Ethics for CPA firm mergers and acquisitions

Obtaining clients’ permission for transfer of files is a key responsibility.
By Ken Tysiac

CPA firm mergers
Image by Otto Steininger/IKON Images

The purchase or sale of a CPA firm brings into focus a whole new set of ethical considerations for buyers and sellers, as they need to take great care to protect clients' best interests. Sellers who have built relationships with clients they may have served for many years want to make sure these clients are treated well after the transition. Buyers want to gain their new clients' trust at the start of what they hope will be a successful relationship.

The "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation in the AICPA Code of Professional Conduct (ET §1.400.205) took effect June 30, 2017. The interpretation is meant to protect clients' sensitive information as their files are transferred or returned during the sale, transfer, discontinuance, or acquisition of an AICPA member's practice. It should be no surprise that questions about this issue are common on the AICPA Ethics hotline.

Mergers and acquisitions are booming in the CPA profession because they are a popular way for firm leaders of the Baby Boom generation to move into retirement while providing a stable future for their clients and employees. Through December 2017, mergers and acquisitions involving the top 500 CPA firms totaled 154 for the year, compared with 125 for 2016, AICPA data show. And in 2015, when there were 134 mergers or acquisitions involving the top 500 firms, nearly one-third (31%) of firms with between $5 million and $10 million in yearly revenue reported that they had acquired another firm in 2015, according to the most recent AICPA Private Companies Practice Section Management of an Accounting Practice survey.

During these transactions — as well as during firm discontinuations — CPAs have a duty to make sure clients' files and information are treated ethically. The following fictional scenarios illustrate the principles CPAs are required to follow to uphold their ethical responsibilities.

SCENARIO 1

Q: Josie Smith, CPA, a sole practitioner, is retiring. A week after selling her practice to ABC CPAs, she meets for lunch with a client, the owner of Great Day Dry Cleaners. Smith explains her retirement plans and asks for permission to transfer the dry cleaner's business relationship and client files to ABC CPAs. The client says he would be happy to work with the successor Smith has chosen and tells her to go ahead and send his files to the new firm. The next day, Smith transfers the files. Has she met her ethical obligations under the "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation (ET §1.400.205)?

A: No. Item a of paragraph .01 of this interpretation requires an AICPA member or member firm to "submit a written request to each client subject to the sale or transfer, requesting the client's consent to transfer its files to the successor firm." Although Smith obtained the client's permission, she did not provide a written notice. The interpretation also encourages AICPA members to retain documentation of the client's consent, which would not be possible for Smith because she obtained verbal permission.

SCENARIO 2

Q: Diego Vega, CPA, sends written notice to all his clients that he will be retiring from his personal financial planning practice in six months. Despite his best efforts, he is unable to get in touch with one individual who has been a client of Vega's for five years. To protect the client's privacy, Vega destroys all of his records. Has Vega met his ethical obligations?

A: No. According to paragraph .02 of the "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation (ET §1.400.205), when a member is selling, transferring, or discontinuing a practice and is unable to contact a client, "client files and records not transferred should be retained in a confidential manner and in accordance with the firm's record retention policy or as required by applicable legal or regulatory requirements, whichever is longer."

SCENARIO 3

Q: Taylor Dobson, CPA, is discontinuing his individual tax preparation practice so he can go work for a medium-size company's corporate tax department. He sends letters to notify his clients but is not able to reach a person who no longer engages his services. Does he have any further ethical obligations to make sure that person is aware of his employment change?

A: No. In fact, it wasn't necessary for Dobson to attempt to contact the individual at all, since that person is no longer a client. When discontinuing a practice, the "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation says that a "member is not required to provide notification to former clients of the firm" (item a of paragraph .03 of ET §1.400.205).

SCENARIO 4

Q: Julianne Kellerson, CPA, is moving to a new area of specialty within her firm in three months. Phil Monson, who was recently promoted to partner in the same firm, is going to take over responsibility for Kellerson's clients. Does Kellerson need to inform her clients in writing that their files are being transferred to Monson?

A: No. Although it's certainly a best practice for Kellerson to introduce her clients to Monson and prepare them for a smooth transition, it's not necessary for her to notify them about any transfer of files because the clients (and files) are staying within the same firm, and ownership of the firm has not been transferred.

SCENARIO 5

Q: DEF CPAs has performed a comprehensive set of services for a client and his family restaurant chain for many years. The firm has performed numerous services for the restaurant chain as well as personal financial planning and tax preparation for the client. Now DEF is merging with A-1 CPAs, which will be able to handle most of the services that DEF performed for this client. But A-1 does not perform employee benefit plan (EBP) audits, so the client will have to find a new CPA to perform that service. Should DEF transfer this client's EBP records to A-1, or should those records be returned to the client?

A: Those records should be returned to the client. Under item b of paragraph .01 of the "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation (ET §1.400.205), a firm that is being sold, transferred, or discontinued should make arrangements to return any client records that are not subject to the sale or transfer. This pertains to any records that the member is required to provide to the client as set forth in the "Records Request" interpretation (ET §1.400.200).

SCENARIO 6

Q: Beth Alton, CPA, is selling her practice and has performed bookkeeping and tax services for many years for the owner of a fitness club franchise. She has asked this client in writing for permission to transfer the club's files to the successor firm. She is certain the client has received the request for permission. Ninety days later, the client has not replied, and Alton transfers his files to the successor firm. Has she met her ethical obligations under the "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation (ET §1.400.205)?

A: Yes. Unless prohibited by law, including but not limited to the rules and regulations of Alton's state board, she is permitted to transfer client files to the successor firm after the client's consent is obtained or after 90 days have lapsed following submission of a written request (item a of paragraph .01 of ET §1.400.205). A client's consent is presumed after 90 days if no reply is received. The "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation encourages a member to retain evidence of consent, regardless of whether it is obtained from the client or presumed after 90 days.

SCENARIO 7

Q: HIJ CPAs has acquired the EBP audit engagements for clients of another firm whose EBP audit expert retired. Within days of the purchase, the predecessor firm indicates it is ready to transfer all the relevant client files to HIJ CPAs. Before agreeing to receive the files, should HIJ's management verify that all clients of the predecessor firm have consented to the transfer?

A: Yes. According to paragraph .05 of the "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation (ET §1.400.205), a member who acquires all or part of a practice "should be satisfied that all clients of the predecessor firm subject to the acquisition have ... consented to the member's continuation of professional services and retention of any client files or records the successor firm retains."

PROTECTING THE CLIENT

The provisions of the "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice" interpretation (ET §1.400.205) are designed to protect clients while facilitating an orderly transfer of information when firms are purchased or sold. Following these rules can help CPAs act in their clients' best interests while upholding their ethical obligations under the AICPA Code of Professional Conduct.


About the author

Ken Tysiac is a JofA editorial director. To comment on this article or to suggest an idea for another article, contact him at Kenneth.Tysiac@aicpa-cima.com or 919-402-2112.


AICPA resources

Articles

Publications

  • CPA Firm Mergers & Acquisitions: How to Buy a Firm, How to Sell a Firm, and How to Make the Best Deal (#PPM1304P, paperback; #PPM1304E, ebook)
  • Planning for Firms Seeking to Grow Through Mergers and Acquisitions (#PPM1712OD, sole practitioner, online access; #PPM1713OD, two to four partners, online access; #PPM1714OD, five or more partners)

CPE self-study

  • Mergers and Acquistions: Specialized Forensic Accounting Course (#167060, online access)

For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077.

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