Block Files Suit Against McGladrey & Pullen

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H&R Block has filed suit against McGladrey & Pullen after M&P announced this week that it was terminating its administrative services agreement with the tax giant.

M&P had been operating under the agreement since 1999, which involved the leasing of office space, back-office services, technology and other services. Under the terms of the contract, M&P was supposed to have the right to end the deal at any time, with a workout period to smooth the transition for clients (see McGladrey & Pullen to Divorce Block).

Under the terms of the agreement, M&P operated under an alternative practice structure arrangement with Block subsidiary RSM McGladrey. M&P would focus on audit and attest services, while RSM provided other types of accounting and tax services. The lawsuit was filed by RSM in a Minnesota court. RSM claimed that M&P had no intention of abiding by clauses in the contract that prohibit M&P from encouraging RSM employees to resign and M&P from taking on new loans or debt.

“We are disappointed that H&R Block has chosen to pursue litigation,” said McGladrey & Pullen managing partner Dave Scudder. “We are committed to respecting our legal obligations and are confident we are doing so. Thus we are confident this lawsuit has no merit. Under the terms of our shared services agreement, we have every right to terminate that arrangement. We have chosen to do so because it is the best business decision for McGladrey & Pullen LLP in order to serve our clients in the increasingly complex business and regulatory environment.”

Block and RSM did not immediately respond to a request for comment.

Block CEO Russ Smyth issued a strongly worded statement a day after M&P announced the termination of the services agreement, warning of risks to M&P (see Block CEO Warns of Risks to McGladrey). “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,” he said. “Whether the full M&P partnership is willing to assume these immense risks remains to be seen.”

However, Scudder told WebCPA that his firm always had the right to terminate the agreement. “We’ve always had the ability to walk away,” he said. “We’ve always been an independent firm, and there’s no reason we wouldn’t retain those rights going forward.”

He explained the decision to end the agreement as a response to current conditions in the market.

“Times are very different from 1999 when we entered into this arrangement to outsource some of the administrative services to them,” he said. He described the decision as a “combination of economic conditions and the overall cost benefits of that agreement, combined with what we think is the opportunity and what’s going on in the marketplace right now.”

“Certainly [it’s] a much more complicated time for our clients, a highly regulated, complex environment for CPAs, and the structure and the services agreement that we have does cause some complexity,” he added. “So when you look at it as a combination, it’s a very simple business decision about looking forward and serving our clients.”

Now that it is facing a lawsuit, however, the firm is seeing that disentangling itself from Block and RSM is proving to be more complicated than it foresaw.

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