This report is submitted to the Canadian Bar Association in response to a request to produce a paper which describes the recent history of the evolution of the accounting profession, and which identifies those elements in that history which enable the CBA to comprehend the various implications of the Big 5 accounting firms diversifying into the field of provision of legal services.

I have been asked to produce this paper in the shortest possible time period so as to meet an internal CBA committee deadline. Two known costs of the speed of production of this paper are a lack of supporting citations for recent developments in the accounting profession, and incomplete referencing. There has been no time for me to go back and retrace the origins of much of the information that I have read and assimilated in the last couple of years. There is thus a risk that some of the information in the paper may prove difficult to validate.

In addition, some of the theoretical analysis that I present about the political and power balances within the accounting profession and within the accounting firms is formulated here for the first time. There has been insufficient time for me to expose these theories to my peers, and thus I run the risk that I am publishing views that I might otherwise wish to reconsider after listening to the views of others. This paper should be considered to be a draft paper, therefore.

Some parts of the analysis may be controversial, if only because I am attempting to grapple with some issues that may not yet have been fully articulated, aired and debated within the institutional context of the accounting profession. I shall leave it to the reader to determine if the theories that I advance about the rapidly evolving accounting profession are plausible or not.

Professor of Management,

University of Saskatchewan

May 12, 1999
 

Executive Summary

The Problem Facing the Legal Profession

The Modern Evolution of Public Accounting Firms

References

Footnotes

A number of bar associations across the world are simultaneously investigating the implications of allowing lawyers to practice in a multi-disciplinary context. The stimulus for each of these investigations is identical -- they are a response to the "Big 5" accounting firms diversifying into providing legal services. The legal profession seems uncertain how to respond to this strategic initiative.

This paper provides an overview of the recent history of the evolution of the accounting profession so as to enable decision makers within the legal profession to have a clearer understanding of some of the many complex issues that are provoked by the entry of the Big 5 into legal services.

The following conclusions are drawn in this paper:

A simple search of the World Wide Web reveals that bar associations in Canada, Australia, the United States and elsewhere are simultaneously investigating the implications of allowing lawyers to practice in a multi-disciplinary context. The stimulus for each of these separate sets of investigations is the same -- the investigations are a response to the "Big 5" accounting firms (1) commencing a strategy of diversification into the field of provision of legal services.

Much of the analysis by the legal profession is directed toward the tricky question of how to assimilate and blend legal practice and accounting practice. The kinds of problems that the legal profession appears to be grappling with are:

In one typical example of the legal profession’s thoughts on the accounting profession, the New York State Bar Association’s Report on MDPs states that:

What would be the point of initiating discussions with the accounting profession if the Big 5’s strategic manoeuvre into legal services is beyond the purview of the accounting profession? If this happened to be the case, then who else would there be to talk to? How should the legal profession formulate a strategic response to the Big 5’s invasion of law if it is concluded that they may be primarily profit-driven business entities rather than public-practice accounting firms operating under the control of a professional institute?

The New York Bar Association’s Report on MDPs states that "the issues presented by multi-disciplinary practice are extraordinarily complex". If the NYSBA’s assumptions about the accounting profession and the Big 5 turn out to be in error because they are based on outdated notions, then the issues of MDPs are perhaps another order of magnitude more complex than had already been imagined. The horror of the Big 5’s move into law may thus be far worse than has been previously conceived by the leadership of the legal profession. If the Big 5’s business activities are considered to lie beyond the influence of the accounting institutes, then the legal profession may have to rethink its reaction.

It is evident that any systematic evaluation of the range of strategic responses by the legal profession to the entry of the Big 5 into law requires an understanding of the history of the Big 5, and of their origins within the accounting profession. The purpose of this paper is to provide such a history, and to describe the current business and professional context for the business operations of the Big 5.

In the period between the formation of professional accounting institutes around the turn of the century and the 1960s, the accounting industry was a very stable industry. Most professional accountants worked in public-practice accounting firms which provided tax and accounting services to businesses, other organizations, and to that small proportion of private individuals whose financial affairs were complex. The scope of most firms was local, with operations confined to one office servicing one town or city and its hinterland.

The growth of public markets for stocks, shares and bonds had led to the creation of regulations on the issuing of financial statements so as to protect the public’s interests. The core public interest activities of public accounting was the auditing of such financial statements, and the attestation of the values of assets to be held as collateral for debt. Even today, with the growth of accounting activities well beyond this core, the main component of qualifying exams for the profession concern auditing and attestation.

Larger accounting firms operated as partnerships rather than sole-proprietor-ships. Recruits to the profession entered as articling students, with each firm admitting only that number of students as would be required by the turnover of individuals within the firm (e.g. by death or retirement) or as required for internal business growth.

In countries with a federal structure, the regulation of professional accountants and the organization of their professional institutes is at the regional (state or province) level. In other countries it occurs at the national level.

Up until the 1960s or so the accounting profession was pretty much identical to the legal profession in its structure, operations and professional control. The main difference lay in the mix of clients: the vast majority of services provided by accounting firms were to organizations rather than to private individuals.

The legal profession served organizations as well, but by contrast a substantial proportion of its activities related to services provided to private individuals in the form of wills, estates, property transfer, and civil and criminal legal advice and representation.

This anchoring of the legal profession to the servicing of the needs of private individuals explains the subsequent deviation in the paths of the two professions. The accounting firms expanded beyond a local focus to follow the regional, national and then the international growth of major clients, while law firms remained predominantly local because of the predominance of private individuals in the client base.

In addition, the moves towards the creation of uniform sets of national standards in accounting has facilitated the creation of transnational accounting firms, while the variations in legal statutes between countries has frustrated the logic of the development of transnational law firms.

The public image of accounting has historically been one of being a rather dull, conservative profession, but one which has the utmost integrity. This image of integrity is still conspicuously evident in the choice of a public accounting firm to tabulate and then keep secret the results of the Motion Picture Academy’s voting for Oscar nominees each year.

The accountant has historically been perceived to be a back-room expert, a "bean-counter", a quiet individual wearing green eyeshades. All of these images have been shattered as the structure of the profession has rapidly evolved, and as the very nature of the topic of accounting itself has changed in recent years.

Regional Mergers

In the past the accounting profession enjoyed a rather insulated and protected environment - most public accountants had a local or regional focus, and were employed by a solid base of permanent local clients.

However, the late 1950s and 1960s saw changes in the transport and communications infrastructures of developed countries that enabled many business organizations to expand the geographical scope of their operations from a local base to a regional and then to a national level. As the accounting profession’s major clients changed their geographical scope, then so it became advantageous for ambitious accounting firms to themselves expand from a local to a regional to a national level.

The means for accomplishing this change in geographical scope was the merger of partnerships based in different cities and towns. Once the first few mergers had taken place, it was evident that there would be competition to see which of the evolving multi-partnership firms would emerge as the dominant entity. Given that in each town or city there were relatively few large accounting partnerships, it was inevitable that the competition to pick up strong representation in each city by the newly-evolving regional and national firms would result in an increasingly concentrated industry (3).

To illustrate the scale of these mergers, the Canadian part of one of the Big 5 firms is constructed from over 90 separate Canadian accounting firms which have been merged over the years.

International Mergers and Industry Concentration

Further growth into the international sphere was achievable for the major accounting firms because the product they offer is more or less homogeneous across national boundaries. The firms could thus follow their clients as they expanded into transnational activities. Growth via international mergers proved feasible for aggressive firms, and this growth yielded further economies of scale in training, administration and systems which had first been revealed in the initial sets of mergers within countries.

