A blurred demarcation between lawyers and accountants raises interesting questions about the future structure of law firms. Vandana Chatlani reports
Earlier this month, the Bar Council of Delhi issued a notice to the “Big Four” global accounting firms in India, temporarily banning them from legal practice. The direction from the bar council follows a complaint from Lalit Bhasin, the president of the Society of Indian Law Firms (SILF), against Deloitte, EY, KPMG and PwC, alleging that these auditing firms were providing legal advice in violation of the Advocates Act, 1961.
SILF’s initial complaint against accounting firms in India dates back to 2015, but tie-ups between law and accounting firms stretch back even further.
“Let’s recognize that EY has SR Batliboi, PwC has Lovelock & Lewes, and similarly, there have been more such friendly partnerships,” says Ravi Raghavan, a tax counsel at Majmudar & Partners. “Effectively, when the Indian accounting firm has discussions with clients, they represent themselves as PwC, Deloitte and EY, etc.
“But to respond to the ICAI [Institute of Chartered Accountants of India], they say they are Indian accounting firms with Indian partners. A lot of business is generated by the Indian arm of the foreign accounting firm. The Indian client is glad, believing they are receiving quality work. This has been going on for the past 30 years – and the Indian Ministry of Corporate Affairs found nothing wrong with this in 2018.”
Although the tussle between law and accounting firms is not new, this is the first time the Big Four have been asked to provide details of all the lawyers they employ as part of an investigation into the type of work these professionals are handling.
“At the outset, I am not sure if Delhi Bar Council has jurisdiction to issue directives to chartered accounting firms who are subject to the ICAI regulations,” says Raghavan. “Chartered accountancy firms are indeed expanding their services into various practice areas, but it’s because of their competency and financial capacity.
“It’s not that the lawyers want to audit books or issue audit reports. Lawyers are saying, ‘you are entering into my territory of drafting legal plaints, advising on legal aspects and issuing legal opinions, appearing before the tax authorities, preparing charter documents for companies, etc.; you’re doing what I’m supposed to do’. And it’s a legitimate ask.”
Bomi Daruwala, a partner at Vaish Associates, says the results of the inquiry will be interesting in terms of uncovering the number of lawyers employed by the Big Four, and understanding their roles. However, he remains sceptical about any changes to the status quo. “If they find that lawyers at the Big Four are being used for pure legal work, then maybe the bar council can intervene,” he says. “But I don’t think it will result in the Big Four in any way stopping what they’re doing. Even if restrictions are put in place, they’ll always find a backdoor mechanism to get things accomplished.”
Court approved mergers are one example where the Big Four step into legal advisory work, guiding clients on processes regarding mergers, demergers or reorganizations. Since all of this requires court approval, the Big Four have ties with “lawyers who do everything including the documentation”, says Daruwala, “and the lawyer’s job is simply to stand in court and give their name. So, I don’t think it will be possible to plug the various ways in which the Big Four are operating, and can operate.”
Another reason the investigation may fail to stop legal activity by accounting firms is because the Indian law firms with which they associate operate under different names. “The inquiry cannot in any way reach the surrogate firms, because these firms, at least on paper, operate independently,” says Daruwala. “Although they may be the first port of call for the accounting firms, they will be difficult to control or wipe out under the present regulatory regime and political setup.”
Crossing the line?
The Big Four accounting firms tend to operate in India in two ways. The first is by working closely with affiliated Indian law firms. While the law firm entity itself is considered an “affiliate”, some observers consider them to simply be the legal arms of the accounting firms in India.
“While Indian law firms working with the Big Four are separate in terms of entity and partnership structure, they often receive huge amounts of funding directly from the accounting firms,” says a senior lawyer who has worked both at India’s top-tier firms and at one of the Big Four firms.
Speaking on the condition of anonymity, he told India Business Law Journal that as much as 80-95% of the revenue of at least two Indian law firms were generated by referrals from their Big Four partners. In those cases, the Big Four partners would cover the cost of the Indian law firm’s office space, share a common server, and permit free use of their infrastructure.
In some cases, partners at the Big Four even have revenue targets for their Indian law firm affiliates to safeguard their existence and growth. In fact, relationships can be so tight that partners at the Indian law firm actually report to a senior partner at a Big Four firm, rather than a managing partner or committee within their own firm.
The second way in which the Big Four have entered into legal territory in India is through the use of technology; namely, its litigation management tools and legal workflow platforms. This software enables clients to manage litigation, track the progress of their legal work and to receive updates on whether they have fulfilled their compliance obligations.
“The Big Four essentially used technology to deliver legal services,” says the senior lawyer. “They call it ‘legal tech-based services’, and say they are not rendering legal advice, but rather offering a platform for clients to manage their legal matters. This is something the Indian Ivy League law firms should have done years ago, but unfortunately the vision was not there. The Big Four have thought leadership, foresightedness and a global outlook; they are way ahead in terms of tech-based tools.”
