Managing Risk in a CPA Firm Merger or Acquisition
More and more CPA firms are up for grabs as Baby Boomers hang up their calculators for good. Merger-and-acquisition activity is high, and this trend is expected to persist. According to the 2012 biannual survey on succession planning conducted by the AICPA Private Companies Practice Section, almost half of multiowner firms had actively discussed mergers, acquisitions, and sales or planned to do so over the next 24 months. The motivations for this activity include revenue growth, expansion into new markets, talent acquisition, and the addition of niche services. Firm leaders weigh many considerations during the due-diligence, negotiation, and integration phases of a successful merger or acquisition. One of the most important considerations is the professional liability risk that can arise from combining with another firm. This column identifies those risks and recommends how to address them. DUE DILIGENCE ON TARGET FIRM Evaluate Skills and Experience Risks: Professional liability claims often arise from niche services, such as family office and personal financial planning, delivered by personnel of the acquired firm. In many cases, principals of the surviving firm aren't supervising the activities and lack awareness of shortfalls in the skills of acquired personnel performing these services. Recommendations: Evaluate credentials of the target firm's personnel. Verify relevant experience, educational backgrounds, required licenses, and professional designations. Inquire about regulatory or disciplinary investigation history. Check state accountancy boards and professional associations to verify good standing. Consider costs associated with the extra resources needed to support this niche practice, including training that would enable your existing personnel to supervise these services during the integration phase. Assess Quality Control Risks: Professional liability claims are more likely if a target firm does not value quality controls. Surviving firms that do not identify quality-control issues of a target firm will miss opportunities to mitigate this risk. Effective quality-control mechanisms are especially important in the early years following an acquisition. The larger the gap in value placed on quality control between your firm and the target, the greater the challenge during the integration period. Recommendations: Read the most recent peer review report. Request a copy of the quality-control manuals. Find out how the target firm's principals monitor quality control. Focus on policies related to engagement letters, engagement assignments, documentation standards, and supervision and review requirements. Assess adherence to established policies through an inspection of a sample of workpapers. Determine if identified deficiencies in quality control can be managed through the integration process. Recognize a red flag if the firm has little to no quality control or if target principals operate with a high level of autonomy. Inquire About Client and Engagement Acceptance and Continuance Policies Risks: While client and engagement acceptance and continuance is a subset of quality control, it is a critical issue requiring its own careful scrutiny during due diligence. Claims often arise from acquired high-risk clients of target firms where the risk was not properly identified and managed. Recommendations: Examine the target firm's existing client and engagement acceptance and continuance policies and procedures as well as its client list. Determine the adequacy of these policies and the target's compliance with them. Identify clients and engagements where risk can be managed through heightened supervision or other mitigating controls. If a client poses too great a risk, the relationship with that client may need to be terminated. Evaluate Claim Experience Risks: The professional liability claim experience of the target firm should be considered from the perspectives of firm culture, practice management, and quality control. …