The net result has been the creation of first the "Big Eight", then the "Big Six", and finally the "Big Five" accounting firms. The failure of the merger of KPMG and Ernst and Young prevented further consolidation down to the "Big Four".

The major structural change in public accounting in the past couple of decades has thus been the emergence of a dominating small number of large global accounting firms. The resultant skewing of the distribution of the size of firms within the industry is critical.

In 1994 Robert Bruce, the accountancy columnist for the Times of London, described the then-current state of the UK public accounting industry as follows:

It is quite unusual to see such a concentration of power and ownership in the service sector, and the situation is without parallel in the professional services sector. In other professions, e.g. architecture, medicine, engineering, law, there are no equivalent "giant" global partnerships.

The net result is that while many members of national accounting institutes are sole practitioners, belong to small firms or are accountants in industry, a large proportion of accounting institute members are the employees of the giant multi-national accounting firms.

The possible ramifications of this concentration of interests within the membership of each national or regional accounting institute will be discussed later on in this paper.

The Decline of Auditing

A further element in the dynamics of change within the profession has been the transformation of auditing from being the profession’s most conspicuous and prestigious product to its current state as an unattractive, low profit activity within a constellation of other more desirable services offered by the major accounting firms.

The process which produced the decline in the desirability of auditing business has not been fully identified, but some educated guesses can be made about the origins of the process.

The sequences of successive mergers of accounting firms may have had an effect on client loyalties within the profession by revealing or reinforcing the notion that audit services are an undifferentiated product. If the name of one’s auditor changes every single year for 5 years in a row because of mergers, and a different group of personnel comes around each year to perform the audit, and yet the end result seems no different despite all these changes, then the impression can arise that an audit is a commodity which is the same no matter which firm does the work.

Clients who came to recognise this fact suddenly become sophisticated purchasers, shopping around for the best deal among the Big 8 and putting intense pressure on prices, and on profits. The traditional long-term auditor-client relationship appeared to have become lost in the process.

Price shopping, coupled with the reduced number of clients caused by the mergers and acquisition binge of the 1980s and the bankruptcy hangover of the 1990 recession, had a dramatic effect on the once-cosy profession:

In Canada the consequences of clients shopping around for low prices in a recessionary environment, and then switching away from long-standing relationships with their auditors, were dramatic for the accounting profession:

An uglier side of the increased instability of auditor-client relationships emerged when a number of companies began to resort to a practice known as "opinion shopping". Here, the audit client would not just approach other accounting firms to gain price quotations, but would also attempt to ascertain the degree to which the new accounting firm might make a better interpretation of accounting standards which would recast the client’s financial statements in the most favourable of ways.

Accounting standards are flexible, and there are alternative standards that can be validly applied to the circumstances of any client. Given that the application of different standards can produce vastly different financial pictures on any given day, then some clients were highly motivated to see just how far they could squeeze an auditor to stretch an essentially subjective evaluation as to which standard should be applied.

There has been no suggestion that any auditor has actually violated professional standards to meet the demands of clients in this newly volatile environment. But there has been evident pressure on the ability of auditors to maintain a totally independent perspective on the most appropriate choice of a range of valid alternative standards.

The new instability of auditor-client relationships may also have provoked the fracturing of relationships where an auditor was applying pressure on a client to conform to certain standards of performance. In an atmosphere of increased swapping of auditors, certain clients may have purposely switched auditors so as to avoid conforming to behaviours that the first auditor may have wished the client to adopt in the medium term.

The net result of all the turbulence of the 1980s was that the audit had become a low margin business activity which affected the profits of the accounting firms, and which placed increased stress on the ability of the firms to maintain a high level of professional integrity independent of market forces.

Cutting Labour and Labour Costs.

In the face of the propensity of clients to shop for audit services, individual accounting firms found that the only competitive variable at their disposal was price. If price is used as a means of attracting business, then this must either reduce the firm’s margins, or else put pressure on the costs of providing audit services.

Given that labour is the main cost of auditing, there are only two ways of reducing the cost of an audit -- either reduce the total person-hours of labour put into an audit, or else reduce the average cost of a person-hour.

With regard to a reduction of labour hours into the audit, one obvious means is the automation of parts of the audit by the use of computers. This has occurred in the profession, but it happened much later in the era of computerization than might have been expected. Part of the shedding of labour by the accounting profession in the early 1990s may have been caused by the increased use of computers in auditing.

Another means of reducing the labour hours applied to an individual audit is simply to reduce the rate of inspection of critical items (transactions, inventory etc.) so as to reduce the number of physical tasks involved in any given audit. Although there appears to be no published research describing any reduction of inspection rates in auditing in the 1980s and 1990s, there is some anecdotal evidence of inspection rates being almost as low as they could go.

For example, in the PBS tv documentary on the gigantic fraud at PharMor (a US chain of WalMart-type pharmacy stores), the Big 6 auditor was described as having won the audit of the firm by low-ball bidding, and then having a policy of inspecting the inventory at just 4 retail stores per year out of over 200 stores in total. The inspection rate could not be much lower in this case.

The other means of reducing audit costs is to reduce the average labour cost per hour of an audit. This can be done by diluting the ratio of high cost partners and managers to low cost employees assigned to any given audit. In the case of accounting firms, the low cost employees are articling students.

The Strategy of Low Cost Auditing using Articling Labour

One major transformation in the evolution of the accounting profession has been the change in the approach to the use of articling students. In the past, as was noted above, articling students were taken on to meet the internal needs of the accounting firm, either as future replacements for normal labour turnover, or else to meet the needs of internal business growth.

The 1970s and 1980s saw the major accounting firms beginning to employ many more articling students than they had need for internally. There appeared to be no adverse reactions to this phenomenon, either from the professional institutes (who stood to gain more revenues from the inflation in their membership numbers) or from undergraduate business schools (who were pleased to see the demand for their accounting students increase).

There seems to have been no worry over the possible excess production of accountants. This is quite different from some other professions, where there is concern over the supply of professionals who are allowed to enter into practice, and where the numbers who graduate from professional schools is actively managed in some form or other.

One of the reasons why there was no concern for the increase in employment of articling students was the fact that there was an increased demand for accountants in industry. Many of the new students ended up being diverted into industry employment after articling with a big public accounting firm.

A large proportion of articling students in the big firms were now taking up offers of employment as management accountants with the firms’ audit clients after they had passed their admission exams. It may even be that the accounting firms had to employ more articling students in the first place because of this new form of erosion of their employee numbers.

Whatever the origins of this new phenomenon, the resulting strategy proved to be very favourable for the big accounting firms. The shedding of the newly excessive numbers of articling students to clients not only produced both happy clients and happy students (who had now given up on their ambition to be public practice partners), but it also seeded the business sector with friends of the Big 8/6/5 so as to ensure a high probability of future business relationships with these "biased" clients.

It was a very clever strategy, and of course, it had the added benefit of flooding the big firms with cheap labour at the very same time as there was pressure to reduce the costs of audits because of price competition in the market for audits.

Lower Quality Audits, Litigation, Insurance and Liability

Reducing the labour input to a given audit via reduced inspection, reduced supervision, or the use of cheap labour has obvious repercussions. Any reduction in the quality of the audit draws the danger of failure to observe some critical feature of the client’s operations, which can attract lawsuits for compensation by those affected by an auditor’s supposed negligence.

The late 80s and early 90s saw a plethora of financial scandals which drew attention to the role of the auditor in the detection of fraud. There was also an unprecedented wave of litigation against the big accounting firms. O’Malley (1993) considered that runaway litigation was threatening the survival of accounting firms of all sizes and had the power to destroy the accounting profession as a whole.

