Managing Liability Risk after a Merger or Acquisition
A CPA firm owner may find himself or herself ready to retire and in need of a suitor to take over the client portfolio. A firm wishing to expand into a new geographic market or delve into a niche area of practice may seek to acquire another firm to help it get a head start. Regardless of the reason, CPA firm merger-and-acquisition activity is on the rise. A good amount of analysis and diligence is generally performed by both sides in arriving at the decision to enter into a transaction. With the amount of effort that is often expended before the closing date, one might think a sigh of relief is warranted when the deal is finally closed. Think again. The real work begins the day after closing with the start of the integration process. Not only is effort required to reap the financial benefits of a transaction, but effort is also required to manage the professional liability risks of the new firm, which, depending on the size of the transaction, may have grown exponentially overnight. Just as a client that has significantly changed its size or operating model is considered to be a higher-risk client, the same is true for a CPA firm that has completed a merger or acquisition. Failure to integrate the operations, culture, and quality control into a single cohesive unit after a merger or acquisition can pose increased professional liability risk. Heeding the following three lessons will help CPA firms manage professional liability risks stemming from integration issues. These lessons can be applied to any size or type of transaction--from an acquisition of another firm's client portfolio or niche practice to a merger of equal-size firms. LESSON 1: CAREFULLY SELECT CONTINUING CLIENTS AND ENGAGEMENTS When a CPA firm completes a merger or an acquisition, hundreds or even thousands of new clients and engagements are accepted instantaneously. While some evaluation of the acquired firm's client portfolio was likely performed during the due-diligence process, the analysis may not have been deep enough. After the transaction, the acquired portfolio of clients should be further screened through the filter of the acquiring firm's acceptance process. As part of this analysis, ask questions such as: * How does this new client compare to the firm's "ideal" client profile? Would the firm have accepted the client absent the transaction? * Are the services provided to the new client consistent with the combined firm's business strategy and risk appetite? * Do any potential or actual conflicts of interest or threats to independence exist? * If the new client presents risks to the firm, can the firm adequately manage these risks? * Does the firm have the knowledge and experience to serve the new client competently? If the answer to any of these questions is "no," the firm should decline to provide services to the client and send a termination letter memorializing this decision and directing the client to find another CPA firm. While this decision may result in hurt feelings or even anger at the loss of a client, client relationships are owned by the firm, not a single partner. While maintaining client relationships is important, managing the firm's professional liability risk is paramount. If the firm is not in a position to review acquired clients individually, consider starting with higher-risk clients, such as clients with collection issues or going concern issues, or high-net-worth individuals or families, and perform a detailed client continuance review. LESSON 2: OVERSEE ALL PERSONNEL, REGARDLESS OF LEVEL Failure to exercise appropriate oversight, supervision, and control of the work and personnel after the consummation of a merger or acquisition can result in significant liability exposure. CPA firms that have acquired a firm in a new geographic location may question how they can properly oversee the activities of the new location without stepping on toes. …