It must have seemed like a good idea to Kenneth Lay at the time. Why not hire only one accounting firm, Arthur Andersen and Company, for both auditing and consulting?

The reverberations of that decision still are being felt throughout the accounting and legal professions. Multidisciplinary practices (MDPs), once considered the new frontier for professional services, have fallen into disfavor."

The primary advocates of MDPs were the accounting firms that allowed accountants to serve both as auditors and as business consultants," said Dennis P. Harwick, executive director of the Kansas Bar Assoc-iation in Topeka. "Then came Arthur Andersen and Enron--and the fatal flaw of MDPs was exposed."

These concerns recently have hit close to home for Kansas City businesses, said Jennifer Gille Bacon, vice president of Shugart, Thomson and Kilroy and past president of the Missouri Bar.

"Having your hand in every pocket of a corporate entity creates a tremendous potential for abuse," she said. "On a smaller scale than Enron, look at the situation at Sprint. Ernst and Young was advising the board about corporate tax matters, working on the Worldcom merger and at the same time providing personal tax advice to top managers, as well as providing audits. Ernst and Young has been criticized for having its hands in all those pockets."

A quick review of the numbers reveals how far-reaching those services can become.

"Ernst and Young earned $68 million from Sprint when it included fees for technology consulting," said Dr. LaVern Krueger, professor of accounting at the Bloch School of Business and Public Administration at UMKC. "After they spun off consulting, however, their total fees were less than $10 million for tax and audit services alone."

Recent high-profile corporate scandals, while perhaps not sounding the death knell for MDPs, have at least put them on life support.

"The Big Four accounting firms now are going in the opposite direction of MDPs," Krueger said. "They have spun off their consulting practices. I would say that is 80 percent of that decision is attributable to Enron."

Theory Behind the Practice

An MDP is simply a professional association, partnership, alliance or other business organization owned jointly by lawyers and nonlawyers whose functions include legal services for which fees are shared among members. The theory behind MDPs certainly seems reasonable. A partnership of lawyers, accountants and financial planners, for example, can provide one-stop shopping and economies of scale.

"There used to be quite a lot of talk about everybody getting together to serve the clients, with lawyers and accountants both doing work for you," Bacon said. "There was a feeling that it was the wave of the future."

This concept is commonplace in many parts of the world. "MDPs operate in Great Britain and on the European continent," Krueger said. "Some of the Big Four firms employ large numbers of attorneys."

In fact, "the largest law firms in the world today are accounting firms that have hired lawyers," Bacon said. Multinational accounting firms would like to replicate that model in the United States.

"MDPs have been driven largely by major accounting firms to allow lawyers to practice for them directly," Bacon said. "Other professionals, such as mental health professionals and domestic relationship counselors, may be in favor as well. But the impetus comes from accounting firms."

In today's business climate, however, any momentum that MDPs once had has come to a standstill.

"I think MDPs right now are dormant, and I suspect they will remain so," said John F. Murphy, chairman of Shook, Hardy & Bacon LLP in Kansas City. "We need to be restoring public confidence, and I'm not sure MDPs would accomplish that."

ABA Proposal Rejected

The current status of MDPs in the United States is clear: Multidisciplinary practices in which fees are shared are not permitted. "You cannot combine the practice of law with another regulated service such as accounting," Krueger said.

The legal profession itself is leading the charge against MDPs. Mario Mandina, an attorney in private practice in Independence, also is CEO of the National Lawyers Association. The NLA is a full-service bar association with 2,700 members in all 50 states.

"We had studied the MDP issue for several years and were the first national bar association to oppose it," he said. "We sent letters to every state bar association asking them to slow down and think about its implications. We looked like prophets after Enron happened."

Attorneys in Missouri, Kansas and other states are governed by Rules of Professional Conduct. The American Bar Assn. drafts model rules, which then are submitted to states for approval. The ABA Commission on Multi-disciplinary Practice drafted a modest proposal in 1999 that would have allowed the MDPs to be established with well-defined safeguards. Members nationwide promptly shot the proposal down.

"That was a sound defeat for the proponents of MDPs," Bacon said, "but most people felt it hadn't really died and would be back. That hasn't happened." The Missouri Bar and the Kansas Bar Association appoin-ted committees to review the pros and cons of MDPs.

"Like most states, our committee recommended against modifying the Rules of Professional Conduct for lawyers to allow MDPs," Harwick said. "The fundamental argument against them was that the core values and duties of lawyers would be compromised if they tried to wear additional hats for the same clients."

Bacon served on the Missouri committee, which also opposed MDPs. "We were very cautious and nervous about the idea," she said. "Then ABA the voted it down."

Myriad Concerns

Attorneys and bar associations oppose MDPs for a number of reasons.

"It opens a can of worms on so many issues that I couldn't begin to tick them off," said Maridee Edwards, chief disciplinary counsel in the Missouri Office of Chief Disciplinary Counsel in Jefferson City. Her office, set up by the Missouri Supreme Court, is responsible for investigating ethical complaints against Missouri attorneys.

"The profession has a set of Rules of Professional Conduct, established by the Missouri Supreme Court, governing lawyers' conduct," she said. "Rule 4-5.4 dealing with the professional independence of a lawyer says a lawyer shall not share legal fees with a nonlawyer. They shall not form a partnership with a nonlawyer if any activities would constitute the practice of law."

One of her biggest concerns is the confidential nature of the attorney-client relationship.

"If you are doing one-stop shopping with law, financial planning and tax work," she said, "it's very hard to draw bright lines between dealing with an accountant who has no confidentiality rules and dealing with a lawyer who may be sitting in the room at the same time."