The profession itself had several explanations for the explosive growth of lawsuits against auditors.

First, there was a general propensity to increased litigation in society, with auditors being seen to have "deep pockets", able to be coerced into providing compensation to those affected by corporate failures.

Second, the US tort liability system was thought to be defective because it no longer provided reasonable compensation to victims by reasonable parties; the system's flaws were seen to be taking a severe toll on the accounting profession via unwarranted litigation and coerced settlements. (International Insurance Monitor, 1993)

Third, the profession considered that the public had unrealistic expectations regarding the auditor’s obligation and ability to minimize risk by preventing business fraud, mismanagement, error, and failure. (O’Malley, 1993) In the UK this so-called "expectations gap" had produced demands for improvements in the scope of auditing so as to conform to public expectations. (Cadbury Report 1992, p. 40; Humphrey et al. 1993)

Lee (1992) considered these explanations for the growth of lawsuits against the profession to be self-serving. He accused the Big Six of ignoring the very real presence of an audit crisis involving huge corporate failures and fraud. He suggested that increased legal activity in the industry was a natural consequence of an increase in audit failures.

As noted above, there were possible commercial reasons for reduced audit quality. The wave of litigation could be viewed as a delayed impact of evolutionary pressures on the workings of simple competitive dynamics: given a free, unregulated market for audits where price competition had developed, and given there was no regulatory mechanism to ensure some constant standard of production inputs, then it is not surprising that production inputs would be reduced and that quality would decline.

Whether justifiable or not, the legal actions against accountants proved to be expensive, both in terms of higher malpractice insurance payments, and in other direct costs:

The Strategy of Horizontal Integration

In the accounting profession the competition for audit clients was intensifying. In and of itself, audit business was becoming remarkably unattractive to the major accounting firms: audits offered declining margins, produced difficult ethical dilemmas, cost a fortune to insure, and produced risks of time-consuming litigation which at the extreme could bankrupt a firm. Why would any firm want another audit customer? Why did competition remain intense?

The reason why audit business remained attractive was because of the spin-off benefits that an audit could produce. An audit allowed an accounting firm to enter the client’s business, and to discover how the client’s various business systems operated. If the accounting firm tangentially detected aspects of the client’s systems that could be improved, then there would be an opportunity for the selling of those services which could fix the client’s problems. These services could then be sold at a high margin, off-setting the low margin audit business.

The audit effectively became a "loss-leader" product for the accounting firms. A firm which had an inside knowledge of a client based on the access provided by an audit had a competitive advantage in bidding for other consulting services to be provided to the client compared to firms which did not have this inside knowledge.

Thus, the predominant strategic response of public accounting firms to the price-cost pressures of competition in the profession was horizontal integration - the offering of other parallel services to audit customers. The strategy was described as follows, with the "shrinking client base" referring to the early 1990s recession:

Horizontal integration provides for cross-subsidization across product lines, and enables competitors in the profession to escape the mutually destructive battle over low cost/low price production of the audit by adopting other generic strategies, such as differentiation, or niche positioning. Thus we have seen particular public accountants developing brand differentiation in management consulting, or alternatively developing specialist skills in niche areas such as electronic data processing (EDP), or human resource management.

A typical illustration of the type of diversified activities the Big 5 firms have entered into is shown below in Figure 1, in a diagram which illustrates the organizational groupings within Deloitte and Touche in Canada.(4)

In the diagram it can be seen that the traditional "attest" activities of Deloitte and Touche (the organizational unit called "Audit and Accounting") is now but one of a total of 7 separate organizational groupings within the accounting firm. The groupings of the organizational units within the other Big 5 firms are similar in nature to the one shown above.

In terms of organizational politics within Deloitte and Touche, the power of the "Audit and Accounting" unit would theoretically have declined as additional organizational groups were formed within the firm.

To make better predictions about changes in internal power we need to compare the revenues of these organizational groups, and how these are changing over time. Table 1 below shows the extent to which the Big Six derived their revenues from sources other than auditing back in 1990.

The author of the table comments on the decreasing reliance of the major firms on auditing:

Ernst & Young’s main web site discloses that their audit and accounting services as a percentage of total worldwide revenues declined from 47% in 1996, to 44% in 1997, and then to 40% in 1998. KPMG UK’s web site reveals that audit and accounting comprised just 36% of the firm’s total UK revenues of £786m in 1998.

The trend in the decline in the proportion of revenues of the Big 5 that come from auditing could conservatively be guessed to be roughly as follows:

With regard to extrapolations into the future, if Ernst & Young’s audit growth continues at 10% p.a., and their non-audit growth is calculated at 20% p.a., then audit will fall below one quarter of Ernst & Young’s total business around the year 2006.

The figures in Table 2 are pretty much those which would be produced by industry growth rates of 5% p.a. in audit, and 10% p.a. in non-audit business since 1980. If such differential growth rates continued into the future then audit would be around 27% of total industry revenues by 2010.

The simple conclusion is that the Big 5 are no longer accounting firms. This reality, and the fact that diversification away from accounting into horizontally integrated services is an explicit strategy of the industry, is confirmed by the following statement of David W. Smith, the Chair of the newly-merged Canadian firm of PricewaterhouseCoopers, quoted on the firm’s web site:

As suggested above, the evolution in focus away from auditing in the Big 5 firms must be having some kind of effect on the political influence of sectional interests within the firms. Given that auditing is becoming a declining proportion of each firm’s total business, it is only reasonable to suppose that the power of the leadership of the auditing units in each firm is declining as well. Those who run the higher growth non-auditing units must be increasing in power.

On top of the power shifts caused by differential growth rates, the fact that the new, high margin product lines are cross-subsidizing the old, low margin audit product line may fuel further political friction within the firms. If the firms have a policy of sharing total profits equally across all partners, no matter which unit they work in, then the partners in the high margin areas may resent having to share their profits with the audit partners.

It was precisely this problem of forced profit-sharing that caused the creation of Anderson Consulting as a separate firm in 1989. Anderson Consulting’s web-site describes the origin of the problem in its description of the history of the original consulting division of Arthur Anderson:

The highly successful consulting group partners did not want to share their high profits with the low profit audit side partners, and after being unable to find an internal resolution to the problem, split off to form their own firm, Anderson Consulting.(5)

The battle between Arthur Anderson and Anderson Consulting has also recently flared up again, with the two sides facing off in court over the use of the common name, and over the use of proprietary consulting methods and systems originally developed within Arthur Anderson.

The fact that the other Big 6 firms did not fracture apart in the same way that Arthur Anderson did is intriguing. It would appear that, having seen the mess of the break-up of Arthur Anderson, they were intent on not repeating that mistake, and thus manufactured internal solutions to deal with the kinds of stresses that had beset the most diversified firm. One of these solutions may have been agreements to have partners rewarded more on the basis of their unit’s performance, and less on the performance of the overall firm. This would have stifled the complaints of high profit unit partners having to share all their winnings with audit partners.

It is of particular interest that Arthur Anderson itself has now regrown its own large consulting division, effectively competing with its old partners in Anderson Consulting. The logic of diversification away from auditing via horizontal integration therefore seems inescapable.

Is Horizontal Integration the same as "One-Stop Shopping"?

As defined above, horizontal integration is diversification via increasing the breadth of products or services offered by a firm that can be purchased simultaneously by an individual client.

The concept is most easily illustrated at the retail level by the phrase "one-stop shopping". For example -- a retailer of cook-stoves may add fridges to the product line; 7-11 convenience stores may add sandwiches to their product lines; a tv retailer may add computer video game machines to her product line.

