Accounting
Tech integration after a merger both an art and science says firm leaders.
The process of merging one accounting practice into another, larger firm will always raise questions, not the least of which is how, and to what degree, they will integrate their technology. This, in turn, raises a host of other questions for both acquirer and acquiree — and no matter how they decide to answer these questions, though, working through them is always a process.
Firms with significant experience in M&A will point to a range of issues that need to be addressed during integration, but the most common are these:
- Data management;
- Cybersecurity;
- IT culture; and,
- Timing and cost.
Data conversions a challenge
One of the biggest challenges is data management, something that often comes up in the acquisition process. Scott MacChesney, vice president of integration for Top 25 Firm Citrin Cooperman, said it’s important to extract client data to ensure a smooth transition.
“The firms we bring in tend to have inconsistent client data systems or no [client relations manager] at all, or the way they manage client data is partially manual and partially through email,” he said, adding that this is so important because “that is one of the key things to make sure we can still service clients well on Day 1 and employees can still understand and see reports on their clients on Day 1,” he said.
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Beyond just extracting the data itself is converting it to the firm’s standards, which V. Allen Smith — chief information officer for Top 10 Firm Baker Tilly— said goes past just file formats and into basic definitions, which he said are not as simple as they seem.
“How do you define a client? How do you define a project? How do you define an engagement? … If you’re serving a multinational [for instance], is each legal entity a client, or do you have a parent-child client relationship? What systems generate the unique client ID? Is it your audit system, your assurance system, your tax system, your practice management system? It’s all about coming up with those definitions. Based on that, the 0s and 1s take care of themselves,” he said.
Firms handle this through both automated and manual processes. Mike Giuli, chief information officer at Top 25 Firm Cherry Bekaert, said their firm uses spreadsheet-based templates for determining key pieces of information that they send to the other firm to fill out. While these have been used effectively for years, he noted that there is a certain granularity that can be lost in the process, which is why they are also developing what he called an “ingestion engine” that can take in raw data for processing.
“So now what we’re doing is we’re building [in] our data lake a landing pad so we can bring in the raw data and do the transformation on our side versus through spreadsheets. … Over the last year we’ve identified the need for this and so we’re trying to create an easier automated and repeatable way that will maximize the time and productivity [improvements] for the firm,” he said.
John Roman, chief information officer of Top 50 Firm The Bonadio Group, said his firm employs a combination of both manual and automated processes to input and process the necessary data. He noted that it’s important that everyone be on the same systems, whether that’s practice management systems, tax prep systems, or even email systems. “Massaging” all this data to fit with their own platforms tends to be a time-consuming task.
“We use a combination of internal resources as well as our software providers that we use to help us. A good majority of the times we are using specific software scripts that take the data and format it in a way that can get into our systems. That is the automated part. The manual part, though, is someone still needs to validate the data [to check if it was] converted correctly,” he said.
Roman noted, though, that much of this process begins with a questionnaire that helps them understand what data even needs to be migrated in the first place. And sometimes firms tell them they only need the old data for historical purposes and that they’ll enter data into Bonadio’s systems from that day on.
Cybersecurity and governance
Cybersecurity is another major part of the mergers and acquisitions process. Different firms can have different levels of risk tolerance, which informs their individual policies and programs. But while the particulars may vary, acquiring firms generally expect the merged-in firm to adhere to their own cybersecurity standards and procedures.
“On Day 1, everyone adheres to our information security policies and procedures. We have certain standards in place that protect both client and employee data and before we bring data in from our merged-in firms, we make sure it is fully scanned and malware free. And we have certain technology controls in place that the merged-in firm would need to follow,” said Roman from Bonadio. “It is never, ‘Well, you can keep doing your own thing from an infosec perspective’ — they have to use our procedure and technical controls.”
