Media Dragon: Tax Office warns law firms over consulting push

Burrowes wants everyone to move on from PwC’s tax scandal

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A TPB media release resulted in more than 12 months of continuing coverage, two specific senate committee inquiries, an international and domestic investigation by the Australian Federal Police and a further nine cases investigated by the Tax Practitioners Board.
The firm was also disciplined recently for its failure to report the TPB investigation’s commencement and outcome to the strict accounting firm regulator, the US-based Public Company Accounting Oversight Board.

ATO should have referred PwC to the TPB earlier, says Hirschhorn

Tax Office warns law firms over consulting push

The Tax Office says it fears law firms will repeat the sins of the big four professional services firms as they push into the consulting sector and mix legal and consulting advice.

ATO second commissioner Jeremy Hirschhorn told the Senate inquiry into consulting this week that attitudes to legal professional privilege (LPP) at some law firms were “disappointing” and the committee should turn its mind to firms that have expanded into the non-legal advisory sector.

ATO second commissioner Jeremy Hirschhorn: “I worry that the exact same problem that we had with the big four accounting firms will be replicated in the big law firms.” Alex Ellinghausen

Led by Ashurst and MinterEllison, a growing number of law firms have opened non-legal advisory arms to lock down a greater proportion of client spending and capitalise on the struggles of the big four.

Mr Hirschhorn made the point at the end of a discussion about how the privilege had been abused at multidisciplinary firms, including PwC.

“If I may make one more observation, which is one of the things that I think may be worth this committee thinking about, is the start of a trend ... of law firms getting into consulting businesses and saying those consulting services are offered under the aegis of a law firm.

Blanket claims

Courts and the Senate have criticised consulting firms for using in-house legal divisions to improperly attach legal privilege to non-legal communications and documents to frustrate regulators’ inquiries and investigations.

In March 2022, the Federal Court found that PwC incorrectly claimed legal privilege over a majority of documents it tried to keep from the Tax Office over its work for Brazilian meat giant JBS. The firm also paid a $642,600 settlement to the Tax Office over separate blanket privilege claims relating to five multinational clients.

Mr Hirschhorn implied that some lawyers were dragging out claims of LPP.

“We have been disappointed with the law firms, whether that is the law division of multidisciplinary firm or a law firm itself, in how they have gone about doing the test as to whether something truly is privileged,” he told the committee.

“Instead, in some cases almost viewing it like a negotiating tactic by making a blanket claim and forcing us [the ATO] to go document by document.”

An ATO spokeswoman said the agency had observed that law firms with advisory divisions may be tempted to market non-legal services under the umbrella of a legal services agreement on the implicit or explicit understanding that the work may attract privilege.

She said the agency’s experience was that such arrangements “may occur even when there are internal protocols which are intended to prevent this”.

“This can then cause significant challenges for the regulator, firm and client when a regulator seeks to obtain the work product under its information acquisition powers, and the client seeks to assert the privilege they mistakenly thought they possessed.”

Law firm Norton Rose Fulbright, which opened its own risk advisory arm in 2018, explicitly marketed the “benefit” of legal privilege to prospective clients.

In a statement, NRF chairman Scott Atkins, who made the claim as then-head of the advisory division, said that “clients may avail themselves of legal professional privilege only when it is legitimately available to them – it being their right to do so as a matter of law”.

Labor senator Deborah O’Neill, who is leading the Senate’s inquiry into consulting, echoed Mr Hirschhorn’s remarks.

“The risk of privilege claims being weaponised in order to inhibit reasonable transparency and accountability … appears to be further heightened in the context of firms whose primary function is to provide legal services,” she told The Australian Financial Review.

“Law firms considering entry into the consulting sector must employ caution, and ensure that the integrity of their work is not undermined by the lure of lucrative consulting opportunities.”

Consulting expansion

The downturn in the consulting sector has not flowed through to law firms, which have continued to expand their advisory offerings.

Ashurst has appointed seven new advisory partners in the past six weeks, while King & Wood Mallesons established its own compliance and risk offering in February.

KWM partner Tim Bednall, director of consulting spinoff Owl Advisory, said the advisory unit “does not offer legal advice, nor offer or claim privilege on the advice it provides”.

“We’re very clear about drawing the line between privileged legal advice and non-privileged governance and compliance risk advice,” he said.

MinterEllison has the largest advisory outfit. The firm’s consulting managing partner, Victoria Hepburn, a lawyer, said MinterEllison “will always be a law firm at its core”.

“We are focused on solving our clients’ most complex problems, which often involves working with other advisers … The importance of appropriate conflict management is emphasised to each and every lawyer, consult and team members at our firm,” she said.

Ashurst’s Australia head, Lea Constantine, said: “We ensure that legal professional privilege is claimed by our clients only where appropriate and where they have grounds to do so.

“Privilege claims are considered on a case-by-case basis and we do not market privilege as a default benefit of our consulting services.”