However, accounting and law firms are not retail walk-in businesses, and the phrase "one-stop shopping" gives a misleading impression of the underlying strategic logic of horizontal integration as practiced by the Big 5.

Horizontal integration by the Big 5 is far more akin to a sales person entering your house to sell you a vacuum cleaner, and then, having noted the condition of all your other household possessions, attempting to sell you furniture, crockery, drapes etc. The initiation of the promotion of a horizontally related product to you is thus a conscious act by the sales person.

The phrase "one-stop shopping" appears to imply that you voluntarily choose a horizontally related product in a retail store, which is quite a different process from having a sales person in your house actively pushing products to you based on an inside knowledge of which of your possessions are nearly worn out.

The use of the phrase "one-stop shopping" by the various bar association committees which are investigating MDPs appears to hark back to the era when public practice was a local "store-front" type of activity. It also harks back to the historical concept that professionals such as accountants and lawyers should not go out to actively seek business, but must remain passive, awaiting the customers to walk in through the front door of their own accord.

Given that horizontal integration by the Big 5 is a very proactive aggressive business policy, the phrase "one-stop shopping" is not just misleading, but it almost conveys the exact opposite of what horizontal integration means to the Big 5. It is therefore recommended that the phrase "one-stop shopping" never be used to describe the accounting/law MDP context.

The Ethical and Political Crisis in the Profession

There were a number of ethical and political issues which arose from horizontal integration and cross-subsidization across services in the accounting profession.

One consequence of price-cost pressures on audit services was that auditing became open to use as a loss-leader. It could be promoted as a "come-on" for the supply of other services which do not have the social impact of auditing. In the United Kingdom in particular the accounting profession came under intense public scrutiny in the early 1990s as a controversy erupted over the failure of auditing to conform to social expectations.

One influential article described the genesis of the ethical and political crisis in the profession in the UK:

Thus we saw the creation of the National Commission on Fraudulent Financial Reporting (the Treadway Commission) in the US, and of the Committee to Investigate Financial Aspects of Corporate Governance (the Cadbury Committee) in the UK. The proposals for change were more radical in the United Kingdom (The Cadbury Report 1992), but were still not satisfactory in the eyes of many observers (Boyd 1996).

The possibility of a stronger government role in the affairs of the UK profession had previously surfaced with the publication of the critique of auditing contained in the Auditing Practices Board’s draft report on "The Future Development of Auditing" (Auditing Practices Board 1992).(6) In this radical document the APB had stated that:

The APB report specifically rejected the strongest proposals to remedy the problems caused by diversification by audit firms and the resulting commercial pressures on audit independence. These proposals were:

Recently, however, the controversy over the conduct of auditors has resurfaced. On September 28, 1998, Arthur Levitt, the Chair of the Securities and Exchange Commission, relaunched the attack on the ability of auditors to maintain independence in the face of commercial pressures and client pressure. In a speech entitled "The Numbers Game", delivered at New York University’s Center for Law and Business, he said:

Levitt’s provocative speech does prove one thing, however. The problems that the accounting profession faced at the start of the decade, and which were supposed to have been addressed by internal and external reports produced at that time, do not appear to have been corrected by the end of the decade. Is there a failure by the accounting profession to regulate the activities of audit firms? ..... activities which draw criticism from the most senior business regulator in the United States, the Chair of the Securities and Exchange Commission?

How is it that the accounting profession could still suffer from the same major problems which were first identified 6 to 8 years ago? The next parts of this paper raise some speculations about the ability of the profession to recognise the structural changes that have occurred over the past 2 decades, about the internal political dynamics of accounting institutes, and about the ability of accounting institutes to be independent of the influence of the Big 5.

Is the Accounting Profession Bewildered?

The transformations that have taken place in the accounting profession over the past 20-30 years are on a scale that is unmatched by any other sector of industry other than those which have been affected by technological change. The profession has gone from being a parochial, passive conservative regional industry to being a progressive, aggressive global industry dominated by a small handful of giant firms in a remarkably short period of time.

The speed of this transformation has been dazzling. Indeed, it is entirely conceivable that one of the characteristics of this industry sector may be an inability of experts both within and outside of its professional institutions to keep up with the current state of transformation of the industry. When change is occurring so fast in a sector that has traditionally been used to a more sedate pace of change, then there will naturally be time lags in the institutional recognition of and accommodation to these changes.

In simple terms, a profession which has experienced a long era of extreme stability and which then enters a period of turbulent change must take time to digest these changes. Given that policy formulation in the accounting institutes tends to be a long-winded committee-based process, they may lag several years behind the current developments in the industry in terms of reacting to change. The institutes may be unable to formulate an institutional view with any degree of speed.

By contrast, the Big 5 firms are unconstrained by any need for the democratic validation of their actions, and have the flexibility to take rapid strategic steps. One possibility, therefore, is that the Big 5’s activities may be far ahead of the accounting profession’s ability to understand and hence craft a response to these activities.

The main argument against any theory that the profession is bewildered and unable to comprehend the consequences of the activities of the Big 5 is the participation of the profession in the preparation in 1992 of the various reports directed at improving the audit. All the problems produced by the Big 5’s diversification strategy seem to have been known at that time.

The problem may lie not so much in the ability to recognise the problems produced by the Big 5’s diversification, but rather the profession’s ability to implement solutions to these problems. Is the accounting profession actually able to exercise control over the activities of the Big 5? Where does the power lie in this relationship?

There are two separate issues to be dealt with here. First, there is the issue of the degree to which the transformations in the industry, particularly the development of extreme concentration in the industry, may have affected the balance of power between the accounting institutes and the Big 5.

And second, there is the question of the degree to which the accounting institutes themselves may have been internally affected by the fact that a substantial proportion of their members are employed by the Big 5.

A Conceptual Framework for the Analysis of Power in the Profession

A relevant conceptual framework for understanding the evolutionary and competitive dynamics of industries and the power shifts produced therein has been developed by Professor Michael Porter, of Harvard Business School (Porter 1980). The accounting profession and the legal profession can each be considered to be a separate "industry" here, much as the automobile and the bus manufacturing industries would be regarded as separate industries, although overlapping slightly at the edges.

Porter describes how any particular industry may be analyzed by the consideration of the flow of critical materials from their original raw material sources through various intermediate stages of processing through to their final consumption as the industry’s product by an end user. The sequencing of the flow of materials through different stages of processing is called the supply chain. Companies in a particular industry may have a choice of where to position themselves in the supply chain; for example, one could be positioned close to the end user as a retailer, or else be further back towards the source of raw materials as an intermediate industrial processor.

The best position to be located within a particular supply chain may be determined by an analysis of the distribution of power across the various stages of processing in that supply chain. The position with the highest power should yield the highest profits, according to Porter.

Porter’s model of power within the supply chain is not easy to adapt to the delivery of professional services, for several reasons:

Power in the Supply Chain for Accounting Services

The diagram shown in Figure 2 shows the flow of the main raw material used in the accounting profession, labour. The supply of labour in the profession comes from the secondary education institutes which are the source of accounting graduates. These graduates then go through an articling process under the aegis of the professional accounting institute, and take the exams of the institute.

When they pass the exams and maintain their professional designation, they qualify for permanent employment in the public accounting firms. These firms then use these individuals to supply services to audit clients. The professional accounting institute’s disciplinary rules and regulations of conduct apply to its members who are engaged in the public practice of accounting, and so it maintains control of its members after they have passed their professional exams.

The main power in this system quite obviously lies with the professional institute, especially under the historical circumstance of total annual audit revenues being spread across a large number of small local public accounting firms.

