Thursday, June 23, 2011

Worst of the Week (Everson)

Two editorials this week are competing for my inaugural "worst of the week" award. Yesterday, I discussed an opinion letter to the Wall Street Journal which expressed Thomas Geoghegan's controversial view on domestic business migration. Today, I'm discussing an editorial by former IRS Commissioner Mark Everson. (Thanks to Peter Pappas and Paul Caron for the lead.)

Second Nominee: Mark Everson

Everson seems to want to say something profound. Unfortunately, his editorial ends up reading as a series of non sequitors. It reminded me of a sci-fi movie with decent special effects but no plot. You walk away thinking: 'that editorial could have made sense, if there were any theme or continuity or relevant message.' After five years as IRS Commissioner, this is all we get?

In a nutshell, Everson suggests that greedy lawyers and accountants contributed to the 2008 financial crisis by abandoning their ethical moorings in pursuit of outrageous professional fees. But that's not quite right... The vast majority of lawyers and accountants represent clients who had nothing to do with the 2008 financial crisis. So let me try again. In a nutshell, Everson calls out greedy lawyers and accountants whose client base includes Wall Street firms and U.S. based multinationals. But, wait, that's not quite right either... Perhaps he suggests that greedy tax lawyers and complicit accounting firms destroyed the moral integrity of the law and accounting professions. Or that the GE tax department is undermining Obamacare. Or that the attorney-client privilege is an anachronism that should be cast aside by the Supreme Court 2.0. Again, 'that editorial could have made sense, if there were any theme or continuity or relevant message.'

I'll stop trying to condense the editorial into a single theme. He basically strings together eight different ideas:

(1) Attorney and auditors are no longer driven by ethics, professionalism and independence that long fostered the "integrity of capitalism." Instead, law firms and accounting firms are driven chiefly by the earnings of their partners. That means regulators cannot rely on these professionals to "check" corporate risk taking.

Two points here. The vast majority of attorneys and auditors work with an incredibly diverse group of clients. The vast majority of these attorneys and auditors display ethical behavior, professionalism and independence from their clients. Everson seems to be focused mainly on "BigLaw" attorneys and "BigFour" auditors whose client base includes Wall Street firms and multinational corporations. Talk about painting with too broad a brush.

Everson's insinuation that the BigLaw/BigFour do not check client risk assumption is absurd. Has he ever been subject to a BigFour audit? Has he tried obtaining an opinion from a BigLaw partner whose home is at risk for malpractice liabilities? Perhaps not, if he truly believes that the BigLaw/BigFour provide no "check" on client risk assumption.

(2) New lawyers at prestigious Wall Street law firms are overpaid.

I'm confused. What does this have to do with the professional decay that Everson previously alleged? Is there some evidence that cutting the pay of new associates will make them more ethical, professional and independent? And what does this have to do with the auditors? Are new BigFour auditors overpaid? Or is the point that BigLaw cannot support its highly-paid young associates without unethical practices?

Everson notes that, in 1948, his father graduated Harvard Law and took a job at a prestigious New York law firm earning $3,600 per year. A new associate at the firm today would make 40 times more than his father (call it $145,000).

Okay, but what happened to Ivy League tuition in the last 60 years? I quickly found data for Penn Law. Today's cost of tuition and fees: approximately $51,000. The 1948 cost of tuition and fees: $615. That means a law school education today costs 80 times more than a law school education in 1948, while new associates today earn 40 times more than new associates in 1948. Perhaps the law firms are exploiting young associates, or the law schools are exploiting law students, but none of this has anything to do with ethics, professionalism or independence from clients.

(3) In the good old days, lawyers and auditors "moving up the ladder, didn't expect to get rich." Wealth was reserved for business owners, corporate execs, talented investors and investment bankers.

This is just melodramatic. I don't know the historical relationship between BigLaw profits per partner and the income of their high-net-worth individual clients (or senior execs at their corporate clients). However, I'd be surprised if it has changed materially over the years. BigLaw attorneys and BigFour auditors make good money for long, high-stress days and nights, but they don't capture the economic premiums of Fortune 500 execs or technology founders (among other high-net worth clients).

(4) Lawyers' and accountants' "core mission" has changed. They used to help clients adhere to professional standards and follow the law. Now they focus on "growing billings" to support lavish profits per partner.

Another stretch. Accountants are focused on numbers, not "helping clients follow the law." For example, if a client is fined for violation of environmental regulations, an auditor must review how the client booked resulting liabilities/penalties. The auditor's role is to confirm that the client's financial reporting of the incident is materially correct. The auditor's role is not to help prevent the underlying environmental violation.

Lawyers provide legal services to clients across a range of matters. I'm not aware of any BigLaw firms which systematically conspired with clients to break the law. If it happened, our 24/7 media cycle will inevitably uncover the conspiracy.

(5) Corporate clients are unwilling to pay exorbitant legal fees (in excess of $1,000 per hour for certain BigLaw partners) for "conservative" legal advice. As evidenced by a recent article about GE's tax department, lawyers and accounting groups are now viewed as profit centers rather than compliance officers.

Sure, legal fees charged by seasoned partners at elite BigLaw firms are pretty shocking. During law school in the early '90s, one of my professors charged $1,500 per hour ($2,200 in today's dollars) to serve as an expert witness in various legal proceedings. That shocks me to this day! The point is: legal fee inflation has nothing to do with an attorney's ethics, professionalism or independence from his or her clients.

The point about GE and "tax departments as profit centers" is wildly exaggerated. The vast majority of U.S. businesses cannot and do not use their tax departments as "profit centers." Their tax departments are primarily focused on accounting for income taxes and tax compliance. As a former IRS Commissioner, Everson should know better.

(6) KPMG is a poster child for the "new norm" of unethical behavior.

No, the unethical decisions of a few senior execs at KPMG does not taint the character or values of thousands of hard-working attorneys and auditors not engaged in marketing of tax shelters. Give me a break.

(7) Congress should re-assess the attorney-client privilege as applicable to corporations.

Seriously? Now he's probably focused on taxes again. The ACP is effectively obsolete in light of new IRS Schedule UTP for corporate taxpayers. (And I note that tax planning did not cause the 2008 financial crisis!)

(8) Businesses should change their compensation structure for finance and legal execs, eliminating reliance on equity compensation.

Now, Everson simply lost me. There is a point here that might be worth exploring in a different blog post. But it's not worth further time for now.

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So which editorial is the Worst of the Week? Geoghegan or Everson? Let me know what you think.

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