CPA Firm Mergers & Acquisitions Face New Ethics Requirements

(New AICPA Guidance on CPA Practice Sales and Mergers)

In 2016 the AICPA (American Institute of CPAs) published some new ethics guidelines that became effective June 30th of 2017. For those CPAs intending to enter into an M&A (Mergers and Acquisitions) arrangement in 2018 and beyond, it would be beneficial to review these new requirements and strategize how these new guidelines will impact your intentions. Confidentiality Agreement

In 2018, as the baby boomer population continues to retire, Mergers and Acquisitions are expected to continue to rise in the accounting and CPA industries. With that, comes compliance with the newly revised AICPA “Code of Professional Conduct”.

The Professional Ethics Executive Committee has issued several new interpretations on the Independence Rule (ET Section 1.200.001) and the Transfer of Files & Return of Client Records in Sale, (ET Section 1.400.205 of the Acts Discreditable Rule). They also issued a revision of an earlier set of guidelines on “Disclosing Client Information in connection with an Acquisition of a member’s practice (ET Section 1.700.050 of the Confidential Client Information Rule) replacing paragraph .04 of ET Section 301.

While all the new guidelines are important to understand, the guidance is particularly tricky as it relates to rules around transfer of files in relation to a merger or acquisitions. For accounting practices that are not CPA practices, this guidance does not apply. The AICPA ethics requirements only cover their member CPAs. For CPAs, this new guidance and interpretation can have a big impact on the success of the acquisition and in turn the proceeds from the sale and your retirement.

A CPA that sells or transfers all or part of the practice to a successor and will no longer retain any ownership in the practice is strongly encouraged to execute the following items:

  • Submit a written request to each client informing them of the acquisition or merger and request consent to transfer the client’s files to the acquiring firm.
  • In addition, CPAs must notify the client that their consent may be presumed if they do not respond within 90 days.
  • No client files may be transferred unless the client has signed and returned the consent form or 90 days has passed since the written request was sent.

The new procedures are intended to protect the client’s information from being transferred without permission. However, this will cause kinks in the execution of a transition plan without adequate planning.   Historically, CPAs were not held to this standard and the degree to which notification and consent were consistently exercised was more discretionary. Many firms close in November and December. This has a lot to due with the seasonal nature of tax return deadlines and the work required prior to tax season. After an acquisition, firms transferred all the files and then began to work to pull in those clients. Those not signing consents had them signed when they came in for their next tax season. The files of those not transferring were returned to the seller if no engagement was consummated. The difficulty of this new guidance is in its practical application during a transition.

Clients do not always pay attention to requests for documents, signatures and consent. In my experience, somewhere between 50%-65% respond on average to this first request. This leaves 35% to 50% of the client base without consents. While some of these clearly have an intention to move to the new CPA, some do not. Transferring files to send out letters, updates, and organizers in preparation of the upcoming tax season cannot be completed for those not sending in consents. This is a servicing issue as sometimes clients have questions or need information from their CPA in the approach to tax season and if their CPA is no longer in business, that request cannot be satisfied. It may be perceived that the new CPA is more difficult to work with. This is especially troubling when the pressure of tax season is upon us and no organizers or client communication can be made from the new CPA until consent is received or 90 days have past.

While the new guidance does protect consumers, it also hurts them if they have not signed consent, but intend to. There are work arounds to these new rules and CPAs should rest assured that the risk in their practice sale can be mitigated through adequate planning. There are several work arounds and “best practices” that we have seen and hope to pass along to you. See below for two of them.

  • Close earlier than November or December

Closing in September would assure that you have 90 days prior to year-end. Client files can then be imported to the successor firm’s tax software and client notification can then be made with all of those in the book instead of just those signing consents.   Closing in September may be an issue if there are substantial extensions in place. Closing right in the middle of a tax deadline can have other negative effects, but this is one possible work around. Closing in July or August would eliminate the tax deadline risk and transition could begin in the slower months.

  • Consider a merger instead of an acquisition

The rule above only applies if the selling CPA member is going to retain no interest in the new firm. There is already a trend in place where there are more exiting CPAs willing to take a partial cash out on their practice, but remain on with the new firm in a lower equity position. If this structure is used to exit, these issues with client consent are removed. There are negatives to this strategy as well if the CPA wants to retire now, but at least this work around would negate the need to obtain all of these. CPAs could consider very minority positions in the new firm, cash out most of the equity and fully exit later.

There are several other work arounds as well, but the selling season for CPAs is very short. May-December with a pause in September and October best describe the CPA selling season. This 6-month time frame should be capitalized on by listing early in the season, so that ample planning can be discussed and agreed to with the successor firm. Listing at the midpoint of the season or late in the season will tie your hands with possible strategies to mitigate these new rules. A specialty CPA broker should be aware of these items and should be prepared to discuss these factors and strategies with you. If you are considering selling or merging a practice this year make sure you talk with a seasoned accounting practice specialty broker to help you mitigate these new risks. Berkshire Business Sales and Acquisitions is a local specialty broker in Arizona that has already helped both large and small firms mitigate these concerns. Call us to discuss these concerns before you take your practice to market (Ryan Gipple – 602-614-3583).

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