Apples + Oranges = Risks in nontraditional acquisitions.

Author:Rood, Deborah K.
 
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CPA firms looking for growth often seek it from the acquisition of other firms or practices or by recruiting individual "rainmakers." However, more recent acquisitions are trending toward firms providing alternative services delivered by non-CPAs, rather than traditional audit or tax. Any acquisition by a CPA firm involves professional liability risk, but there are special considerations to identify and address with nontraditional acquisitions. Navigating through the acquisition, onboarding, and integration of nontraditional professionals can be tricky.

Consider one firm that acquired an IT consulting practice to help implement machine-learning capabilities for its client accounting services (CAS) practice and delivery of IT consulting services to the firm's clients.

Unfortunately, the machine-learning process implemented by the IT practice regularly misclassified nondeductible expenses as deductible. This error was detected when the IRS audited one of the firm's CAS clients. The firm's investigation identified the root cause of the error and the impact to more than 100 CAS clients. The CPA firm eventually lost many of these clients and faced claims for penalties, interest, and costs to amend the clients' tax returns.

What went wrong? To start, the IT practice was not integrated with the CPA firm, and this resulted in a lack of communication between the IT, tax, and CAS practices. Consequently, the scope and objective of the machine-learning project was not clearly understood by all parties. Additionally, because the CAS and tax practice did not fully understand the complexity of the IT team's work, it did not fully review or test the accuracy of the output, instead assuming it was correct. In the end, the CPA firm learned an expensive lesson on how not to work with nontraditional professionals.

As client needs and demands have become increasingly complex, CPA firms have evolved to meet these needs and will continue to do so. Whether it's IT, data privacy, human resources, or something else, the trend to acquire expertise in nontraditional practice areas is not going away and neither is the related professional liability risk. Just like apples and oranges, while CPA and non-CPA professionals are similar, the differences present unique risks, warranting a different approach to risk management, as explained in the following tips.

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Skills and experience

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