McGladrey & Pullen said it intends to terminate its administrative agreement with H&R Block, in which, among other things, non-audit services have been offered through Block-owned RSM McGladrey.

The Bloomington, Minn.-based firm’s audit practice is an independent, partner-owned firm, but under a 1999 agreement with Block, it has offered related professional services through RSM McGladrey, which operates in an alternative practice structure with McGladrey & Pullen.

McGladrey & Pullen anticipates that it will take at least seven months to fully unwind its relationships with both RSM McGladrey and H&R Block. The firm said it expects the process to be “seamless” to its clients.

“This arrangement made sense in 1999,” said McGladrey & Pullen managing partner Dave Scudder in a statement. “However, that operational and financial model does not serve us well as we address our future goals of client service, opportunity for our partners, and continued growth. We are taking this action because we believe it to be in the best interests of our partners, our employees and our clients. We see great opportunities for success and growth for McGladrey & Pullen as a traditionally structured firm able to provide full service across all industry segments.”

An H&R Block spokesperson said that the details were still being worked out.

A McGladrey & Pullen spokesperson noted that RSM McGladrey is an entity created by H&R Block. Under the 1999 agreement, McGladrey & Pullen paid a fee to Block for leased space, back-office services, payroll and other services, but now believes that it can get the services more cost-effectively. The arrangement also put some restrictions on the firm and on the kinds of clients it could attract. By ending the deal, M&P may be able to attract a wider array of clients. M&P had the ability to terminate the deal at any time, but Block and M&P had built in a workout period to allow a smooth transition for the entities and their clients. At this point, it is unclear how the business will be divided, but the spokesperson emphasized, “It needs to be an orderly process.”

“It will be interesting to watch it unravel,” said Allan Koltin, CEO of the Chicago consultancy PDI Global. “At the end of it, the fifth largest accounting firm in the U.S., according to Accounting Today, will be somewhat smaller but potentially very different. The tricky part will be figuring out which entity the partners and associates that were in both entities will now be part of. They have a lot of people who were active in both. They will have to divide up any common marketing, HR, technology and financial issues between the firms. Will RSM McGladrey still refer audit work to McGladrey & Pullen, and will McGladrey & Pullen still refer tax and consulting work to RSM McGladrey? If that holds and they still refer business, much like we’ve seen with the Big Four firms when they spun off their consulting businesses about a decade ago, the change won’t be that dramatic. That will decide the landscape.”

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