Figure 3 shows the same supply chain, but brought up to date with the two main characteristics of the modern evolution of the profession highlighted: 1. the concentration of the professional accounting firms into a group of 5 major firms, and; 2. the diversification of these firms away from the main core of accounting activities. The diagram suggests that power has drained away from the professional accounting institutes towards the big accounting firms as a result.

This conclusion that the Big 5 have increased their power relative to the accounting institutes is hypothetical, and possibly controversial. However, this question does need to be explored in detail because of the possibility that the legal profession may be misled in thinking that it should talk to the leadership of the accounting profession about the entry of the Big 5 in law.

It is relatively easy to conclude that the professional accounting institutes have lost power because of the diversification of the Big 5. Although the "owners" of the non-auditing organizational units in the Big 5 may be qualified accountants (as may be required under the accounting institute’s sets of rules for multi-disciplinary practice), the accounting institutes have no regulatory control over these non-auditing activities nor over the activities of qualified accountants within them. These accountants are subject only to the same minimal controls over their actions (e.g. avoidance of criminal conduct) as are accountants in industry.

In comparison to the original state, where accounting firms offered predominantly public accounting services, the accounting institutes now only have regulatory influence over a declining proportion of the Big 5’s business.

The more difficult question, though, is the degree to which the accounting institutes may have lost power over that part of the Big 5’s business, auditing, which they do have regulatory control over.

As noted above, the evolution of a profession to the state of industrial concentration currently exhibited in the accounting profession is a new and unresearched phenomenon. Also, as noted, the speed with which this industry has evolved may have taken many by surprise. Any analysis of the consequences of concentration in this profession must be conjectural at this stage, and hence the reader is cautioned to exercise healthy scepticism when reading the next sections.

Beyond Control? The Scale and the Scope of the Big 5

One topic that appears to have been undiscussed within the accounting profession is the degree to which the very scale and scope of the operations of the Big 5 may place them in a domain that is beyond the reach of the discipline and regulatory procedures of an individual accounting institute. It may sound like heresy to suggest that this may be the case, but the reality of today’s litigation processes may effectively protect the Big 5 from discipline by the accounting profession.

Suppose that one of the Big 5 is the auditor of firm that goes bankrupt with debts of $220m following a succession of annual audits which had revealed nothing untoward. It is later revealed that there was fraud in the case going back many years, and that criminal charges may be laid against several managers. Some of the evidence in the case suggests defects in the audit. The auditor is sued by a number of interested parties.

In this case, the accounting institute is effectively rendered impotent, unable to conduct any disciplinary inquiry into the performance of members involved in the audit. The Big 5 firm will say "wait, you cannot discipline any of our members who are accountants because this case is before the courts. You must wait till the case is proven one way or the other." Presumably the accounting institute will not go ahead and discipline a member before the court case is resolved, for any finding of a breach of professional rules by the institute may prejudice the resolution of the legal case.

Given that many of these cases drag on for years, the actual instance of misconduct may vanish into the distant past before the institute has a chance to conduct a hearing. Anyway, it may also be logical for a Big 5 firm to say "leave the discipline to us, we have internal methods for managing accountants who do not perform well".

If the above theory is correct, then there should be empirical evidence that the accounting institutes do not discipline members who are employed by the Big 5. It is understood that empirical research into exactly this question is underway at the present time.

There is one newspaper report about a Big 5 firm attempting to litigate to prevent a national accounting institute in Europe from initiating a disciplinary inquiry into the conduct of one of its employees. The litigation was eventually dropped, but the very fact that it was initiated is indicative of a new order in the profession.

There is a jurisdictional question involved here as well, in that the geographical scope of the activities of the Big 5 may be so grand as to effectively render each firm superior to the jurisdiction of any one local accounting institute. This is especially true in those countries where the organization of professions is at the state or provincial level (e.g. the USA, Canada, and Australia). This limited local locus of control is completely out of step with the global activities of the Big 5.

The phenomenon we are dealing with, therefore, is the transformation of the profession’s clients, and of the auditing firms who service these clients, to a level of scale and scope which may invalidate the application of control by the profession. The regulatory controls of the profession were designed in an earlier, simpler age to apply to small local public practitioners, and have not been upgraded to apply to the realities of the Big 5’s current commercial context.

Would the accounting institutes be motivated to make such changes? This begs the question of the degree to which the Big 5 exercise power within the accounting institutes by the subtle means of the influence of that proportion of the institute’s membership who are employed by the Big 5.

The Influence of the Big 5 within the Accounting Institutes

This paper has so far identified a number of different elements of possible influence by the Big 5 over the affairs of the accounting institutes. The most obvious form of benign influence again comes from pure scale. If the Big 5 have become so large and dominant within the accounting profession, then the sheer number of accountants that they employ who are also automatically members of the accounting institute must give the Big 5 an effective dominant voice within the institute.

This phenomenon should be of particular concern to the legal profession. The threat of influence within a particular bar association of a large group of lawyers whose common interest is that they are all employed by a giant diversified firm may be a bigger threat than any other aspect of MDP operation.

The NYSBA Report on MDPs notes exactly this phenomenon in action. It states that:

The diagram shows that the Big 5’s commercial use of the audit to acquire clients for its other business services has stimulated criticism of industry conduct. The firms’ activities thus attract the attention of the institute. But the ability of the institute to do anything about the criticism is affected by the strong influence of the Big 5’s accountant-employees within the institute, reinforced by the probable lack of concern for the problems of public practitioners by the institute’s majority of industry accountants.

The most alarming element of the diagram is the suggestion that, while the institute may be dominated by Big 5 accountant-employees, the decline in power of the audit within the Big 5 firms may be such that the unspoken agenda of the dominant Big 5 employees is to promote the non-audit activities of the Big 5, possibly to the detriment of the institute’s control on audit activities.

There is not much in the way of empirical evidence to support these various hypotheses about the Big 5’s influence within the institutes. However, one curious fact is that the various strategic planning documents produced by various national accounting institutes over the past couple of years make no reference whatsoever to the phenomenon of increasing concentration within the structure of the industry. It is as if the topic that is just too dangerous to be talked about or to be analyzed in any way by the institutes.

The fact that the various national accounting institutes were all conspicuously silent during the Fall of 1997 when two sets of mergers among the then Big 6 were being negotiated is also very suspicious.

There were protests by leaders of the business community over the threat of further concentration in the profession, and in particular finance directors in the UK were vehement in their denunciation of the mergers. Nigel Stapleton, former chairman of the 100 Group of Finance Directors said that:

The inevitable conclusion is that effectively the accounting institutes were not operating independent of the influence of the Big 5 and were unable to express independent opinions about the business practices of its major membership groups.

If the accounting institutes are not independent of the Big 5, and if the Big 5’s activities, structures and leadership are being increasingly diluted away from public accounting, then the implication is that the accounting institutes’ ability to act as the guardians of public accounting practice is diminishing. The high ethical standards expected of the accounting profession by others (and particularly by the legal profession in the case of the analysis of MDPs) may just not exist in the form anticipated.

This is not to say that accounting institutes are unethical, nor that the Big 5 are unethical. Merely that the role of the professional body as the creator and monitor of ethical standards is declining. Presumably the Big 5 may argue they can operate an internal "discipline" process within their organization. Given that they must of necessity appear to have impeccable integrity for market competitive reasons, there would be a strong internal stimulus to weed out those who may compromise a firm’s reputation.

