Accounting giant KPMG announced this month that it is disbanding its international network of lawyers because of continued fallout from the Sarbanes-Oxley Act. KPMG’s legal entity, KLegal, doesn’t have any member law firms in the United States, and KLegal’s international clients are not necessarily registered with the Securities and Exchange Commission. Yet the Big Four accounting firm contends that its corporate clients are so skittish about new restrictions on the range of services that accounting firms can perform that its clients are opting out of the “one-stop shopping” approach to accounting and legal services.

Sarbanes-Oxley prohibits accounting firms from providing both audit and legal services to the same client. The law responds to criticisms that corporate accounting scandals were made possible partly by accountants who were lax because of their interest in consulting work at the companies they audited.

Adding to the conflict is post-Enron legislation, similar to Sarbanes-Oxley, that France passed in August.

As a result of the regulatory changes, “Companies are less willing to take legal services from a firm connected to their auditor,” says KPMG’s London-based spokesman Mark Hamilton. He adds that the fears were present even when client companies weren’t registered in the United States and subject to the authority of the SEC, which is issuing regulations implementing Sarbanes-Oxley.

The downfall of KLegal, announced Nov. 7 after only three years of operation, “clearly shows the extraordinary reach of the U.S. securities law,” says Fordham University law professor Mary C. Daly, who was the reporter for the ABA Commission on Multidisciplinary Practice.

MDPs are flourishing in Europe and have tremendous prospects for growth, Daly says, yet “the SEC is the 800-pound gorilla.”

It’s not that companies don’t want the one-stop shop. Eliminate the fear of the SEC, Daly says, and the market would continue to grow for these globally networked firms. But, she says, “companies don’t want to wrestle with the 800-pound gorilla.”

KPMG’s announcement came as a surprise to the other Big Four firms, which also have amassed large legal networks. PriceWaterhouseCoopers has a network of 2,850 lawyers in more than 40 countries through its legal affiliate, Landwell. The firm said through a spokesman that it has no intention of disbanding or disassociating from its legal network. Neither does Ernst & Young, which this year launched EY Law, a network that the firm claims has grown to include 2,000 lawyers in 30 countries. Deloitte also has a legal arm but has not indicated it will make any significant changes to its network. A U.S.-based company spokesman did not return calls for comment.

Despite these optimistic forecasts, the British legal press is reporting that a growing number of law firms are severing ties to the legal networks established by the accounting giants.

“Sarbanes-Oxley has had a chilling effect on the accounting firm MDPs on a worldwide scale,” says Ward Bower, chair of the International Bar Association’s MDP Working Group. Bower, a principal with the legal management consulting firm Altman Weil, predicts that the Big Four will be pursuing other strategies and finding ways to provide legal services to nonaudit clients.

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