“PwC to curtail consulting work for US audit clients to reduce conflict risk” —

• “PwC is planning to give up tens of millions of dollars of consulting work for its US audit clients to reduce the risk of conflicts of interest, challenging its rival Big Four firms to follow suit.”
• “The accounting firm has begun to tell clients it will stop offering them some advisory services, even though they are permitted under US rules, as part of a wider revamp of its audit work.”
• “The move comes amid a worldwide debate over how to ensure accounting firms remain independent of the companies they audit, after scandals such as the collapse of Carillion in the UK. It follows an abortive attempt by PwC’s Big Four rival EY to spin off its consulting arm. The UK accounting regulator has already pushed the biggest accounting firms to make their audit operations in the country more independent of their consulting arms.”
• “PwC’s US leaders have agreed a package of reforms that also include the introduction of clawback provisions in their executive pay and the promise of new disclosures about how the firm manages conflicts of interest.”
• “The moves are designed to head off concern among clients, whose directors and shareholders are increasingly scrutinizing potential conflicts, and to improve the reputation of a profession that has found it harder to attract young people.”
• “The US drastically curtailed the consulting work accounting firms can do for audit clients in the Sarbanes-Oxley Act, passed in 2002 after the Enron scandal. However, the rules still allow for more non-audit services than allowed in other parts of the world, particularly Europe.”
• “Non-audit work accounts for a smaller proportion of the fees PwC gets from its US audit clients than it does at Deloitte and EY, according to public disclosures collated by Ideagen Audit Analytics.”
• “The Big Four sold $1.5bn of tax and miscellaneous consulting services to their US-listed audit clients last year, on top of $13.5bn of audit and audit-related fees, the figures show. The proportion has been trending down for most of the past two decades.”
• “The move by PwC US is limited to miscellaneous consulting and would not affect tax work, it said. It could affect its consulting revenues outside the country, if its local member firms work for overseas subsidiaries of US audit clients. The work would be phased out by 2025, PwC said.”
• “Details were due to be announced in May but the launch was pushed back while the firm dealt with a scandal in Australia in which partners were revealed to have misused confidential information about the government’s tax plans, according to people familiar with the situation.”
• “PwC US will also next year introduce new audit procedures to improve the detection of fraud and to broaden the range of factors staff must consider when ruling on whether a client is at risk of bankruptcy.”
• “Other measures include expanding the audit report that is published with its US clients’ annual report, which will from 2025 be modeled on the UK, where additional disclosures are required about contentious issues an audit has raised.”

“Ethical Considerations for In-House Lawyers” —

• “Although the Rules of Professional Conduct have many provisions targeted to lawyers who are in private practice, in-house lawyers, who are dedicated solely to representing their corporate client’s—and employer’s—interests, are still subject to those rules.”
• “Notably, the nature of the in-house counsel role can pose some unique ethical considerations for attorneys whose clients also serve as their employers.”
  “Among other things, in-house counsel may wear different hats in the course of their work, acting as both legal adviser and business adviser at times, which can lead to complicated ethics questions.”
• “There may be circumstances, however, in which an in-house lawyer is providing legal support to individual employees of the company. For example, Rule 1.13 allows lawyers to represent an organization and ‘any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7.'”
• “This may come up in a situation in which an in-house lawyer provides guidance to an employee who is about to be deposed in a case involving the organization. The in-house lawyer is permitted to provide advice to the employee, but the lawyer should be wary of any situations that could create a conflict, such as when the individual employee’s interests and the corporate client’s interests are adverse.”
• “In accordance with Rule 1.13(f), in-house counsel will often advise the employee that they represent the company, not the employee as an individual, and that the lawyer is permitted to tell the company anything the employee divulges. Sometimes, for this reason, companies will elect to use outside counsel to conduct sensitive internal investigations, which, among other things, can help avoid any misunderstandings about an in-house lawyer’s role (and any potential awkwardness around the Upjohn warning that an employee’s conversations with in-house counsel are not private from their employer).”
• “As noted above, there may be circumstances in which an in-house lawyer can represent an individual employee in an event like a deposition. However, if the employee is adverse to the company, the conflicts-of-interest rules advise that in-house counsel cannot represent both parties.”

Claire Brown, Partner, Commercial Litigation at JMW Solicitors explains: “How do we regulate conflicts of interests arising out of directorships in competing businesses?” —

• “In law, there is no limit upon the number of companies that any one individual may be a director of. However, where an individual has multiple directorships, particularly where one of those company directorships competes with another, there are several considerations to be mindful of. The consequences for a director who disregards these considerations can be severe.”
• “A company’s Articles of Association will often dictate how directors’ conflicts of interests should be managed. Where the Articles of Association are followed in a situation of conflict, no infringement will be deemed to arise under the Companies Act 2006.”
• “Under the Companies Act 2006, it is possible for the directors to authorise a conflict, in the case of a private company, where nothing within the company’s constitution invalidates such authorisation and, in the case of a public company, where its constitution provides for such authorisation and any prescribed process for obtaining such authorisation is followed. In either case, the authorisation will only be effective if any constitutional voting or quorum requirements are met without counting the director in question (or any other interested director).”
• “In resolving whether or not to approve a conflict of interest, whether in relation to a director’s involvement in a competing business or otherwise, the directors must act in accordance with their general duties and, in particular, their duty to promote the success of the company. Where an industry specialist is brought on board to assist with the growth of a company, for example, the existing board may reasonably determine that any potential risk associated with the conflict is outweighed by the expertise that the incoming director can bring (particularly if conditions are attached to such approval). However, more generally, it will likely be difficult to lawfully sanction such competing interests.”
• “In the inevitable event that the director’s competing directorship gives rise to a breach of the statutory duties above, or any contractual obligations owed to the company, and the breach causes harm to the company in question, the company will be able to bring a claim against the director in respect of such breach.”
• “Where the competing director controls the board of directors in the original company and does not support action being taken against them by the company, it is possible for a shareholder to seek to bring a claim against the director ‘derivatively’ on the company’s behalf.”