Succession and practice continuation agreements

In late March, a 44-year-old CPA-triathlete was getting ready for a morning run before a busy day at work. While getting dressed, he suddenly had a massive stroke. His wife was able to call an ambulance and get help quickly, but the CPA was in a coma for a week and hospitalized for several months thereafter.

The CPA was a sole practitioner, and the April 15 tax deadline was approaching. His wife, who had no prior experience with his business, was thrust into having to address the impending deadline, all while juggling her career, their three children, his care, and her feelings and emotions.

She frantically searched her husband’s records, looking for someone who might be able to assist his clients, as she knew he would not want to leave them in a lurch. Even though she eventually found help, the process took an unnecessary and perhaps avoidable emotional toll on everyone.

Unfortunately, this is not an uncommon situation. The AICPA Professional Liability Insurance Program regularly hears from spouses and children who are left to fumble their way through their loved one’s business and client needs while processing their own grief.

How can you avoid putting your spouse, child, other family member, or friend in this position? Entering into a practice continuation agreement (PCA) with another CPA to help you plan and prepare for the unimaginable.

WHAT IS A PRACTICE CONTINUATION AGREEMENT?

A PCA provides for your practice to be assumed by another firm or individual in the event of your death or permanent or temporary disability. It details who, how, and when another CPA will step in to assist should the need arise. The purpose of a PCA is to decrease the likelihood of a significant break in the client service, and, depending on the size of the firm, assure staff of continued employment.

Unfortunately, according to the 2020 AICPA CPA Firm Succession Planning Survey, only 6% of sole/solo practitioners report having a PCA. On a slightly brighter note, 47% of survey respondents understood the need for a PCA but didn’t know how to get started.

HOW TO GET STARTED

Analyze your practice and its value

Understanding your practice can help identify what type of PCA is appropriate. Perhaps you want to partner with another sole practitioner and you both agree to be the successor for the other. Perhaps you and several other CPA firms agree to act as successors for the group, asking clients to select a new CPA from among the surviving members. It is important to understand the benefits and risks of each type of PCA and to select the one most appropriate for your practice.

Reviewing your practice can also help to assess its value, as compensation is a typical element of a PCA. Armed with this information, you can then identify potential successors.

Identifying candidates

Next, identify a successor that will help your clients if necessary. What is the potential successor’s client service philosophy? Management style? How much will clients and staff need to adjust, or will the transition be more seamless? Will the potential successor’s professional experience support your client’s needs?

In most PCAs, the purchase price is based upon clients retained by the successor. As a result, it is important that the successor have the capacity and expertise to retain and continue serving your clients.

How to identify potential successors? Consider other firms you know from professional associations, conferences, and volunteer activities. What about current or former employees? Your state CPA society may be able to identify potential successors as well.

Constructing the agreement

The PCA should address the assumption of your practice for both temporary and permanent situations, including triggering events. Consult with an attorney familiar with PCAs to help draft the agreement. Like any good plan, it is recommended that the PCA be reviewed periodically to ensure the plan is ready for action when necessary. From a professional liability perspective, the following items should be addressed in the PCA:

Workpapers: Your firm’s workpapers are needed to support previously delivered services and to allow the successor to continue to efficiently serve clients. Address how a copy of your firm’s records will be transferred to the successor in the PCA. Note that your original records should be retained and maintained by your estate in accordance with your record retention policy. Finally, if tax information for individual tax clients will be shared with the successor, the next of kin should obtain client consent that meets the requirements of Internal Revenue Code Sec. 7216 before information is transferred to the successor. AICPA members can obtain sample consent forms found here.

Client notification: How clients will be informed of the event triggering the PCA should be addressed. Consider making clients aware of the PCA’s existence so they understand there will not be a service disruption if something happens to you.

Professional liability insurance: Most professional liability insurance policies are issued on a “claims made” basis, meaning that a policy must be in effect at the time a claim is made for coverage to exist. In the event of temporary disability, the PCA should address the responsibility for continuing to maintain your professional liability insurance policy.

In the event of death or permanent disability and the assumption of your practice by the successor, an extended claim reporting period (ECRP) policy, commonly known as a “tail,” should be purchased. An ECRP policy extends the reporting period of time for claim reporting following the policy expiration date, so coverage is available for future claims that are made against you during the applicable ECRP due to an act or omission that happened prior to the end of the policy period and is otherwise covered by the professional liability policy. Instruct your next of kin to contact your professional liability agent or broker regarding this coverage.

COMMUNICATION TO NEXT OF KIN

After the PCA is finalized, communicate it to your next of kin so they are prepared. Consider creating an instruction sheet that includes key dates and deadlines; contact information of important people and entities, such as your attorney and professional liability agent or broker; and the location of the PCA and other important documents for your firm.

WHAT IS THE RELATIONSHIP TO PROFESSIONAL LIABILITY?

While a PCA makes good business sense, it also helps manage professional liability risk. When a CPA is unexpectedly unable to fulfill his or her client responsibilities, and the next of kin does not know how to proceed, problems may arise such as:

• Missed filing deadlines, which may result in a professional liability claim;
• Mishandling of confidential client information, leading to a data security incident requiring client notification;
• Transitioning all records to clients or another CPA, making them unavailable to help defend a future professional liability claim; or
• Not purchasing a tail policy, which may expose next of kin to an uncovered professional liability claim.

More important than ensuring client service, or mitigating professional liability risk, a PCA can give you peace of mind knowing that, while you cannot control the future, you can help make the inevitable bump in the road smoother for your loved ones.

PCPS member resource

PCPS members have access to Practice Continuation Agreements: A Practice Survival Kit, which provides a comprehensive description of the practice continuation process.

Sarah Beckett Ference, CPA, is a risk control director at CNA. Deborah K. Rood, CPA, is a risk control consulting director at CNA. For more information about this article, contact specialtyriskcontrol@cna.com.

Continental Casualty Company, one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.

This article provides information, rather than advice or opinion. It is accurate to the best of the authors’ knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice.