Accounting Today - January/February 2010

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
WASHINGTON, D.C.

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 by mid-2010.

“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
regulated bodies.”
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
certain responsibilities?”
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