The partners at McGladrey & Pullen ended
a five-month legal imbroglio and voted to accept a revised services agreement that would
re-unite them with H&R Block subsidiary
RSM McGladrey, ending a litigious struggle
that began in July when M&P voted to terminate a 10-year services agreement between
the two firms.
McGladrey & Pullen’s audit practice is an
independent, partner-owned firm, but under
a 1999 pact with Block, related professional
services have been offered through RSM,
which operates in an alternative practice
structure with McGladrey. M&P focused on
audit and attest services, while RSM provided
various types of accounting and tax services.
Under that pact, RSM had provided accounting, payroll, marketing and other administrative services to M&P in return for a management fee.
However, after M&P elected to terminate
the agreement in July, RSM filed suit and
Block subsequently moved to terminate the
agreement in September. The two firms went
M&P partners vote to go back to RSM
BY MICHAEL COHN
through mediation and subsequent arbitration proceedings.
An arbitration ruling, which was handed
down in late November, favored H&R Block
and RSM, enforcing the restrictive labor covenants involving employees of the two firms.
In a December earnings call with analysts,
H&R Block president and chief executive officer Russ Smyth spoke about the pending
resolution of the dispute after the company
announced that the arbitration ruling had
been handed down and that the two firms
were continuing negotiations on changes to
the current arrangements that would allow
the collaboration to continue.
Last month, roughly 650 McGladrey partners met in Orlando, Fla., and subsequently
voted to approve the agreement after the M&P
board, including managing partner Dave
Scudder, had earlier approved the deal.
The revised agreement will change the eco-
nomics of the revenue split slightly, favoring
RSM partners, according to Allan Koltin, CEO
of PDI Global, a Chicago-based consultancy
to the profession, which had worked closely
with both firms. Instead of keeping 65 percent
of the profits, the RSM partners will now keep
67 percent of the profits, with the other 33
percent going to H&R Block. There may also
be some additional capital requirements for
the partners of M&P.
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In a case that carries the potential to reshape
the regulatory landscape of the accounting profession, the U.S. Supreme Court last
month heard oral arguments in a lawsuit
challenging the constitutionality of the Public Company Accounting Oversight Board
— with several justices appearing to take the
plaintiffs’ side in the case.
The case, Free Enterprise Fund v. Public
Company Accounting Oversight Board, was
brought on behalf of a small Nevada accounting firm, Beckstead & Watts, which challenged the constitutionality of the law after
objecting to the PCAOB’s inspection findings
on a number of its audit reports.
The Free Enterprise Fund, a conservative
group opposed to government regulation,
had lost the case before both a district judge
and an appeals court. But if it wins before
the Supreme Court, the ruling could have
wide-ranging implications not only for the
PCAOB and its oversight of public accounting
firms, but also for the law that established the
board: the Sarbanes-Oxley Act of 2002.
The plaintiffs argued that the PCAOB violates the separation-of-powers principles in
Supreme Court takes up the fate of the PCAOB
the Constitution because the PCAOB’s members are appointed by the Securities and Exchange Commission, and not directly by the
president, and they cannot be fired except for
cause. Several justices indicated some sympathy for that viewpoint in their questions.
The court is expected to render its decision
“As a practical matter, does the president
have any ability to control what the board
does?” asked Justice Samuel Alito.
Justice Antonin Scalia also remarked on
the limitation on the powers of the president
with respect to the SEC and the PCAOB. “He
cannot remove the commissioners, and it’s
the commissioners that govern the board,
not the chairman,” he said.
Chief Justice John Roberts wondered if Sarbanes-Oxley went too far in establishing the
independence of the PCAOB, “because you’ve
got to rely on the SEC to get to the board.” He
appeared to question how much authority
the SEC actually has over the board.
“The board can act, and the SEC can, I sup-
pose, retroactively veto their actions,” he said.
“But the SEC doesn’t propose what actions
the board takes, actions that can have sig-
nificant, devastating consequences for the
However, Justice Ruth Bader Ginsburg
seemed sympathetic to the PCAOB’s case,
noting, “The SEC is set up like the [Federal
Communications Commission], the other
independent regulatory commissions, but
this is a board that has a relationship with the
SEC, where it can’t do anything that doesn’t
have the SEC’s approval.”
Justice Sonia Sotomayor also seemed skep-
tical of the Free Enterprise Fund attorney’s
arguments. “Let’s break down each part of
your argument, please,” she said. “You are
suggesting that Congress doesn’t have the
power to determine that a particular princi-
pal or agent of the government doesn’t have
The swing vote may be Justice Anthony
Kennedy. His former clerk, Brett Kavana-
ugh, is now a judge on the appeals court that
heard the case last year and ruled in favor of
the oversight board. However, Kavanaugh
sided with the Free Enterprise Fund in a dis-
senting opinion. AT
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