Handling M&A Due Diligence Meetings

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#1
TaxLoco  
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I have an international corporate client that is currently undergoing an internal due diligence audit by a large public accounting firm in the hopes of being acquired. I prepared their US subsidiary corporate tax return last year and supported them with quarterly return estimates.

To support their review, I provided fresh copies of the firm's tax return and provided them the client information provided to me used to prepare it. They responded by asking for all of my internal workpapers, transfer pricing testing and virtually everything we have associated with the return. The diligence team is also insisting I attend a two hour meeting with all 30 staff working on the review with the client.

I have not provided anymore documents and frankly am pretty uncomfortable with their request and the insistence of the meeting. This is especially true since it has come to my attention through this process that the client's US accounting/books/records may have issues. Have any of you folks dealt with this before? Any thoughts on how to handle?
 

#2
sjrcpa  
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1. You need client's permission to provide this info.
2. You get the accounting firm to sign a hold harmless letter.
 

#3
TaxLoco  
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Thanks, sjrcpa. Yes the client wants to me to provide all information I have. I am the one who is not comfortable with providing workpapers and do not plan to provide anything else. I am worried about liability in the event there is an issue with the return due to information provided to us OR in the event we did not think to request certain information b/c of how the books were presented.

In regards to the Hold harmless letter, how would a hold harmless letter help me with the 3rd party accounting firm if I am not engaged with them. Wouldn't I need this from the client? Our engagement letter includes indemnity language for situations outside of IRS/state tax filings, if thats what you mean.

I have never encountered a situation where this level of information and the need for a meeting is requested. Usually I provide the tax returns and maybe have a short meeting the client and possibly the DD firm, and thats it.
 

#4
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What's worst case scenario?
You were engaged to file a tax return, right? That doesn't entail an audit of the client, which is what this M&A firm is, essentially, doing. If they uncover something, then you'll either fix it or address it appropriately.
You have all the appropriate authorizations to share information as candidly as possible.
Are you afraid they'll find something you didn't think of? Maybe they will. That's their job. Your discomfort with having someone look at your work doesn't create any legal liability. I'm, of course, assuming your original engagement letter laid all this out (you relied upon client's records and representations, etc.).
~Captcook
 

#5
JAD  
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You have concerns, so you could touch base with your liability insurance carrier and make sure that these processes are normal.
 

#6
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CaptCook wrote:What's worst case scenario?
You were engaged to file a tax return, right? That doesn't entail an audit of the client, which is what this M&A firm is, essentially, doing. If they uncover something, then you'll either fix it or address it appropriately.
You have all the appropriate authorizations to share information as candidly as possible.
Are you afraid they'll find something you didn't think of? Maybe they will. That's their job. Your discomfort with having someone look at your work doesn't create any legal liability. I'm, of course, assuming your original engagement letter laid all this out (you relied upon client's records and representations, etc.).


Agreed. Ive done this 2-3 times. Handed off a client to to a larger CPA firm due to a merger, growth etc.

I follow solid tax prep principles but they will ask for things that you may not have done. As long as your work is solid, supported by a GL, basic WPs, FA schedules, perhaps some reconciliations. You’ll be fine.

I’d send my client an engagement letter and get a retainer for 10 hours.

Bad scenario I have seen is the new CPA firm has a materiality threshold different than yours and may nit pick depreciation, 263A etc.
 

#7
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I've done a lot of these. The buyer just wants to know what they are buying, how much money the company makes, and what the potential legal liability is. They typically aren't concerned if your tax return is 100% correct. They are not the IRS. They will create their own EBITDA financials and use that to determine the value for the buyer.

Most of these I have done have resulted in a lot of fees for our firm. Typically the client is getting a big check after the sale so they are more than happy to pay you. Just make sure you have a good engagement letter to protect yourself.
 


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