The unfortunate implication of these conjectures is that the accounting profession is no longer a "profession", where the definition of a profession is that of a self-regulating body. If the task of regulation of the conduct of a large minority of the profession’s members has been delegated to the major multi-national business service providers who are the employers of these members, then it would appear that the fundamental definition of the profession is lost. If self-regulation is lost, then can accounting legitimately be called a profession any more?

These very fears were voiced 8 years ago by Barefield (1991), when he asked about the implications of diversification by accounting firms:

This section should perhaps be titled "The Future Evolution of the Big 5 Firms" because it has already been strongly suggested that since the majority of these firms’ activities lie outside of accounting, they are no longer situated in the mainstream of the accounting industry. They do, however, remain the biggest firms within accounting, despite the extent of their diversification into adjacent services.

One major source of further transformation of the accounting industry will be the continuing evolution of the topic of management accounting, and of the role of the management accountant in industry. As described in Appendix A, the very subject matter of accounting is becoming strongly integrated into topics that formerly were previously quite distinct from accounting, such as strategic planning. And the clarity of the role of the accountant in industry is blurring as accountants move from the back-room to join the teams of forward planners in organizations.

When these transformations are combined with the structural and positional changes of the Big 5, then there is an increased likelihood that the identity of accounting as a distinct profession and as a distinct professional activity may begin to fade over the next 2 to 3 decades. This is almost certain to occur in the absence of some form of regulatory intervention.

Future Regulation of the Industry?

As noted above, one form of intervention that could theoretically be stimulated by future audit scandals is stronger government regulation of the activities of auditors -- specifically the prohibition on accounting firms offering any services other than auditing to audit clients. This scenario is not very probable, especially given that governments themselves seem to be evolving towards less, rather than more, intervention in the market place.

If such a stricter regulatory environment were to evolve, then what would be the reaction of the Big 5? Would they want to dispose of their new service divisions and revert to being simple audit firms? Or would they look to their new divisions as their prime sources of profit, and spin off their newly-regulated low profit audit divisions?

It is pretty easy to predict that the evolution of the big firms has now reached a stage where their diversified service activities are probably more valuable to hang on to than their audit activities. If this supposition is correct, then this again has great relevance to the decisions to be made by the legal profession about the Big 5’s entry into law. The implication is that of the following two alternatives (one of which is admittedly impossible if audit cannot be combined with anything else for regulatory reasons), the big firms would prefer the second combination of services.

If the latter combination is considered more likely, then this implies that the Big 5 would prefer to combine legal services with those elements of their business activities that are not covered by the jurisdiction of another profession.

The only other form of regulation of the big accounting firms that can be conceived of is some enforced reduction of activities so as to reduce industry concentration. This possibility was discussed by some forecasters earlier this decade, but the conclusions reached were that the growing pains of diversification rather than stronger regulation would eventually force the fragmentation the industry.

Irvine (1990) had forecast that by the year 2000, major accounting firms in the UK would be forced to demerge their consulting businesses because of increased internal friction and conflicts of interest. She reported a prediction by the management and computer consultant PE International that the Big 6 would become the Big 18 -- effectively splitting their main divisions into independent single business firms.

Parritt (1994) examined various changes in the marketplace - internationalization, growth of information technology, customer sophistication, etc. He concluded that while "regulation and intervention will continue relentlessly - on a worldwide basis .... auditing may become a service offered by specialists in separate limited liability companies that will have been hived-off for commercial, rather than regulatory, reasons."

Neither of these predictions has yet come to pass, and there also seems no likelihood that either government nor the accounting institutes themselves would move towards forcing the big firms to downsize. The only possible future control on the structure of the industry is a veto on future mergers between the big firms. This is already intuitively known amongst all the big firms.

If there are further mergers involving the Big 5, they will certainly be external, and in those sectors which are the main strategic directions that the firms want to move in. An insight into what these possible directions may be can be gained by reviewing the web sites of the Big 5 to see what they have to say about themselves.

What do the Big 5 Web Sites Tell Us?

A visit to any of the Big 5 firms’ web sites shows the reality of just how far these organizations have traveled from their accounting roots. The actual word "accounting" is hardly anywhere to be seen on their web-sites; in fact it appears so infrequently as to suggest that the firms may be purposely trying to avoid the use of the word, reinforcing the statement of the Chair of one of the Big 5 quoted above, who wants "clients to think of us as a professional services firm, not an accounting firm".

The mission statements and goal statements of the firms are all generic, as the selection below shows, with some even contradicting the logic that an auditor is to be independent of the client, and is to report to shareholders:

There is a strong hint here that the Big 5 firms are moving to a new form of internal organization of their activities, one which may have a profound impact on the ability of the firms to maintain the integrity of the independence of their original core activity, auditing.

Are the Big 5 Firms Becoming Market-Driven Organizations?

Until relatively recently, most of the Big 5 firms have been organized internally around the logic of collecting together within each organizational unit those individuals who share the same set of skills. Thus, all the auditors would be in the audit unit; all the tax experts would be in tax unit; and all the human resource practitioners would be in the human resources service unit.

The logic of this form of organization of activities within the firm is shown in this hybrid list of the kinds of organizational units one may have found in a typical Big 5 firm until recently:

There is thus a de facto Chinese Wall preserving the independence of the audit in this form of organization of activities. The achievement of synergies between audit and other business services requires individuals from the other organization units to cross the boundary into audit within the organization to make inquiries about a client. These "visitors" can theoretically be easily monitored, and in this way it must be relatively easy for the Big 5 firms to operate audit as an independent activity, or at the very least to claim that the structure protects the independence of the audit.

There are hints that this classic functionally-oriented form of internal organization may be disappearing among the Big 5, to be replaced by a more market-oriented form of organization. The two forms of organization are best described by the aid of diagrams. Figure 4 below shows a functional approach to organization.

The diagram shows that the firm has three clients who are each buying services from each of three units within the firm. There is also one client who is buying just one service from the firm. The greater becomes the number of clients who buy multiple services from the firm (the logic of horizontal integration) the more inefficient this form of organization becomes. There are nine separate points of contact between the three clients and the three organizational units in this illustration.

An alternative form of organization is shown in Figure 5, in which the Big 5 firm organizes itself around the groupings of clients in the market place.

Figure 5: A Market Approach to the Design of Organizational Units

Under this system the same sets of services are being provided to the same set of clients, but now for the three clients receiving the three sets of services there are only three, not nine, contact points between the clients and the firm. Each client receives a bundle of services delivered by a multi-disciplinary team.

This form of client-centred business organization is suggested by this description of Deloitte Touche Tohmatsu’s current operations, taken from their web-site:

KPMG’s organization is clearly a hybrid of a client-centred market design (the 5 industry-facing lines of business providing assurance services, tax and consulting), and a product-oriented design (the 4 product-focused lines shown at the bottom of Figure 6). The client grouping here is by industry sector. It is not entirely clear from the Annual Report if this organization structure is the actual basis for the delivery of services by KPMG, or if this is an artificial structure constructed for the purpose of reporting. The former seems more likely.

Part of the text of KPMG’s UK Annual Report _for 1995-96_gives a strong hint that all of the services they provide are being bundled together:_

If the Big 5 were being criticised for the conduct of audits and the commercial pressures on audit independence when they were organised internally on a functional basis, then what on earth will happen to the independence of the audit when the Big 5 are organized internally on a market-facing basis? The chance for the effective operation of Chinese Walls between audit and consulting in a bundled service delivery context seems slim.

The scenario that is evolving therefore is one in which the Big 5 appear to be moving even further away from control by the accounting institutes into a domain where control over the integrity of the audit is becoming almost exclusively internal. Again, there is no suggestion here that the Big 5 are unethical, merely that the accounting institutes seem to be becoming ever more remote from influence over their activities as the firms move to organizational structures which appear to further threaten the integrity of the audit.