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MacChesney from Citrin Cooperman said they assess cybersecurity risks for incoming firms the same way they assess it for new clients, noting, “We don’t cut corners, we really implement the playbook.” While he suggested that cybersecurity alignment is more of an ongoing conversation, there is still the general expectation that the incoming firm will adhere to certain expectations and policies.
“The changes are more about communicating to the income firm what the expectations in our environment are, and what the needs of our firm are, to be comfortable with the transaction. That is what it really comes down to, [cutting down on] surprises after we close. We communicate as early and as often as possible,” he said.
Similarly, while Baker Tilly’s Smith said it’s more about having a conversation to see where the firms align on risk tolerance, ultimately there is expected to be an alignment within the combined firm, as it does no good to have everyone on different systems.
“We’ll take this combination as an opportunity to address those kinds of areas where you might be misaligned, like how you use multifactor authentication. To the degree where the smaller firm is maturity-wise … These combinations are a great opportunity to get into alignment and — again, it’s not on our firm or their firm but the new firm, the combined firm — once you get that, we’ve all agreed this is what we’ll be doing, now the discussion can be when do we do it? Do we do it on Day 1? Is that something we’ll do on Day 180? I would say some are Day 1 and some don’t have to be,” he said.
This goes beyond just what tools are used, however. Cherry Bekaert’s Giuli said that while many things are negotiable with the new firm, compliance and data management standards are “one of the non-negotiables.” For instance, he said new firms need to adhere to Cherry Bekaert’s own data retention policies. Some firms, he said, don’t have one at all, and might have emails going back 20 years (versus the one year his firm requires).
“So it really becomes a change management exercise and this is one of the things where we put a lens on what people will need to do differently tomorrow versus today. As you look at acquisitions, every one of them is different, so [it’s important] to understand what our rules and our policies are going in and saying, ‘Here is what you need to adhere to’ and understand where we are today and how we help them move to make sure they’re complying with our policies,” he said, adding at a different point that this also includes security policies like ensuring everything is firewalled.
IT cultures
Another technology challenge in the merger process has nothing to do with the technology itself but, rather, the culture behind it. Different firms have different cultures overall, and this includes their IT culture as well. Some firms have one big, centralized team while others have several smaller specialized ones; some firms cloister their IT people from the other professionals while others embed them directly into teams; some are thought of as mainly troubleshooters and support, while others take a more strategic role.
Managing this issue is mainly an exercise in diplomacy, in particular being open and transparent and not demanding everything change immediately. Bonadio Group’s Roman said everyone always has lots of questions when they’re merged in, and that includes the IT team. Taking care to answer these questions and being open about what those answers mean can go a long way in reducing the anxiety and stress that might come with an acquisition.
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“Human nature is people have questions: How will this affect me, how will I support my users, how do I fit into this new group? So we spend a lot of time pre-merger working with them to integrate them with our own IT team. … so they feel part of the team,” he said.
Another common point was how important it is to recognize what makes a particular team unique and to not bulldoze over that in the quest to assimilate their culture. Smith, from Baker Tilly, notes that each firm is “unique and special” and stressed he does not mean this in a feel-good personal sense but in a pragmatic one.
“Every organization we have ever combined with, their IT team did something better than our IT team, regardless of size. So how can we bring that learning into this new combined organization and have that be in the culture?” he said, noting that this makes it difficult to talk about a unitary IT culture, as it changes with every firm they merge in.
While Giuli, from Cherry Bekaert, put a little more emphasis on his firm’s own culture, like Smith he noted that every acquisition brings new skills and competencies into the firm, and IT is no exception. Recognizing that and working it into their own procedures is what helps bring teams together.
“You’ve got to understand the talents firms have and how they all fit together. You also need to know it’s sometimes an evolution — you can’t assume everything will work smooth on Day 1. You try your best, you constantly figure out ways of working in the culture to bring the teams together. You may get talent you didn’t have before, so it may result in the creation of new capacities you didn’t have before, by virtue of the people in play,” he said.
