For the past five decades, law firms as well as accounting firms have tried to achieve broader coverage and obtain referrals through establishing and joining networks and associations of professional firms. The prevailing legal structures are mainly companies limited by guarantee, Delaware member corporations, and Swiss Vereins.[1]

The collapse of Italian dairy product giant Parmalat and the Enron case led to a restructuring of the regulatory framework for accounting Transnational Organisations and Practices (TOPS), resulting in higher regulation through the 8th EU Directive and the Statutory Audit Directive from 2006 as well as in the commonly accepted network definitions according to the International Federation of Accountants (IFAC). Consequently, there needs to be a differentiation between integrated networks of accounting firms and loose networks of accounting firms referred to as “alliances” or “associations,” regardless of their effective legal structure. Integrated networks of accounting firms require thorough independence checks prior to accepting new clients and are potentially exposed to more vicarious liability.[2]

Organisations consisting purely of law firms enjoy much more flexibility and are not yet subject to global regulations, restrictions, or limitations. It is unavoidable that potential conflicts arise from the different corporate structures chosen; in particular, conflicts of interest can even lead to malpractice suits against law firms, members of TOPS. The choice of the legal structure has, however, very little impact on vicarious liability for law firm networks. A substantial conflict can be identified by the market perception of clients and by elements of misrepresentation, in particular if networks of law firms label themselves as global law firms when in fact they are Swiss Vereins and therefore factually single-branded networks of independent firms.[3] A series of law firm networks may promote themselves as global law firms and be perceived as such, despite their structure as a Swiss Verein.[4]

Professional service firms have over the past century cooperated on an international scale in different ways. Similar to the correspondent bank network of the 19^th century, international law firms and accounting firms have come to understand that it is essential for them to rely on strategic partners or associates abroad in order to serve clients better, particularly when it comes to transnational assignments.[5] Historically, a broad variety of different models has arisen, from very loose “clubs of friends” with no formal corporate structure to the more modern and often highly integrated and monitored firm model, using a single brand and following global standards, such as the “Big Four.” 

The differentiation between accounting networks or alliances and their corresponding legal networks has initially been very easy; however, as a consequence of the Parmalat case and of a series of legal and regulatory alterations, governance and regulations changed considerably for accounting networks and associations, while they did not for the legal profession. The origin of accounting networks can be found in the need for listed U.S. companies to be audited in order to comply with the regulations of the Securities Exchange Commission (SEC).[6]

Law firm networks began to internationalise much later than the accounting profession,[7] since their clients’ needs differ from those of accounting firms. The latter had to be able to conduct standardised audits globally to comply with consolidated reporting for their nationally regulated clients. Law firms, however, could rely on vetted correspondent firms if and when a matter involved another jurisdiction. After the Second World War, law firms followed U.S. clients in particular, who began to expand abroad as a result of increased internationalisation, consequently referred to as “globalisation.”[8]

The global or multijurisdictional aspect of organisations of professional firms allowed loopholes and a flexibility in the structure and running of transnational organisations of professional firms. Bad governance together with poor financial reporting led to the Enron collapse and the introduction of Sarbanes-Oxley.[9] The Parmalat case triggered at the EU level the introduction of the Statutory Audit Directives and a regulatory change regarding transnational networks of accounting firms.

These regulatory changes have also led to the clear differentiation between “networks” and “associations” for transnational accounting organisations as defined in the EU Statutory Audit Directive[10] and the derived IFAC definition. According to the IFAC Code of Ethics 290.17, the determination should be “made in light of whether a reasonable and informed third party would be likely to conclude … that a network exists.” A referral network is not a network by this definition. The shared costs must be significant. Common quality control systems and business strategies are important considerations. 

This differentiation between network and association materialises in the level of potential vicarious liability and in a more stringent regulatory framework, with, for example, the requirement for the formal registration of networks with the national regulatory or supervisory body, clear conflict checks, and ultimately a formal or perceived proximity between the individual affiliated member firms. Where, for instance, the use of a common brand and coordinated or monitored management and control can be identified, the acknowledgement of an agent structure can be positive. The member firm agreement, reserved ownership of IP regarding manuals and software, and a centralised implementation of quality control and training programmes are clear indicators of the existence of an integrated network.  