In this context it seems unwise for bar associations to treat the Big 5 as if they were completely beholden to the accounting institutes. It could be a complete waste of time talking to the accounting institutes about how they may wish to control the business affairs of the Big 5.

It may be far simpler for the legal profession to simply conceive of the Big 5 as being diversified providers of business services which are not controlled by a professional body (which is what they almost are), and to treat them as if they were just any old business conglomerate wishing to diversify into another business service area. In other words, react as if they were several department store chains wishing to offer legal services within their stores.

The Big 5’s Diversification into Law

Although the delivery of legal services and the employment of lawyers do not feature prominently in the web sites of the Big 5, it is clear that entry into legal services is an explicit strategy that is being eagerly pursued by the firms. If they all now see themselves as "global professional services firms", then legal advice to business must fall squarely into the centre of this definition.

In the various documents which explore MDPs it is apparent that the legal profession is uncertain about how to respond to this diversification move by the Big 5. Reactions appear to vary between complete acceptance of MDPs on the one hand, through to complete rejection on the other, with many intermediate positions also being identified as possible responses.

For the analyst of business strategy it is of interest to observe this response of the legal profession to the strategic manoeuvre by the Big 5 -- the profession seems confused about how to react. This lack of a clear idea about how to respond is a fascinating phenomenon. Is it possible that such a confused reaction was anticipated by the Big 5, and that the exploitation of this confusion has been an integral part of the strategic manoeuvre itself?

The phrase "strategic manoeuvre" is perhaps too bland a description to use here. Maybe it is more pertinent to use the business language of "takeovers" and "acquisitions" to describe the strategy of the Big 5 as being one of "invading" the domain of the lawyer. If we use this terminology, then the Big 5 would be cast as the predator, and the legal profession would be the prey in this case.

Such concepts were clearly within the mind-set of one senior partner of the Big 5 who was quoted in a European newspaper last year. In justification for the actions of his firm in acquiring law firms, he stated that "the structure of the legal profession is stuck in the 19th century, and they deserve everything that is coming to them." He went on to forecast that the legal profession would be "easy pickings" and that firms such as his would modernize the delivery of legal services to clients.

These are indeed the fighting words of a predator, not the friendly words of a prospective fellow public practitioner in another discipline with whom one has to work out some set of mutual rules for ethical professional business conduct.

It would appear that the Big 5 are out madly hunting for a new service to diversify into, and that the legal profession may be rudely shaken up now that the Big 5 have selected law as their strategic target.

The mandate for the production of this paper was to describe the evolution of the history of the accounting profession, not to provide a comprehensive analysis of the strategy of the legal profession, and how it should react to the Big 5. Nonetheless, some recommendations have already been proposed in this paper, and there are a few more points that can easily be made.

The Use of the Phrase "Multi-Disciplinary Practices"

The strategic initiative of diversification by the Big 5 firms invariably seems to be described by the title "Multi-Disciplinary Practices" when being examined by the legal profession. The use of this name could be misleading though, because it automatically conveys the impression that the practice of law would take place alongside other activities in a 100% professional practice context.

It is entirely conceivable, however, that the Big 5 firms will offer legal advice alongside a non-public practice activity such as management consulting, which has no statutory professional code of conduct to guide its delivery. For example, when promoting the logic of a particular business acquisition to a client, the firm could then offer its own legal services for the implementation of the acquisition.

Such a combination of a legal service with a normal business advisory service may be far better described as "Diversified Business Advisory Services" rather than under the more value-laden nomenclature of "Multi-Disciplinary Practices".(8)

In much the same way that the use of the phrase "one-stop shopping" was recommended to be avoided because it conveys the wrong idea of passive selling rather than active selling by the Big 5, then so too is it recommended that the phrase "Multi-Disciplinary Practices" be avoided, because it wrongly portrays the straight commercial business activities of the Big 5 as being within an aura of professional institutional oversight.

Prohibition versus Acceptance of MDPs: the Case of Pharmacy

The various papers which analyse MDPs that have been produced by the legal profession each describe the two extreme solutions for the profession: acceptance of MDPs on the one hand, and prohibition on the other. They also examine every option in between these extremes, but for the moment we will address just the extreme options.

Are there any examples of different professions which have adopted the opposite approaches to MDPs, and whose experiences can therefore be examined for the guidance of the legal profession? Given that the NYSBA report on MDPs describes the case of Sears trying to set up legal services, then one clue about other professions which have entered the MDP domain might come from seeing which professions have teamed up with department stores. The two obvious ones are pharmacy, and optical dispensing.(9)

It may be productive for the bar associations to explore the consequences of having followed an MDP-acceptance type route for these professional groups, versus the experiences of another professional group (e.g. lawyers!) which has prohibited MDPs so far. The author has not studied these types of contrasting professional experiences, and thus has no comment to offer on what may be found from such a study.

Are there examples of individual professions which have adopted the opposite approaches to MDPs in different countries, and whose experiences can therefore be examined for the guidance of the legal profession? The only example that the author knows of in this regard is the comparison of pharmacists in N. America (who have accepted MDPs), and pharmacists in Germany (who have not). (10)

Pharmacies in Germany operate as stand-alone retail stores, with no horizontal integration into any other kind of product or service beyond pharmaceutical services. Pharmacists themselves still dress in white smocks which are reminiscent of some medieval guild, which in fact is the tradition which is being preserved. The stores have restrictive opening hours, but then the whole of the retail sector in Germany has restrictive opening hours compared to North America. There are no pharmacy outlets other than these stand-alone retail pharmacies in Germany.

In North America there are no stand-alone pharmacies which have not diversified via horizontal integration. One can buy a bottle of Coke in any pharmacy here. There are also pharmacies operating as MDPs within supermarkets and within discount stores and department stores. Pharmacies may be open for 18 hours, or even 24 hours a day. Pharmacists do not portray an aura of an elite professional group, as they do by their costume in Germany.

In Germany, the pharmacists themselves certainly benefit a great deal from the system they have created. They probably have higher income, since they do not have to share their monopoly profits with anyone else. They have higher prestige and better working hours and conditions of work. There are probably fewer of them per capita of the population.

In Canada, on the other hand, the customer is much better off. There are more pharmacies, with many of them being in more convenient and accessible locations. The pharmacies are open for longer hours, and there is the possibility of price competition amongst stores. For the pharmacist, though, life is tougher. There are probably many more of them per capita, and they have to work shifts in less attractive work environments. They have little prestige compared to their German counterparts.

Which is the better system? Well, it very much depends on how you measure public good, and who is doing the analysis. The German pharmacists would almost certainly not give up their privileges, even though a transition to the North American system might benefit the German consumer greatly.

The most interesting question pertains to the role of the professional pharmacists’ institutes in both countries. Which has the more power -- the Canadian pharmacist institute, or the German institute? If one thinks about the ability of the Canadian pharmacist institute to enforce a rule such as "a pharmacist shall not be engaged in the selling of cigarettes", then the institute is clearly unable to enforce this rule when a pharmacy is set up as a unit within a large discount store. Hence the MDP route diminishes the power of the institute.(11)

One of the questions therefore becomes "how important is it for society to protect the power of the profession’s institute?" In the case of accounting, society does not seem to place a particularly high value on the independence of the audit, and so does not seem to care much when the profession is essentially high-jacked by a few concentrated firms. In law, society’s valuation of the retention of power by professional institutes may be different.

