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Directive11 and the derived IFAC definition. According to the IFAC Code of Ethics 290.17, the
determination should be “made in light of whether a reasonable and informed third party would be
likely to conclude … that a network exists.” A referral network is not a network by this definition.
The shared costs must be significant. Common quality control systems and business strategies are
important considerations.
This differentiation between network and association materialises in the level of potential
vicarious liability and in a more stringent regulatory framework, with, for example, the
requirement for the formal registration of networks with the national regulatory or supervisory
body, clear conflict checks, and ultimately a formal or perceived proximity between the individual
affiliated member firms. Where, for instance, the use of a common brand and coordinated or
monitored management and control can be identified, the acknowledgement of an agent structure
can be positive. The member firm agreement, reserved ownership of IP regarding manuals and
software, and a centralised implementation of quality control and training programmes are clear
indicators of the existence of an integrated network.
Therefore, the network definition represents an additional layer of liability for accounting
firms organised as members in a transnational entity, regardless of the legal structure this entity
has chosen. Depending on the jurisdiction, this can result in a piercing of the corporate veil.12
Managed organisations of professional service firms are incorporated under the laws of a
wide variety of countries; however, the main legal structures are common law companies limited
by guarantee, Delaware non-stock member corporations and Swiss Vereins. Network
organisations are defined mostly by their purpose, structure, and process. This chapter will include
multidisciplinary organisations, i.e., networks or alliances including both law firms and accounting
firms.
The striking differences between networks in a generic sense and transnational partnerships
cannot necessarily be found by looking at their legal and operational structure. The aim of most
transnational organisations is to have a broad or at least strategic coverage and to be perceived as
such while vicarious liability and burdensome regulatory matters should be mitigated.
Regulatory matters have thus changed the concept of independence checks and vicarious
liability for global accounting organisations or multidisciplinary organisations consisting of both
accounting firms and law firms. Networks of law firms, however, do not face the same degree of
regulation and are much more flexible. In both the accounting and the law firm cases, this is
regardless of the structure or legal entity chosen. The reason therefore is mainly because law firm
networks are regulated by ethics and not by any governmental agencies, while accounting firm
networks and associations are regulated in accordance with national or supranational laws. The
fact that accounting firm networks were established out of a transnational need based on reporting
requirements and securities laws of individual member firms also underlines the different scope
and the public interest character of these entities. Transnational accounting networks and
associations are usually not directly affected by national regulations; they are affected when their
individual members do not comply with them.
Some law firm networks have in the past five years benefitted from a less regulated
environment compared to the accounting profession. This explains why some law firm networks
11 Directive 2006/43/EC: “‘[N]etwork’ means the larger structure: which is aimed at cooperation and to which a statutory auditor or an audit firm
belongs; and which is clearly aimed at profit- or cost-sharing or shares common ownership, control or management, common quality control policies
and procedures, a common business strategy, the use of a common brand name or a significant part of professional resources…” available at
http://ec.europa.eu/internal_market/finances/docs/terminology/annex_2_analysis_of_undertakings_terminology_rev_g3_en.pdf.
12 Gutierrez v. Cayman Islands Firm of Deloitte Touche, 100 S.W. 3d 261 (Tex. App. 2002); see also Deloitte & Touche Netherlands Antilles &
Aruba v. Ulrich 172 SW 3d 255 (Tex. App. 2005).
139
determination should be “made in light of whether a reasonable and informed third party would be
likely to conclude … that a network exists.” A referral network is not a network by this definition.
The shared costs must be significant. Common quality control systems and business strategies are
important considerations.
This differentiation between network and association materialises in the level of potential
vicarious liability and in a more stringent regulatory framework, with, for example, the
requirement for the formal registration of networks with the national regulatory or supervisory
body, clear conflict checks, and ultimately a formal or perceived proximity between the individual
affiliated member firms. Where, for instance, the use of a common brand and coordinated or
monitored management and control can be identified, the acknowledgement of an agent structure
can be positive. The member firm agreement, reserved ownership of IP regarding manuals and
software, and a centralised implementation of quality control and training programmes are clear
indicators of the existence of an integrated network.
Therefore, the network definition represents an additional layer of liability for accounting
firms organised as members in a transnational entity, regardless of the legal structure this entity
has chosen. Depending on the jurisdiction, this can result in a piercing of the corporate veil.12
Managed organisations of professional service firms are incorporated under the laws of a
wide variety of countries; however, the main legal structures are common law companies limited
by guarantee, Delaware non-stock member corporations and Swiss Vereins. Network
organisations are defined mostly by their purpose, structure, and process. This chapter will include
multidisciplinary organisations, i.e., networks or alliances including both law firms and accounting
firms.
The striking differences between networks in a generic sense and transnational partnerships
cannot necessarily be found by looking at their legal and operational structure. The aim of most
transnational organisations is to have a broad or at least strategic coverage and to be perceived as
such while vicarious liability and burdensome regulatory matters should be mitigated.
Regulatory matters have thus changed the concept of independence checks and vicarious
liability for global accounting organisations or multidisciplinary organisations consisting of both
accounting firms and law firms. Networks of law firms, however, do not face the same degree of
regulation and are much more flexible. In both the accounting and the law firm cases, this is
regardless of the structure or legal entity chosen. The reason therefore is mainly because law firm
networks are regulated by ethics and not by any governmental agencies, while accounting firm
networks and associations are regulated in accordance with national or supranational laws. The
fact that accounting firm networks were established out of a transnational need based on reporting
requirements and securities laws of individual member firms also underlines the different scope
and the public interest character of these entities. Transnational accounting networks and
associations are usually not directly affected by national regulations; they are affected when their
individual members do not comply with them.
Some law firm networks have in the past five years benefitted from a less regulated
environment compared to the accounting profession. This explains why some law firm networks
11 Directive 2006/43/EC: “‘[N]etwork’ means the larger structure: which is aimed at cooperation and to which a statutory auditor or an audit firm
belongs; and which is clearly aimed at profit- or cost-sharing or shares common ownership, control or management, common quality control policies
and procedures, a common business strategy, the use of a common brand name or a significant part of professional resources…” available at
http://ec.europa.eu/internal_market/finances/docs/terminology/annex_2_analysis_of_undertakings_terminology_rev_g3_en.pdf.
12 Gutierrez v. Cayman Islands Firm of Deloitte Touche, 100 S.W. 3d 261 (Tex. App. 2002); see also Deloitte & Touche Netherlands Antilles &
Aruba v. Ulrich 172 SW 3d 255 (Tex. App. 2005).
139