Legal technology has proven lucrative for accounting firms. The senior lawyer estimates that the Big Four generate about ₹8-9 billion (US$115-130 million) on subscriptions for their software tools alone. “The tool cost about ₹2 million for a company which was operating only two or three manufacturing units in India,” says the senior lawyer. “But for a company like that, it resulted in huge savings on legal spending. The key is that this is a recurring annual fee, so you are assured of this revenue for a very long time. This was a huge missed opportunity for law firms and now they won’t be able to catch up. The Big Four will just improvise, innovate and come up with better tools and strategies to market such software in the future.”
EY and Deloitte did not respond to emails seeking comments. PwC declined to respond, while KPMG in an emailed response denied the allegations: “We maintain our response provided to the Bar Council of Delhi for the same complaint raised in 2015 by the complainant. In our response, we specifically stated that KPMG does not represent or hold itself out to be a legal firm or a firm of lawyers or legal experts nor is it engaged in the practice of law. Given the matter is baseless and incorrect, we would refrain from commenting on it further.”
Himavat Chaudhuri, the chief legal and regulatory affairs officer at Tata Sky, recalls a time when accounting firm Arthur Andersen ran the biggest law firm in India under its own name. “Purely from a lawyer’s professional point of view it was great,” says Chaudhuri.
“They paid great salaries, there were opportunities to work on terrific projects and I think the interface with business, tax and audit was very good.” The battle between accounting and law firms began close to the time that Chaudhuri moved in-house. “The Bar Council of India made sure Arthur Andersen shut down their practice of law and that’s how DSK Legal was formed [in 2001],” says Chaudhuri.
The rationale behind partnering with, or in some cases launching, these firms under a different name is to retain clients who would have otherwise sought legal advice elsewhere. Based on revenue, such partnerships are not a money spinner, says the senior lawyer. “Law firms act like a shield for accounting firms. Removing their legal arms will expose them and make them very insecure. If they are forced to refer work to non-affiliated law firms, they run the risk of exposing those firms to their clients and potentially losing them in the process.”
Chaudhuri believes the concern relates partly to the fact that lawyers follow a code of conduct. “It’s not just knowledge of the law, you have to understand a lot of other things that accountancy firms are probably not geared up for,” he says. “For practising lawyers to report to someone who is a non-lawyer offers a set of challenges because they don’t always understand the nuances of the profession.”
For example, the Big Four often do not have a partner to sign off on the corporate law advice they are issuing, says the senior lawyer. “They have the bandwidth, resources, infrastructure, etc., but they don’t elevate lawyers to partnership that easily; only chartered accountants. In case of legal audits, they can’t provide a view on whether a company’s actions are correct. Companies approaching them are running a big risk, because they lack the technical competence in particular areas.”
Lawyers, unlike chartered accountants, are also regulated by the Bar Council of India, and thus must adhere to specific rules of ethics such as maintaining client confidentiality – rules which do not necessarily apply to accountants. “Lawyers and chartered accountants have different regimes regulating these professions, with lawyers subjected to stricter confidentiality requirements,” says Stella Joseph, an associate partner at Economic Laws Practice, speaking in a personal capacity. “Enabling accountants to de facto provide legal advice without these conduct requirements might prove counter-productive.”
Of course, the primary reason lawyers are up in arms is due to a fear of losing clients. “Practising lawyers were very happy that this action had been taken because they want to protect their turf,” says Chaudhuri. “I think they just don’t like the idea that a part of their business is going to accountancy firms, which are professionally managed, and have more money and resources at their disposal. Law firms, especially smaller ones, don’t have that luxury.”
Chaudhuri says law firms may be unnerved by the Big Four’s aggressive push to secure direct and indirect tax work – one area in which advisory is permitted. “Accountancy firms will not just restrict themselves to tax, they will extend themselves,” he says. “Law firms want to put a stop to this before there’s a complete takeover and specialization beyond tax into other areas.”
Definition and demarcation
In order to effectively restrict accounting firms from legal practice, the government must first revisit the Advocates Act and the Chartered Accountants Act, 1949. “One would need to understand the terms ‘practice of accountancy’ and ‘practice of law’, says Raghavan. “Accountancy generally includes financial accounting, issuance of audit reports and financial statements, maybe some tax planning, financial management consulting, etc. On the other hand, ‘practice of law’ is all encompassing.”
However, Raghavan points out that a recent Supreme Court judgment concluded that legal practice went beyond appearances in court and included drafting opinions and instruments, and participating in conferences, non-litigation, etc. “Rightly or wrongly, the ambit of work permitted to law firms is huge,” he says. “The law as it stands today puts a lot of restrictions on the practice of law by accounting firms.”