Therefore, the network definition represents an additional layer of liability for accounting firms organised as members in a transnational entity, regardless of the legal structure this entity has chosen. Depending on the jurisdiction, this can result in a piercing of the corporate veil.[11]

Managed organisations of professional service firms are incorporated under the laws of a wide variety of countries; however, the main legal structures are common law companies limited by guarantee, Delaware non-stock member corporations and Swiss Vereins. Network organisations are defined mostly by their purpose, structure, and process. This chapter will include multidisciplinary organisations, i.e., networks or alliances including both law firms and accounting firms.

The striking differences between networks in a generic sense and transnational partnerships cannot necessarily be found by looking at their legal and operational structure. The aim of most transnational organisations is to have a broad or at least strategic coverage and to be perceived as such while vicarious liability and burdensome regulatory matters should be mitigated.

Regulatory matters have thus changed the concept of independence checks and vicarious liability for global accounting organisations or multidisciplinary organisations consisting of both accounting firms and law firms. Networks of law firms, however, do not face the same degree of regulation and are much more flexible. In both the accounting and the law firm cases, this is regardless of the structure or legal entity chosen. The reason therefore is mainly because law firm networks are regulated by ethics and not by any governmental agencies, while accounting firm networks and associations are regulated in accordance with national or supranational laws. The fact that accounting firm networks were established out of a transnational need based on reporting requirements and securities laws of individual member firms also underlines the different scope and the public interest character of these entities. Transnational accounting networks and associations are usually not directly affected by national regulations; they are affected when their individual members do not comply with them.

Some law firm networks have in the past five years benefitted from a less regulated environment compared to the accounting profession. This explains why some law firm networks consisting of independent member firms organised or bundled in, for example, a Swiss Verein appear to the clients as global firms when in fact they are not.[12] In the United States, the alleged cases of conflicts of interest of Norton Rose Fulbright[13] and Dentons,[14] both organised as Swiss Vereins, underline the problem of alleged appearance of impropriety.

Multidisciplinary networks and associations are basically those organisations, or TOPS, that consist of both law firms and accounting firms, together as member firms of the coordinating entity. Multidisciplinarity exists in some countries on a national level. It is common practice, for example, to find in Germany or in Italy professional service firms consisting of both statutory auditors and lawyers admitted to the bar.

Commonly, the most prominent level 4 networks, the “Big Four,” are identified as accounting firms or accounting firm networks; however, they comprise considerable numbers of lawyers and are therefore also ranked as leading law firms in several countries, for example in Spain.

When accounting firm networks expanded their reach by also adding legal services, there was initially much controversy.[15] The dissolution of Arthur Andersen after the Enron scandal seemed to temporarily put an end to the multidisciplinary ambitions of the large accounting TOPS, but the fact is that, today, the “Big Four” comprise large single-branded law firm networks in each of their organisations outside of the United States, since the Sarbanes-Oxley Act does not prevent them from providing non-audit and non-accounting services outside of the United States.[16]

Today, the multidisciplinary structure of the “Big Four” is evident: PwC comprises more than 2,500 lawyers in 85 countries; KPMG Legal counts more than 1,200 lawyers in more than 50 jurisdictions; Deloitte’s legal network employs more than 1,700 lawyers in 73 countries; and EY comprises more than 1,800 lawyers in 75 countries. 

Professional magazines such as the IAB (International Accounting Bulletin) usually take into account in their rankings the total revenue of accounting networks like the “Big Four,” and this also includes the revenue generated by their law firm departments. Multidisciplinary associations of independent firms like GGI Geneva Group International, MSI Global Alliance, and Alliott Group are obliged to exclude the revenue generated by law firms affiliated to their organisation for the global rankings.[17] 

Generally, multidisciplinary networks or associations are considered networks or associations of accounting firms for regulatory purposes.

