H&R Block CEO Russ Smyth issued a strongly worded statement warning of risks to McGladrey & Pullen after receiving a notice terminating their administrative services agreement.

M&P announced Tuesday its intention to terminate an agreement dating back to 1999 under which M&P paid Block and its RSM McGladrey subsidiary a fee to provide leased space, back-office services, payroll and other services (see McGladrey & Pullen to Divorce Block).

“We believe the path proposed by certain of M&P's leaders is fraught with significant business and financial risk and is not in the best interest of M&P partners, employees or clients,” said Smyth. “Whether the full M&P partnership is willing to assume these immense risks remains to be seen.”

M&P is a professional services partnership fully independent of H&R Block, while RSM is a wholly owned subsidiary of H&R Block. RSM provides tax and consulting services to thousands of clients across the U.S. every year. Through its contractual arrangement with M&P, attest services have also been available to such clients. Unless revoked or modified prior to that time, M&P’s notice will effectively terminate the services agreement in 210 days.

Despite the stern warning, Smyth seemed ready to move on with just RSM. Up to now, RSM and M&P have been operating in an “alternative practice structure” that benefited Block and its customers.

“Regardless of M&P’s final decision regarding its relationship with us, RSM will continue to provide the superb tax and consulting services that our clients enjoy today,” added Smyth. “We would prefer to continue working cooperatively to build better client service capabilities and to capitalize on opportunities for future mutually beneficial growth. However, if necessary, we are fully prepared to replace M&P in the overall business, and to make the necessary arrangements to assist clients transitioning their attest work.”

Block noted, however, that under the agreement, M&P has received a significant line of credit from RSM to finance its receivables and working capital, as well as office space. M&P has also received the benefit of substantial capital investments from H&R Block affiliates to assist in acquisitions of professional services firms, to develop software and other technology for attest and other practices, and to support the overall development of the business.

During the notice period, the existing agreements among the parties remain in effect. RSM has previously discussed possible modifications of the terms of the services agreement with several individual board members of M&P. RSM expects that it will continue to discuss a variety of issues pertaining to its relationship with M&P during the notice period.

In the event the notice is not withdrawn prior to becoming effective, Block said, RSM would “enforce the extensive rights it has under all agreements with M&P to the fullest possible extent, including contractual noncompetition provisions limiting the future activities of both M&P and certain individual M&P partners. However, RSM believes that the existing relationship provides a proven framework for meeting client needs, while also offering opportunities for the M&P partners and staff to participate in future growth opportunities.”

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