The Choices for the Legal Profession

Basically the argument about the acceptance or the rejection of MDPs seems to come down to a matter of self-interest versus public interest. Prohibiting MDPs would protect the status of lawyers and protect the average income of one’s membership.(12) Allowing MDPs would increase public access to legal services and probably reduce the price of legal services. But in the case of the legal profession opening up access to the delivery of legal services by the Big 5, the creation of MDPs would not necessarily mean reduced service costs for clients - the high monopoly rents that lawyers currently enjoy may just be transferred to a different group of oligopolists.(13) It is the industrial concentration of the Big 5 that is the more important issue here.

The plain truth is that, if MDPs are allowed, the Big 5 will capture the lion’s share of the market for external legal services provided to business. The lawyers employed by the Big 5 will dominate the legal profession. However, these lawyer-employees themselves will not dominate their employers, who will have a more diversified set of interests and agendas than their law interests. These firms may also be operating their legal services on a scale that makes them virtually immune to the influence of professional institutes with archaic powers in insignificant jurisdictions.

Hence the legal profession, like the accounting profession, may embark on a path towards the dilution of the identity and meaning of the profession. This may not be a bad thing from a public interest perspective, but certainly the evolution of power will diminish the power that some institutions may value highly.

The two end questions will be: 1. is the business sector better-off getting its legal advice from a small set of widely diversified business service giants; or better-off getting that advice from a less concentrated set of non-diversified specialist legal firms? and, 2. is this a natural time to wave a fond farewell to the classic professions as we have known them for most of the 20th century?

This appendix briefly deals with another major issue facing the accounting profession, but one which nonetheless is rather tangential to the current interest of the legal profession, and hence the relegation of this topic to presentation in an appendix. It has been noted above that the public accounting firms were able to begin engaging many more articling students than they had internal need for because of the growth in demand for accountants in industry.

Students who originally had an ambition to be a public practice partner in an accounting firm were being lured in to industry employment, typically by having worked first on the audit of the client who would later become their employer.

One of the main consequences of increased industry employment of accountants was the change in the constituent memberships of the accounting institutes. Institutes which had predominantly served the needs of public practitioners, and whose rules and regulations for conduct were directed exclusively toward members in public practice, now found that they had a growing population of non-public practice members.

In the early days, there was a class distinction between these employment sectors, as indicated by the following quote:

Despite these changes, the entry exams for admission into the profession (the "UFE", or Uniform Final Exam) remain focused on audit and tax, and articling for students is only available via placement in public or government audit practices.

There are developing pressures for modifications to these exams, and pressures to allow for articling in industrial contexts though. It is not surprising to find that there are political tensions within the accounting institutes with regard to meeting the membership needs of industry accountants.

It is likely, however, that the interests of industry accountants are fragmented when compared to the unity of interests of the public practice accountants. It is thus possible that the actual political influence of industry accountants within the institutes may be much lower than their proportional numbers might suggest.

The actual topic of management accounting is undergoing a profound transformation, with the result that accounting as a technical discipline is becoming less distinct from other elements of technical analysis within business. The identity of the subject is now less distinct from, say, strategic analysis than it ever was.

The tasks that management accountants as individual employees perform are also radically changing. The accountant in industry is now a member of the strategic planning team, and no longer the back-room analyst of days gone by.

The blurring of the nature of the topic of accounting, and the participation of the industry accountant in the management team means that the identity of the accountant is becoming less distinct within the spectrum of managerial disciplines.

These trends, when added to the evolution of the Big 5 firms into broad business service providers, raise questions about the eventual path that the accounting profession will take. There is a possibility that the identity of the profession may begin to fade or blur over the next decades. What effect this will have on the profession’s institutions is impossible to predict at this stage.

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1.    The Big Five are: Arthur Anderson, Deloitte Touche Tohmatsu, Ernst and Young, KPMG, and PricewaterhouseCoopers

2.    In this paper, the "accounting profession" refers primarily to the members of the dominant public accounting institute in each jurisdiction. Unlike law, there can be a number of different accounting institutions representing professional accountants in one jurisdiction.
For example, in the UK there are 6 different accounting associations, and 3 in Canada. As a rule of thumb, in most countries there are 2 distinct accounting institutes: one representing public practice accountants ("Chartered Accountants", "Certified Accountants", or "Public Accountants"), and the other representing accountants in industry ("Management Accountants"). As will be noted in the paper, one of the developments within the public practice accounting institutes is the rapid growth in the proportion of their memberships who are not in public practice, and who might otherwise be predicted to be members of the industry-oriented professional group.

In this paper "the accounting institute" refers to the dominant professional body controlling the affairs of public-practice accountants in each province, state or country; and the plural "accounting institutes" refers to the sum of these dominant institutes added across provinces, states and countries. The plural "accounting institutes" does not refer to the sum of different accounting associations within any one jurisdiction.

3.    "Concentration" in an industry is an economic concept which describes the proportion of that industry’s total annual turnover which passes through the hands of a small number of industry members. There are various indices or ratios of concentration which can be used to compare degrees of concentration across different industries. Oligopolistic industries such as personal computer operating systems would exhibit high concentration ratios, while fragmented industries such as hair-dressing would exhibit low concentration ratios. The accounting industry is highly concentrated compared to other industries.

4.    Information on Deloitte and Touche’s organizational grouping retrieved from the firm’s Canadian web site in September 1998.

5.    For a full description of this notorious battle for power between Arthur Anderson’s accounting and consulting partners, see The Economist (1991).

6.    The concerns of the APB report were similar to those of a parallel AICPA report produced in the US. The Auditing Practices Board’s concerns included 1. redefining the role and scope of company audit, 2. enhancing the independence of auditors, 3. balancing competition, cost, and quality, and 4. mitigating litigation. The American Institute of Certified Public Accountants’ concerns were for 1. improving the prevention and detection of fraud, 2. enhancing the utility of financial reporting to those who rely on it, 3. assuring the independence and objectivity of the independent auditor, 4. discouraging unwarranted litigation that inhibits innovation and undermines the profession's ability to meet evolving financial reporting needs, and 5. strengthening the accounting profession's disciplinary system. (AICPA, 1993)

7.    The full version of Levitt’s speech may be found at the following web site: http://www.rutgers.edu/Accounting/raw/aaa/newsarc/pr101898.htm

8.    Despite this objection to the name "Multi-Disciplinary Practices", the abbreviation MDP has been used throughout this paper because of its familiarity to the readership.

9.    The various papers analyzing MDP s note the precedents set in a BC court case between Costco and the opticians institute.

10.    There may be other examples of other national pharmacist institutes which have rejected MDPs. The author’s comparisons between the Canadian and German pharmacy professions are purely anecdotal, and are for illustrative purposes only.

11.    This example should not be used to imply that the MDP question should be considered on the limited basis of, say, just the effect on the power of the professional institute. There are a wide range of other issues, including analysis of other strategic trends in the industry, that should be factored in to the equation. For example, in pharmacy, there are technical trends which are promoting the use of the Internet and mail order as alternative forms of service delivery. Which system (pro- or anti-MDP ) would protect various interests the best in the light of such trends?

12.    If MDPs were allowed then for sure the income of that proportion of lawyers who work for the Big 5 may go up, but this would be far more a function of oligopoly and concentration in the industry than a byproduct of MDPs in themselves. The pharmacy example shows what would happen to the mass of lawyers in a free-market MDP environment.

13.    It may also be that there are synergies and economies of scale in the MDP offering of legal services that may possibly reduce the effective cost of legal services, and which have to be set against the exploitation arising from the oligopolistic structure of the market.