McGladrey & Pullen recently announced its intention to terminate its administrative services agreement with H&R Block.

M&P had been functioning under the agreement since 1999, allowing the CPA firm to operate in an alternative practice structure with Block subsidiary RSM McGladrey (see McGladrey & Pullen to Divorce Block).

Block provided services such as back-office services and the leasing of office space, while M&P provided audit and attest services for Block and RSM clients. In response to the termination of the agreement, Block CEO Russ Smyth warmed of risks to the firm (see Block CEO Warns of Risks to McGladrey). Within days, Block’s wholly owned subsidiary RSM McGladrey filed suit against M&P accusing the firm of violating non-compete clauses in their contract (see Block Files Suit Against McGladrey & Pullen).

Dave Scudder has been with M&P since 1986 and has been a partner since 1995. He was appointed the audit and assurance services practice leader of the firm’s Great Lakes practice in 1998 and was elected to the M&P board of directors in 2005. Scudder became managing partner of the firm in January 2007 and works out of the Chicago office. He is a CPA and holds public accounting licenses in Illinois and Georgia. Scudder talked with WebCPA shortly before learning about the lawsuit.

Why did you decide to terminate the services agreement with Block?

There were a number of reasons, but I would say it was simply just a business decision. It’s going to be in the interests of our clients going forward. Times are very different from 1999 when we entered into this arrangement to outsource some of the administrative services to them — the 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. So when you look at it as a combination, it becomes just a very simple business decision about looking forward and serving our clients.

What sorts of services did they involve?

It’s just what it sounds like. It’s administrative services, and includes some back-office things. We lease space, we utilize some administrative services, technology, tools, certain things like that, and for that we pay an administrative fee, but with conditions as it sits today, and with our size and reach, essentially we feel like we can get those services much more cost effectively elsewhere. It’s a great time to be building infrastructure. It’s a very cost-effective way to do that, so it’s a matter of being a little bit more efficient on that side so we can help our people and our clients.

What’s your reaction to the statement by H&R Block CEO Russ Smyth warning about the risks to McGladrey if you pulled out of the agreement?

You know, McGladrey & Pullen has always been a 100 percent-owned CPA firm, fully independent and fully controlled by our partners, so we know our clients very well and we know our people very well. Frankly they’re our clients and our people, so this is not a risk. As a matter of fact, it’s a benefit. It’s done for the purpose of our clients so we can serve them better. It’s quite the opposite of that.

Do you have another partner in mind already that would provide the back-office services that Block had been providing?

We have a very long transition period that’s well documented. This was all contemplated from the very outset of the arrangement, that we would have a very long period to transition, to be very seamless to our clients, and during that period, which will take at least seven months, it will be very much at our discretion to go for the most cost-effective approaches. So we have many, many options for that.

How would you describe your firm’s relationship with Block and RSM over the years?

I think when we entered into the transaction, it was for business reasons that existed back then, so I’m certainly not critical of our decisions to have done that. It’s just really about looking forward and trying to make sure we’re positioned to serve our clients under today’s conditions and in the future.

Was there any particular tension underlying your decision to terminate the agreement? Had you been having problems with them?

Really it’s about looking forward, it’s a culmination of factors. Really it’s just a simple accumulation of situations, as we look at the economic conditions, the complexity of the environment that we operate in, and our own resources and capabilities. It just becomes the best decision for us going forward. The best thing for us is to focus our attention and build infrastructure around our clients and CPA-driven services, so it’s just simplicity and efficiency and focus on looking forward.

Do you expect there to be much legal action resulting from this?

It’s always hard to contemplate those things. I certainly hope not. We’ve always had the ability to walk away. That’s part of it. We’ve always been an independent firm, and there’s no reason we wouldn’t retain those rights going forward. I don’t anticipate anything of any difficulty.

[After receiving word shortly after this interview of a lawsuit filed by Block's wholly owned subsidiary RSM McGladrey, Scudder released the following statement: "We are disappointed that H&R Block has chosen to pursue litigation. 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."]

Looking at the accounting profession more broadly, do you see more opportunities now for your firm to pursue other kinds of clients and business?

There are restrictions that we operate under. The independence requirements that the alternative practice structure resulted in, there were some restrictions on us because of the relationship, so we’ll be free to expand our capabilities into areas where we had independence problems in the past. Other than that, it’s a full-service CPA firm. That’s what we intend to be, that’s what we are, and what we will continue and do even more of in the future.

So you’ll be providing more tax services and things like that?

All full-service CPA firms’ services, just what you’d expect a CPA firm to provide.

As the economy shows some signs of recovering, do you see more opportunities for accounting firms to provide services?

I think if we focus on our middle-market clients and turn our infrastructure attention and our investments towards things that make sense for our clients, I think it’s a tremendous economic environment for us. Certainly the complexity and the regulations and the standards are not going to simplify anytime soon, so that will create opportunities for us and we need to be positioned to take advantage of those, and that’s a big part of this.

Anything else you can tell us about your plans going forward?

It really is simple. It may not seem simple. It should be pretty seamless to our clients. We don’t anticipate any disruptions along the way.

Are you going to expand geographically?

We always look to do that, certainly maintain our geographic reach where it is now and continue to invest in things that continue to make sense as we go forward. There could be some geographic expansion. Certainly areas like international are very worthy of continued investments, but I don’t know if that is going to change our physical presence as much as just our depth.

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