United States: Accountants M&A Alert: New AICPA Guidance On Transfer Of Client Files

Last Updated: October 30 2016
Article by Peter J. Larkin

If you are selling or acquiring an accounting practice, you need to read the AICPA's new guidance "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice," which clarifies the obligations of the selling and the acquiring parties and explains how to deal with clients that do not respond to the notification of the transaction.

Accounting firm mergers and acquisitions have been hot for quite some time, leading to a wealth of public information concerning the important "do's and don'ts" in this arena. While most participants have been attentive to their professional and ethical responsibilities while pursuing these transactions, there has been a certain lack of uniformity in how some of these issues have been handled, leading to concern by some that there was not enough authoritative guidance in this area.

In summer 2016, the AICPA continued to fill this perceived void through the addition of a new interpretation and revision of another interpretation in the AICPA's Code of Professional Conduct, and offering some new answers in the Frequently Asked Questions: General Ethics Questions, as of August 2016 (the August 2016 FAQs).

New and Revised Interpretations

Section 1.700.001 of the Code of Professional Conduct mandates that members shall not disclose any confidential client information unless the client consents to disclosure. There are certain exceptions to this mandate, including review of client information in connection with a prospective purchase and the sale or merger of a practice (i.e., due diligence), provided safeguards such as a written confidentiality agreement are put in place (see Code of Professional Conduct § 1.700.050).

Section 1.400.200 of the Code of Professional Conduct requires that members provide and/or return certain records upon request. Although compliance with this rule can sometimes be nuanced, section 1.400.200 generally provides that "client-provided records," "member-prepared documents" and final work product must be provided, but not working papers. Failure to provide and/or return the appropriate records within 45 days of a client's request is considered a discreditable act under the Code of Professional Conduct.

New Section 1.400.205

A new interpretation of the "Acts Discreditable Rule" has been added as section 1.400.205, entitled "Transfer of Files and Return of Client Records in Sale, Transfer, Discontinuance or Acquisition of a Practice." In connection with the sale or transfer of a practice, the selling firm should submit a written request to each client subject to the sale or transfer requesting consent to transfer its files to the successor firm and, importantly, it should "notify the client that its consent may be presumed if it does not respond to the member's request within a period of not less than 90 days," unless such a provision is prohibited by applicable state law. With respect to files not subject to the sale or transfer, the selling firm should make arrangements to return to the client all records that should be provided in response to a client request under section 1.400.200. To the extent the selling firm cannot contact a client whose records are not being transferred, the selling firm should retain those records pursuant to the most restrictive policy or regulation that is applicable to the records.

FAQs: General Ethics Questions

The August 2016 FAQs elaborate that the notice to the clients can be provided by email, provided that electronic communication would not violate any applicable privacy laws, and that the transfer of files to another partner within a firm after a partner leaves the firm does not trigger the notice requirements of section 1.400.205.

The successor firm that acquires the transferred client records must satisfy itself that the predecessor firm has complied with section 1.400.205 or it faces being charged with a discreditable act (see also, Code of Professional Conduct § 1.700.050.03). Section 1.700.050, noted above in connection with due diligence review, also was revised to make it clear that the firm acquiring the practice must treat the transferred files as confidential and cannot disclose any of the information contained in those files.

If you are considering the sale, acquisition or merger of a practice, make sure you know the applicable ethical rules and do not focus only on the financial aspects of the transaction. As set forth above, new guidance continues to be promulgated. While most of the rules are intuitive, the new 90-day presumed consent provision in section 1.400.205 is not nearly as obvious. Additionally, state laws and regulations also may apply and must be considered. Accordingly, you should strongly consider retaining counsel knowledgeable about not only the structuring of a transaction but also the important considerations that are unique to transactions involving accounting practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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