Covering Your Bases: Responsibilities to Clients When a CPA Firm Is Merging or Acquired.

• Author: Dellinger, Arthur J. "Kip", Jr.
• Position: Professionalissues

it's not news to CPAS and their firms that the profession began undergoing an enormous consolidation a few years ago, which is expected to accelerate over the next several years. This is a result of many factors: retirement planning, monetizing of client values, staggering advances in technology, market share and services expansion, among many other reasons.

The consolidation typically takes the form of mergers and acquisitions and sometimes a combination of both. And it involves not only very large firms merging--or bringing in firms of significant size in a local or regional market--but also includes local firms and even sole practitioners combining or acquiring practices of retiring practitioners.

When a proposed merger or acquisition is undertaken, questions arise about the professional obligations and responsibilities of the target firm, including any required communication pertaining to its clients' confidential information and the transfer of client files to the successor entity.

Professional Standards

Two provisions of the AICPA's Code of Professional Conduct address merger and acquisition issues.

The first and most significant provision is ET Sec. 1.400.205, Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice, and additionally interpreted in Frequently Asked Questions: General Ethics (us.aicpa.org/interestareas/professionalethics/resources/tools/downloadabledocuments/ethics-general-faqs.pdf, updated March 18).

ET Sec. 1.400.205 provides that when a CPA's practice is sold or transferred to another firm and the seller/transferor will no longer retain an ownership in the successor practice, each client must receive a written request for consent to transfer its files to the successor firm. The notification may state if a negative response is not provided within 90 days, permission will be assumed by the successor to transfer the files.

Moreover, the files should not be transferred until client permission is obtained or the 90-day period expires. Additionally, the acquiring firm is equally responsible for compliance with these requirements. However, there are conflicting requirements discussed below when tax information will be transferred in a sale of a practice.

Equity vs. Non-Equity Transferors

The Frequendy Asked Questions addressing "Transfer of client files in a merger" clarify that if a target CPA firm's owner(s) become equity partners, the client notice requirements do...