The accountants are coming – aren’t they?

Any well-informed law student and regular reader of LC.N will of course be aware of the Legal Services Act 2007. This brave new world came into being on 6 October 2011 and brought with it the phenomenon of the alternative business structure (ABS). Among many changes created by the Legal Services Act, some of the most important allow lawyers to form partnerships with non-lawyers, accept outside investment and operate under external ownership.

As part of its ongoing "open conversation with members", the Law Society’s latest Twitter hour considered how the legal profession will look in 2020, specifically given that new entrants into the legal market include insurers and accountants. While the #LawSociety2020 debate perhaps didn’t create dramatic waves among blawgers and legal twitterati, it did highlight that there remains underlying concern at the prospect of accountants moving into the legal services market in full force. On that basis, it’s important to review how and why accountants are on the march (once again) and whether this has any real significance for law firms.

When did it all begin?

The competition between accountants and law firms, and the idea of 'multi-disciplinary practices', began long before the advent of ABS. If considering researching this topic seriously for an interview, you should be sure to take note of activity in the 1990s. One of the then big five, Arthur Anderson, expanded into consulting and law with the law firm Garretts. Eventually generating £36 million per year, courted by firms like Wilde Sapte (now Dentons) and with 70% of its revenues generated independently, from in-house referrals, Garretts was no runt of the litter. But in 2002, following the fallout of the Enron scandal, the collapse of Andersen in the United States and its subsequent merger with Deloitte in the United Kingdom, Garretts was left in the cold and a significant workforce were on the job hunt. Ernst & Young (EY) also severed ties with its law firm, Tite & Lewis, when it was acquired by Lawrence Graham In 2004; now, all legacy Tite & Lewis partners have moved on.

Commentators warned about the damaging risk of conflict of interest, citing this as a reason for the demise of accountants’ legal divisions. Most sold or closed all legal practices, keeping only a pre-existing tax advice wing.

How did the change in law affect accountancy firms?

The tide turned when the change in rules allowed accountants to own and control law firms. The Legal Services Board also confirmed that the Institute of Chartered Accountants in England and Wales (ICAEW) had satisfied the criteria to become an approved regulator of ABS.  

As well as in this country, this qualified privilege only applies in Australia and Mexico. In China, France, Germany, Italy, Japan, Spain and Ontario (Canada), accountants can collaborate with law firms and share costs. It’s particularly important to note that the United States remains off the cards, as it accounts for over a third of global legal spend. Both EY and Deloitte have expanded into China, acquiring Chen & Co and Qin Li respectively.

Which firms have acquired an ABS licence in the United Kingdom?

PricewaterhouseCoopers (PwC) was the first of the big four to secure its ABS licence in 2014; it already has a legal services division, but the ABS could allow it to own a separate law firm within the PwC network.

KMPG followed suit in October 2014, but was keen to vocalise its lack of ambitions to establish a standalone legal practice; UK chairman Simon Collins commented: "The new regulatory regime, designed to open up the provision of professional services across the sector, allows us to extend our legal services provision where we have a proven and successful track record."

Joining its rivals, EY confirmed its ABS licence in December 2014. The firm already had 1,100 people employed within its global law practice, having been particularly active overseas in recent years. As The Law Society Gazette reported, EY is keen to grow its legal presence further. UK chairman Steve Varley said: "We aren’t competing with the business models of traditional law firms. We are offering something new…accountants and other professional advisers working side by side will be a real advantage to our clients and ultimately help us to provide a better level of service."

What might this mean for law firms?

Any impact on law firms and risk to revenue is very much dependent on the approach pursued by the accountancy firms. Most of the firms' PR to date suggests they are simply seeking to provide services supplementary to their accountancy products, barring conflict of interest. But there is the possibility of competing in the market of alternative providers or even directly with traditional law firms. However, Eduardo Reyes, writing in The Law Society Gazette, casts doubt on clients’ purchasing habits regarding the use of “one-stop shops” in a multi-disciplinary practice. In an era of in-house teams unbundling services, looking to outsourcers (moving away from the billable hour) and ultimately needing to drive down costs, he concludes that the "window they [accountancy firms] had to revolutionise the legal sector has surely passed".

Nonetheless, is worth reflecting on a point highlighted by The Economist when it considered the effect of accountants as new entrants to the legal market. It’s a factor that is hard to ignore: the combined annual revenue of the 100 largest law firms combined is dwarfed by that of the big four accountancy firms - $120 billion compared to $89 billion in 2014. So while many law firms remain unmoved by the idea of any risk from the big four, surely it would be foolhardy to dismiss the size, capital and technical efficiencies of these (nearly) new entrants entirely?