The traditional view of attorney-client relationships is much different here than in European countries where MDPs are common, Bacon added.

"The legal profession in the United States has placed a tremendous premium on the independence of lawyers and the absolute confidentiality of client matters with lawyers," she said. "That is not true in many other legal systems."

The problem is compounded by the difference in ethical standards among professions.

"The professional rules that a lawyer must comply with are not necessarily the same standards as those in accounting, for instance," Edwards said. "The confidentially rule for lawyers in Missouri, as in most states, is very broad. The confidentiality rule for an accountant could be much narrower. Certain disclosures may not necessarily apply to working with an accountant or insurance agent or someone in the securities field. How do you oversee everyone to protect confidentiality?"

Furthermore, MDPs may compromise the traditional independence of the legal profession. "A lawyer is independent and must remain independent," Bacon said.

"A lawyer would not be allowed to advise a corporate executive at the same time as the board and corp- oration. He or she must give independent advice to a single client."

Edwards Shares This Concern.

"The basic idea is that the relationship between a lawyer and client is such a special one and of such a high fiduciary responsibility that you don't want the lawyer to be improperly influenced by outside forces in giving their best legal advice," she said.

Mandina believes MDPs would chip away at the profession until little remained.

"The legal and accounting professions can work together, but we don't want to see one swallow up the other," Mandina said. "We felt the insurance industry could take over medical lawsuits, and real estate agencies could take over property law. Eventually, there would be no more independent practice of the law, except maybe for parking tickets. The strength of our system of jurisprudence has always been a strong, independent legal community."

A sticky issue for nonlawyer members of an MDP is crossing the line into illegally practicing law. An ABA committee currently is working to tighten the definition, Murphy said.

"In a recent case in Texas, it was charged that Arthur Andersen had undertaken the practice of law," he said. "That case died on the vine. The speculation was that nobody in the state bar was willing to spend the time and money to take on Arthur Andersen. But that was before Enron. Today, a lot more people might be willing to take on that type of case."

Some accounting firms have attempted to expand their practices by blurring the definition, Bacon said.

"Major accounting firms in Washington and on Wall Street in the last five or 10 years have hired entire securities or tax practices away from law firms," she said. "In some cases, they even hired entire practices. Accounting firms have lawyers on staff, but rather than call them lawyers for the clients, they call them legal consultants. There really is not much of a difference."

The bottom line, experts agree, is that MDPs may create more problems than they solve in today's economy.

"The lesson that accounting firms are learning the hard way is that this idea of being all things to all people perhaps is not the best," Bacon said. "The interests of the executives of a corporation may not always be in harmony with the interests of the corporation itself. It's hard to provide all services to all members."

Growth in Ancillary Services

Although the tide is running against MDPs, local professionals are looking at ways to expand the range of ancillary services they can offer clients. Some U.S. law firms have ventured into related fields such as governmental relations, environmental counseling, human resources outsourcing, real estate title services and even money management. Lathrop & Gage LC, for example, has organized an ancillary business called Human Resources Return on Investment to complement its labor and employment practice.

"Like all of the other firms in Kansas City, Shook, Hardy and Bacon is always willing to look at the possibility of offering ancillary services through subsidiaries," Murphy said. "We just have not found anything yet that is a good fit from a business standpoint."

As the Big Four accounting firms get out of the consulting business, it is opening more opportunities for middle-tier firms, Krueger said.

"This really is nothing new," he said. "The firms a tier below the Big Four can go into an SEC client that is not an audit client of theirs and provide some one-stop shopping for financial accounting, tax and technology applications."

BKD, one of those middle-tier firms, is finding new ways to serve its clients. "One thing we have done in the last few years is add a variety of services, such as financial planning and investment advice," said Doug Gaston, partner of the KC office. "For example, an individual may sell their business and have a substantial amount of cash. They can come to us and ask where to invest, be- cause we already have established a trust."

New service offerings will be customer-driven, he emphasized. "Health care, for example, is our largest industry concentration. We have hired nurses to assist some health care organizations in the areas of billing, coding and reimbursements. That would have been highly unusual 10 years ago."

Grant Thornton tailors its services to the needs of its middle-market clients.

"Most of our clients are not public, and want to deal with only one firm," said Scott Curtin, managing partner in KC. "They like the fact they can work with one client service team and not have to educate other people about their business."

The federal Sarbanes-Oxley Act, adopted in the wake of Enron, is opening new service opportunities, he said. Even more important is the ability to fully under- stand a client's business, identify potential problems and propose solutions.

"You have to be able to solve a client's or potential client's needs," Curtin said. "Sometimes, it is an education process to help them understand how to reduce taxes or protect themselves from an IRS penalty for failure to comply."

The Last Gasp?

Although professionals predict a trend toward legal and accounting firms offering ancillary services, they agree it may be a long time before the concept of MDPs is revived.

"I think it is a dead issue," Murphy said. "The fact that it was defeated by a 3-to-1 margin in the ABA's House of Delegates even before the events of Enron and Worldcom clarified where the ABA was coming from."

He won't get an argument from accounting professionals.

"There was interest three years ago," Krueger said, "but post-Enron and post-Worldcom, that has gone up in smoke."

It turns out that Kenneth Lay and Bernie Ebbers may have struck a fatal blow to MDPs as well as their business empires.

"There are those who think the market will continue to move to some kind of MDP," Harwick said, "but the current political and regulatory climate in the United States is still dealing with the aftershock of Enron and Worldcom.

"I think it is fair to say the legal profession has taken considerable solace in having rejected MDPs and has, rightfully, been able to say, ‘I told you so'."