that a meeting of all PwC’s Australian-based tax and legal partners, held earlier this month, had considered the ongoing ramifications of Sarbanes-Oxley and reached a “broad consensus” that structural change was not necessary.
Asked to explain why PwC was confident of negotiating the generic independence concerns that prompted KPMG’s actions, Koenig said his firm was more self-sufficient and did not necessarily rely on referrals from other practices to survive.
“Clearly SEC rules and independence concerns impact on everyone in some way, but here in Australia there is no need to put any greater distance between [lawyers and PwC generally] than already exists.”
“We are a much more substantial law firm, with 300 staff, and have a very substantial existing client base.”
Australian lawyers at KPMG confessed they expected the split to eventually take place, but were caught off-guard by the expediency with which global directors acted to sever the legal arm.
Ever since 2002’s disintegration of accounting giant Andsersen, which felt the brunt of Enron’s spectacular collapse, KPMG Legal staunchly maintained remedial conflict provisions formulated in the US would not impact upon Australian MDP interests.
“The timing was a bit out of the blue,” said head partner Jeff Goss. “We originally thought this scenario would come up within the next calendar year. You could say [the decision] leapt up on us.
“We anticipated that certain national practices could maintain close ties and but that option has now been taken away.”
As part of the split, KPMG Legal will undergo a name change and formal separation is expected to be achieved by the end of the year. Goss said a “best friends” arrangement would be established with audit, tax and accounting arms of the wider firm.
No freeze would be placed on hires, he added, during the process.
“If we get the model right, we’re seeing this as a significant opportunity for growth,” Goss said.
Echoing Goss’s sentiments were remarks from a number of sources with KPMG legal, many of whom said they were “relieved” by the news.
One lawyer described the split as a “breath of fresh air”, adding that Sarbanes Oxley provisions meant time consuming conflict searches had become an odious fact of life at the firm. As a result, it had been difficult for KPMG Legal to attract the best talent.
Another insider said KPMG Legal had been disappointed at partner growth in recent times, with the legal arm accommodating fewer senior lawyers than anticipated.
Commenting on the difficulties inherent in Sarbanes-Oxley, Goss concluded: “To comply it takes time to conduct a global search and ensure there is no conflict with audit services. Waiting for an answer has practical implications that were always going to lead to these inevitable circumstances.”
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