Navigating the M&A Minefield

Source: Journal of Accountancy

For many CPA firms, mergers and acquisitions provide solutions to a broad range of problems, from unfunded partner retirement obligations to a shortage of rainmakers in the succession pipeline. In this article, authors John F. Raspante and Joseph A. Tarasco warn firms of several potential traps that, if overlooked, can create significant problems for merging firms or even derail the transaction. They include:

• Potential restatements of financial statements audited by a predecessor firm. This can create conflict between the two firms' partners, lead to loss of the client, or even undo the deal. If the merger agreement is silent as to which firm's professional judgment prevails, the partners should consider alternatives to restatement, while being mindful of the client's needs and relevant professional standards.
• Pre-merger engagement letters. The successor firm may need to update or renegotiate a predecessor's engagement letters to avoid liability exposure. The ideal solution, though, is for firms to include “successor and assigns” language in their letters in anticipation of a future merger.
• Client confidentiality. The AICPA's Code of Professional Conduct protects the confidentiality of client information disclosed as part of the pre-merger due diligence process, but the best course is to prevent improper use of client information with a separate confidentiality agreement.
• Undisclosed “clawback” agreements or other pre-existing agreements with partners or employees. To avoid unexpected payouts, ferret out these agreements in the due diligence process.
• Partners who leave and take clients with them. To preempt this problem, execute noncompete agreements or meet with dissatisfied partners early in the merger process to negotiate fair withdrawal terms.
• Post-transaction liability for pre-transaction work. Work with your professional liability insurer to ensure that the predecessor firm's work remains covered throughout all applicable statute of limitations periods.

For the complete article, read “Traps for the Unwary in CPA Firm Mergers and Acquisitions.”

From Journal of Accountancy, American Institute of Certified Public Accountants, August 2011, http://www.journalofaccountancy.com/Issues/2011/Aug.