 Conclusions

 The legal profession and the accounting profession cannot be compared without stressing the clear and evident differences. Both professions are consultants or advisors in the broader sense to their clients. Disciplines cannot strictly be separated, and blurred lines between tax advice, legal advice, transactional services, consulting, or trust services are part of the daily reality of dozens of the leading networks or associations of law firms and accounting firms. Multidisciplinarity therefore also exists in networks or associations apparently being dedicated to only one discipline. The commonalities are differentiated by the very nature of the professions. Law firms employ solicitors eventually pleading in court, admitted to bars and subject to ethical standards of their respective national or state bars. Clients benefit from a series of long-established principles, such as privilege, but also the essential factor of independence. The nature of the legal business is not as recurring and perpetual as that of an accounting firm.

Accounting firms need to ensure independence when it comes to audits of their clients.[18] Statutes have led accounting firms organised in networks or associations to choose which type of transnational organisation they want to be affiliated with, having to bear the consequences of, for example, additional global independence checks in the case of being part of an integrated network. Liability matters have evolved in the accounting profession over the last few decades, leading from the unlimited liability of partnerships and their partners to limited liability through the type of partnership chosen after the 1989 and 2006 U.K. Companies Acts.

The 8th EU Company Law Directive on the Statutory Audit, Directive 2006/43/EC ensures a more accurate view of the transnational networks and associations of accounting firms but also of TOPS. Ultimately, the expectations of clients of accounting firms and third parties are the accuracy of the provided audit report, which leaves very little room for interpretation, provided that the information submitted by the respective company and its directors is accurate. On the other hand, legal representation of course also needs to be handled with utmost professionalism, but the outcome also is conditioned by a variety of external factors and is, alas, less of a commodity. Nevertheless, the main pillars of the professions are the independence for accountants and the lack of any conflicts of interest for lawyers. Clients should be sure of the loyalty of lawyers — it is the most important of all fiduciary duties the lawyer owes to his client.[19]

The legislator has tried to ensure that accounting firm networks and associations are what they seem and no longer have the potential to mislead clients by alleging a global presence as a multinational group while in fact being a franchise or a loose cooperation of independent legal entities owned by separate persons. The rationale of regulation is embedded in the public interest, in particular, in audits of public companies. The potential damage a law firm or a law firm network could cause to a client is not fully perceived.

The financial collapse of a public company because of poor audit services without a doubt would have a major impact, but the collapse of a global law firm or a single branded global law firm network would certainly have a severe negative impact on their clients, too. The question of whether a global law firm is a safer option than a network of independent firms cannot clearly be answered, as the totality of the needs of a client must be taken into consideration — if there are ongoing mandates, specific ones, in various jurisdictions, in specific disciplines or just randomly. It is, however, alarming that the Swiss Verein law firm imbroglio has systematically evolved over the past decades, starting with the inclusion of Swiss Vereins in law firm rankings.

Several cases of conflicts of interest underline the considerable lack of care and disregard of client loyalty; future ones should be addressed and sanctioned accordingly. The accounting profession has found a potentially viable way forward with the “network” definition and therefore an approach that better safeguards concepts of independence and ultimately the necessary ethical standards of a sophisticated and regulated profession. The lack of uniformity in the detailed application of the regulations for the accounting profession, for example throughout the different countries of the EU, however, weakens to a certain extent this achievement.

Vicarious liability, a specific concept of tort, is an essential doctrine beyond the borders of common law. The necessary clarity cannot be found in recent case law. There is a tendency that law firm networks opt for the Swiss Verein, while accounting firm networks and associations avoid this structure and currently prefer companies limited by guarantee.

Whatever the choice of corporate structure for networks, associations, or TOPS, whether it is a law firm, accounting firm, or multidisciplinary organisation, both statute and ethical principles and regulations should supersede corporate veils,[20] national borders, and potential loopholes to ensure that auditor independence, client loyalty, duty of care, privilege, and strict avoidance of conflict of interest prevail. This should be ensured for the benefit of clients and consumers, regardless if an organisation is multidisciplinary or not.