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Professionals Play Monopoly

With advanced education and privileged access to the movers and shakers of commerce, lawyers and accountants know first-hand how much wealth our free enterprise system generates. You might think these two learned professions would want to try a little free enterprise themselves.

Apparently not. For all the talk about a brave new world in which capital glides between industries and across borders, it seems lawyers and CPAs will have to be dragged shrieking out of their comfy little monopolies. The process, which is just getting underway, is likely to be a long one.

The issue is not whether non-lawyers should “practice law” or non-CPAs should “practice accountancy,” whatever that means. Grant that the public welfare is served by requiring those who render such services to be trained, tested and licensed. The question is whether there is some benefit to society in allowing only licensed professionals to employ similarly licensed professionals, and thus reap the profits from the labor of those employees. Giving the professions a monopoly on the capital as well as the labor employed in their industries needlessly drives up costs and distorts markets.

The problems are most visible in the more-insulated legal profession. It is generally illegal for someone who is not a party to a case to finance a lawsuit in exchange for a share of the proceeds. This restriction is justified on grounds that the courthouse would otherwise become a cross between a bazaar and a casino. At the same time, non-lawyers are forbidden to share in the ownership of a law practice. This, ostensibly, is to ensure that the attorney’s loyalties lie always with the client rather than with the attorney’s business partners.

From Advocate To Partner
Yet it is perfectly all right for attorneys to speculate on lawsuits by accepting contingent fee arrangements. Contingent fee arrangements, especially the near-universal practice of having no cap on the lawyer’s share of any award, convert the lawyer from the client’s advocate into the client’s partner. We are thus treated to such spectacles as law firms demanding billions of dollars from tobacco settlements, representing the combined suffering of hundreds of thousands of smokers, whose cases the lawyers, and only the lawyers, were permitted to underwrite.

Do we actually avoid conflicts of interest by allowing only attorneys to buy into cases? Not at all. These days we see settlements in which the only cash payment goes to the attorneys, while the clients who were being represented receive discount coupons, glass beads and similar trinkets.

Defenders of the contingent fee system argue that attorneys provide access to the courts for clients who lack cash, and that the attorneys are entitled to big compensation for the big risks they take. If this is so, then the obvious solution is to continue to permit contingent fees while we reduce the risks by spreading them. In other words, allow outside capital to organize large numbers of lawyers working on large numbers of cases, and spread the risks across a much more diversified portfolio of business. Less risk equals less risk premium equals lower costs.

Attorneys will, I am sure, bitterly resist outside ownership of their business. They will likely succeed for some time, perhaps quite a long time, but at the price of a gradual narrowing in the definition of legal practice. While only lawyers may be allowed into the courtroom, I expect non-lawyers such as accountants, investment bankers, appraisers and general business consultants to become increasingly involved in structuring deals, developing policies and providing advice. Just this summer, a committee of the Texas Supreme Court rejected charges that Arthur Andersen L.L.P. was engaged in the unauthorized practice of law, even though that accounting firm employs more lawyers than even the largest law firm. In fact, the largest private employer of lawyers in the United States reputedly is another Big Five accounting firm, PricewaterhouseCoopers.

Change Comes To CPAs
The changes that I expect to eventually reach the legal profession have commenced in the accounting industry. American Express has been one of the most active “consolidators” in acquiring accounting practices, including the prominent mid-sized New York firm of Goldstein, Golub, Kessler & Co. whose partner, Stuart Kessler, just happens to be president of the American Institute of CPAs. The Amex model is to exclude or spin off the target firm’s audit practice as a separate entity to avoid entanglement in the profession’s rules governing auditor independence. Everything else — the tax, financial planning and other consulting businesses — gets folded into American Express Tax and Business Services.

Only time will tell whether these consultants maintain any semblance of objectivity or just become part of the distribution system for Amex financial products. Either way, with proper disclosure to clients, consumers will decide if they want to buy what Amex is selling.

This is not to say that accountants have embraced competition while attorneys have resisted. Accountants as a group have about as much stomach for competition as the communist hard-liners in the Russian Duma. The proposed Uniform Accountancy Act, which was developed by the AICPA and an association of state regulators, asserts that the mere presentation of your accounts in, say, a balance sheet or profit-and-loss format (a “compilation” in accounting parlance) is an “attest” service that should be restricted to CPAs under their own state-granted monopoly. This despite the fact that a compilation expressly excludes any statement that attests to the accuracy or fairness of the figures presented.

The compilation provision of the UAA has been portrayed, justifiably, as an effort to grab small business work away from non-CPA bookkeeping services and other competitors. This is unfortunate, because the UAA otherwise would make many constructive changes in the way accountants are regulated.

Accountants also have pressed for rules requiring new entrants into the profession to complete a fifth year of college. The justification for this new hurdle is to protect the public welfare. Oddly, CPAs currently in public practice would not need to go back to school for this fifth year of training to protect that very same public. This year New York became the 44th U.S. state or territory to enact the five-year rule, effective in 2009.

Not that I have anything against advanced education. My own MBA is the best investment I ever made. The fact that I hold it means I would be unaffected even if the new education requirement did apply to practicing accountants. But there are many levels of complexity in any profession. Four years of accounting education has always been enough to train a CPA to complete a simple tax form or keep the books for a small business. Why must clients who have only rudimentary needs be forced to pay for the CPA’s advanced training, or more likely be driven from the CPA to some other service provider?

I am not a doctor, but I can own a hospital. I do not know the first thing about designing airplanes, but I can buy stock in Boeing. In those businesses a mistake can kill people. An error in a contract, a will or a tax return is a bad thing, but not life-threatening. Our society is quite capable of policing the ownership of professional firms by non-professionals. When it happens to accountants and lawyers, the benefits to our economy should easily outweigh the costs.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.