In this article, Nidhi Mahesh Shetty pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the legality of the usual practice where Big accountancy firms in India have their captive law firms.

Introduction

Law as a profession has seen unprecedented development tearing through the traditional sense of practice. In India, post the iconic economic liberalisation in 1991, global access was re-defined. The scope of work for professionals like chartered accountants and lawyers gained impetus as India stood at the threshold of economic prosperity. Numerous companies cropped up in the domestic scenario either in conjunction with global or local investment. The roles and responsibilities of professionals in the field of accountancy and law were brought into spotlight for driving this economic liberalisation in terms of company incorporation, audit, taxes and dissolution.

When the Chartered Accountants Act was enacted in 1949, it enabled chartered accountants to perform duties relating to the legal aspects of companies such as incorporation or representation of the company before the Tax tribunal. Though such duties would be familiar to a lawyer, as such duties were classified as an imminent part of the legal functioning of a company, the Companies Act of 1956 expressly authorised chartered accountants to perform such duties.

Post-1991, corporate activity in India found urgent prominence. It formed a complex web of statutes, rules and regulations that every legal entity had to mandatorily abide to. This further lead to the establishment of specialised law firms dealing with corporate law and such activities.

The Big Dissent

However, the complexities gave rise to an enormous battle between accountants and lawyers. This battle focussed on clear demarcation of the roles and responsibilities of both the parties. Arguments were raised over chartered accountants encroaching the roles of advocates in terms of providing legal advice, compliance, and support that traditionally advocates are authorised to do. The bone of contention still exists as no clear relief has been notified.

Chartered accountants are professionals governed by their quantified law i.e. the Chartered Accountants Act, 1949 and advocates are professionals governed by the Advocates Act, 1961. However, allegations have surfaced in the recent past over accountants doing work that they are not authorised to perform.

Allegations have especially been levelled against the Big 4 accountancy firms, that have operations in India too. The firms were alleged of carrying out functions primarily designated to lawyers like advising clients, providing legal opinions, appearing for the clients and so forth. The legal fraternity in India raised concerns and voiced their dissent to the Bar Council over such multi-disciplinary approach of the firms. Dissent arises also from the fact that accountancy firms employ graduates from the field of law solely to cater to their clients, which is against the provisions of law.

Though many economies around the world, one of them being UK have permitted for such multi- disciplinary approach of accounting firms, India is yet to warm up to the idea. The largest economy in the world, United States too hasn’t opened up to the multi-disciplinary approach of big accountancy firms.

The Big Explanation

Over the years, however, it has been observed in India that global accounting firms like the Big 4 have “friendly” relations with some law firms that handle substantial of their work. Such international accounting firms seem to have tapped into markets where their accounting services are a big hit, but fall short in providing legal advisory to their clients. Given that, such huge accounting firms already possess the prestige and reputation, clients do not have to think twice before approaching their “friendly “law firms for any legal complications. Also, with the ever dynamic market of India, many advisories of mergers & acquisitions, fund raising, venture capital, complex tax matters and so on, have found huge significance. Clients having familiarity with big accountancy firms can trust their captive law firms for such complicated matters.

Chartered accountants have denied accusations of any sorts relating to encroachment upon legal profession. Stating reasons that the coursework of chartered accountancy itself provides for students to study subjects relating to company law, securities law, industrial and general laws, the question of encroaching on legal domain does not arise. Knowledge is universal and cannot be confined to particular sections only, is what is reasoned.

It is also to be noted that under the Chartered Accountants Act 1949, the Advocates Act 1961 and the Bar Council of India Rules 1966, the only legal work CAs were not allowed to perform was to represent their clients in the lower and higher courts of law in India. Providing legal advice or not, isn’t particularly debarred. Many accountants argued that if their clients approached them out of familiarity and trusted their opinions on legal matters pertaining to various scope of corporate law, nothing illegal could be made out of it. Arguing that knowledge doesn’t belong to anyone and is a universal domain, CAs seem to wiggle out of the sticky situation.

Big accountancy firms are also of the opinion that clients might prefer one stop solutions for their legal as well as accounting & taxation problems. Taking the advantage of such situations and leveraging for the “benefit of their clients” cannot add up to an illegality.

Legal firms have made a hue and cry that their practice is directly affected because of the accounting firms aggressive poaching on their clients. Such firms have set up huge law practice simultaneously claiming it to be some of their subsidiary company, when in fact they are actually incorporated bodies.

The Big Sly Move

The fact that such a dissent has arisen over accountancy professionals illegally rendering legal services, comes from the realization that they cannot practice the lucrative litigation. Earlier, existed a time when accountancy firms and law firms worked hand in glove, with accountancy firms providing referrals of law firms to their clients. These law firms were separate legal entities, and not in-house. Such a system existed because the market was rigid and exclusive. With the times and markets evolving with every legislation, the demarcation became blur.

Big firms began to wonder the reason behind referring their clients to outside law firms. Accountants have always been efficient regulatory compliance work. But, when their clients faced difficulty to the point of facing litigation, the accountants had to give them up to their “friendly” law firms. On understanding the potential market the accountancy firms are losing out on, these big firms (Big 4) created virtual independent law firms consisting of advocates only. This was to give an appearance that the accountancy firm and the law firm were distinct in their approach and businesses.

The apparition of separate entities was created, when in fact such entities work nearly exclusively with each other. Such law firms entertain clients brought to them by the subordinate accountancy firm. Revenue sharing agreement is also established between such firms; it is believed but could not substantially be proved. Big accountancy firms began literally poaching on the partners of big corporate law firms under the guise of separate legal firm of their own. It could be established that such captive law firms held files of the CA firm and mandated their actions through the directions of the accountancy firms. Such an approach has directly hit the law firms with direct competition. Law firms now have to compete not only with other law firms but also with such huge accountancy firms.

Big accountancy firms, until few years ago provided major referrals and recommended law firms to their clients. Now that such approach has been put to a back burner, law firms have to establish their own edge.

Arguments have been made that if the accountancy firms only seek consultancy from such law firms then it cannot be a matter of contention, as nowhere it has been a restriction on accountancy firms to seek legal consultancy from outside.

Fee splitting with such accountancy firms still is a matter of concern as it could affect the independence and proper judgement of advocates. However, many are also of the opinion that legal firms need not create mole out of a mountain. Legal firms have their own specialised niche carved. Offering of such services in terms of the standards and techniques that can be solely assured by a law firm only cannot be threatened. Instead, it is the accountancy firms that have to vigorously fight the reputed law firms for the international standard of work committed by them.

The Big Example

Taking the case of E&Y, it can be established that big accountancy firm have entered into the domain of legal work. PDS legal is termed to be the “best friend law firm” of EY, as PDS legal has been inducted as an affiliate firm of E&Y Global Limited. [1] PDS legal is a law firm consisting of lawyers and that cater to legal framework. However, the nearly exclusive manner that EY and PDS legal work with each other cannot be ignored. Though no direct evidence of any revenue sharing arrangement can be established between them, it also cannot be denied on face that EY has in the guise of a captive law firm, engaged in law practice.

Conclusion

Thus, establishing illegality or borderline defiance of law is only a technicality. Drawing a line is pertinent. Understanding the principle and respecting the essence of it, is important and should be made clear cut. What cannot be done directly should not be done even indirectly.