Daruwala agrees. “‘Legal services’ is a very broad term – it is so broad that one doesn’t know where to draw a line,” he says. An accounting firm may advise clients on entry strategies into India, for example, and provide basic advice on the Companies Act, the Income Tax Act, labour laws, etc. “Strictly speaking, this may constitute legal advice,” says Daruwala, “but it may be the bare minimum of legal practice. If you were to introduce a negative list, that would be a very difficult exercise because there’s always an overlap between financial and legal aspects, such as in M&A transactions.”
Winners and losers
For many clients seeking tax advice and assistance with forensic investigations, the Big Four remain attractive for their efficient, affordable, high-quality services and project management skills. These Big Four firms usually have a huge bench strength, operate on lower costs compared to large law firms, and have lower margins because they depend on a high volume of work.
“If Amazon or Walmart wanted to get a legal audit done across India, they would look for someone who could offer results in two or three weeks,” says the senior lawyer. “For a law firm, that’s impossible; they won’t have the resources to undertake an audit so quickly and there’s no concept of project management or tools to manage these projects. I know a law firm will do a better job because they’ll go into more detail – but as a client, do I really need those details? It’s more of an internal process in many cases, and what matters is that it’s signed off by one of the Big Four.”
Chaudhuri attests to this efficiency and commitment. “When I conducted an employee investigation, I appointed an accountancy firm and asked them what would happen if there was a dispute with an employee. They told me they would testify in court. I cannot imagine any law firm giving me that kind of service. I would have happily gone to a law firm for the forensic investigation – they may have had a more diligent, measured and cautious approach than some of the accounting firms. But the way these accounting firms operate is impressive. They are prepared to take risks and put everything on the table for a client.”
An expert committee from the Ministry of Corporate Affairs published a report in October last year, calling for amendments to “archaic laws and regulations”, particularly in relation to the legal profession, which “impose unnecessary hurdles in the smooth development of MDPs [multi-disciplinary practices].” The committee suggested that Indian firms needed to evolve into globally competitive leaders in auditing, legal, consultancy, and ancillary services, and called for amendments to the Advocates Act to enable such growth at Indian law and accounting firms.
“There are a lot of technical areas, including tax, where chartered accountants could offer expertise, which would complement the legal understanding of a matter and vice versa,” says Joseph. “I personally support a move towards multidisciplinary services going forward as it will benefit everyone in the long term, provided that the regulations governing both professions are on par.”
Levelling the playing field, however, also requires addressing the opaque funding structures currently enjoyed by the Big Four’s Indian law firm affiliates. “This is not a healthy practice,” says the senior lawyer. “The Big Four have deep pockets globally, and running a law firm in India completely removes competitiveness for the smaller firms. The affiliate firm’s infrastructure is taken care of, the rental space being paid for, and as a result they have little or no overheads. Because of this, others are clearly losing out. The funding should completely stop. Cross-referring work is fine, but it can’t be a one-way street.”
The need for openness
Accounting firms are not the only ones being turfed out of India’s legal landscape. Foreign law firms, too, have failed to make inroads into India’s legal sector following a Supreme Court judgment last year that legitimized the “fly-in, fly-out” model, but stated that this “only cover[s] a casual visit not amounting to ‘practice’”. The judgment gives the bar council power to take a decision in the event of a dispute over whether a foreign lawyer is doing more.
Many argue that India’s promoter-driven law firm culture must change to enable any meaningful growth. “As organizations grow, the need to evolve, adapt and reinvent becomes an existential imperative,” says Joseph. “I believe most firms will transition to a professional structure where self-governance, ‘gold standard’ service delivery, and engagement guidelines will emerge as clear differentiators.”
Raghavan believes accounting firms locally have been able to grow precisely because of their affiliations with multinational firms. “Things would be completely different if foreign law firms were to operate in India under fair rules. The legal profession would be as good as the accounting firms, if not better, in terms of volume, money, technology and value addition.”
The multidisciplinary model may remain a dream unfulfilled for some time. “I doubt that changes will come into play anytime soon,” says Chaudhuri. “Not too long ago, law firms had to get approval from the BCI to have a website, but then you couldn’t publish the names of partners or practice areas. The wheels move very slowly. Of course, we shouldn’t forget that lawyers comprise half the union cabinet. So it won’t be easy for the accountancy firms to get away with what they’re doing if the lawyers’ bodies get together.”
The accounting firms face the Bar Council of Delhi on 12 July. Many are convinced that the process of ironing out differences and pleasing various stakeholders will not be a quick one.
“One factor is that the revenue generated by the Big Four are not something the Indian government can afford to ignore,” says Raghavan. “It’s a very sensitive and tricky issue. I think it will take quite some time before a logical solution is found.”