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Traps for the Unwary in CPA Firm Mergers and Acquisitions: Allure of a Tie-Up May Vanish If Improperly Planned or Executed

2011; American Institute of Certified Public Accountants; Volume: 212; Issue: 2 Linguagem: Inglês

0021-8448

John F. Raspante, Joseph A. Tarasco,

Financial Literacy, Pension, Retirement Analysis

EXECUTIVE SUMMARY * Besides the well-publicized succession problem facing CPA firms, a number of other demographic and economic forces have increased pressure on firms to combine. Firm mergers and acquisitions (M&As) are fraught with hazards, including some less-apparent traps that are often overlooked. * When evidence suggests a prior audit by a predecessor firm may require revision of financial statements, a disagreement over whether a revision is necessary can scuttle a planned merger and/or lead to the loss of the client. The merger parties should be prepared to explore all possible alternatives to restatement while duly considering applicable professional standards and the client's needs. * A predecessor firm's engagement letters might need to be updated by the successor firm or the engagements renegotiated, especially if the predecessor did not include successorand-assigns language in the letters. * Although the AICPA Code of Professional Conduct addresses client confidentiality during the due diligence process preceding an M&A, the parties may wish to execute a confidentiality agreement further protecting them from client infringement and improper use of client information. * Pre-existing clawback or other agreements with partners or other employees should be particularly sought out during due diligence. * Noncompetition agreements and fair withdrawal terms for partners can lessen the possibility of disgruntled partners leaving and taking clients with them. * Make sure professional liability insurance continues to cover work done by the prede cessor firm for the applicable statute of limitation period. ********** [ILLUSTRATION OMITTED] You can't hold back the demographic tide. In the U.S., another baby boomer turns 60 every eight seconds. This translates into a leadership change in the near future at many CPA firms. Thousands of partners are at or reaching retirement age now and in the next five years, putting a tremendous strain on even the best succession plans. But age isn't the only factor affecting the profession. Factors such as increased globalization and turmoil in the general economy causing greater competition have been analyzed previously in the JofA (see Accounting Firm M&As: A Market Update, Nov. 2010, page 30). Consider also these forces: * A significant number of firms have unfunded partner retirement obligations. * Efforts to retain women in the profession and facilitate their progression to the partner ranks have been largely unsuccessful. * There is a lack of next-generation rainmakers. For many firms, an M&A strategy will be the solution to these problems. It's a necessary step: A recent CCH survey revealed that managing partners of the top 100 firms in the country spend 20% or more of their time in merger-related areas. A properly planned and implemented M&A strategy can: * Increase revenues and grow the firm at a faster pace to maintain a competitive edge within the marketplace. Organic growth alone is often insufficient to keep pace with competitors who have grown through M&A. * Obtain niche and industry experts as the marketplace moves more toward specialists and away from generalists. * Overcome succession-planning issues by merging in partners who have leadership and practice development skills. * Expand the firm's geographic market. * Improve the chances of attracting better quality staff. * Spread the cost of marketing, human resource and IT professionals over a larger base of partners. However, improperly planned and implemented mergers and acquisitions can create more problems than they solve. Some of these issues have been explored in a JofA two-part overview, Mergers & Acquisitions of CPA Firms: Understanding the Roadblocks to Successful Deals (part 1, March 2009, page 58), and Keeping It Together: Plan the Transition to Retain Staff and Clients (part 2, April 2009, page 24). …