MacChesney from Citrin Cooperman, described a similar approach and emphasized that it’s important to communicate that you’re there to amplify what already makes them special, not squash it beneath your feet. He said there’s a general acceptance of a firm’s “quirks” and his firm tries to maintain that even as they’re merged in. He said they don’t want them to lose whatever ethos or culture made them an attractive buy in the first place.
“It’s my job to make sure that their voices are heard, that those cultural nuances are identified, and that when we do implement change, we explain the why behind stuff, and that we also understand it’s a two-way street with the why. I need to understand why they do something and they need to understand why we might want it to change, and that is how you build that understanding. So we can definitely migrate or bring on a firm and fully integrate it into our firm, and then still have their own unique way of doing things or their own unique kind of subgroup cultures,” he said.
Timing and cost
While declining to share specific total figures, the firms we spoke to generally agreed that aligning with a merged-in firm on a technology level is not free. Beyond the technical and cultural considerations are also serious material expenses.
MacChesney from Citrin Cooperman said, in fact, that is probably the most expensive aspect of the process, as it involves bringing in new devices, which in turn necessitates adding layers of infrastructure and security. He added that, depending on the systems they want to integrate into their main tech stack, there may even be a need for software developers to craft their own custom application programming interfaces, which could take additional time and money. One of the main ways they control these expenses is by handling things through an in-house dedicated team versus hiring consultants or outsourced talent.
“We know what our infrastructure can do and are fully tied into our IT environment as subject matter experts. That, to me, is the biggest driver in cost reduction on the tech side. These people are professionals, they know the questions to ask and the things to look for, and I’m not saying we’re perfect, but they at least know the scary things to look out for on the highway,” he said. When asked for an example of a “scary thing,” he mentioned disaster recovery, saying that many smaller firms do not have “the capital or robust IT environment” to support it, and so the team makes sure to put that in place if it’s missing.
He also noted that tech expenses aren’t “taking our breath away or making us shy away from the transactions we’ve done,” noting that if it the costs were very significant, the firm likely would not have done 20-plus deals over the years.
As far as how long it takes, he said 90-100 days “is probably par for the course.”
Bonadio Group’s Roman said that at his own firm most of the cost is additional licenses. For instance, after merging in a smaller firm, he might suddenly need to budget for 25 additional Microsoft 360 licenses. Beyond that, they might also need to buy more cloud servers or laptops.
As far as timeframe goes, he said six to eight months is typical for a larger firm, with the vast majority of the work coming in the final two months.
“So, for the first six to eight months, let’s plan and work closely with their IT team, and start going over equipment. In the last six to eight weeks, we do a ton of work. We start with data migration, mapping data fields from one system to the next,” he said, adding that for a smaller firm the whole process takes about six to eight weeks total.
Meanwhile, Baker Tilly’s Smith said he doesn’t really view these things as costs so much as investments — pricy investments, to be sure, but investments made to improve performance and increase cohesion in the now-combined entity.
“For example, in every combination we’ve done over 15 years, we purchase brand-new end user systems for everyone. You’d say, OK, if you do a combination with 1,000 people and computers cost $2,000 that is a big number. But from our perspective, it is about [providing] something new, something tangible, ‘Wow I joined this organization and now I get this new thing!’ That really resonates. But we don’t view it as a cost. We view it as if we had 2,000 people or 100 people or 20 people join the organization off the street, what would they get? They’d get a new computer. So it’s a difference in perspective,” he said. “We don’t view it as part of the transaction. That’s just the normal environment.”
He raised a point that others raised too: In the end, while best practices involve the technology, they’re not so much about the technology itself but all the other things around it.
“Best practices have very little to do with the actual technology; they more have to do with the approach, with the level of engagement, how you communicate, with the focus on how the other individuals you talk to are feeling. Because on the one hand maybe you can say not a lot will change, but on the other hand it’s easy for you to say that because you’re not going through the change. It’s being respectful and understanding,” he said.
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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