Leaving or closing an accounting practice
By Matt Dickstein
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This article gives a very brief overview of how an accountant leaves or closes an accounting practice. The accountant can’t just walk away – leaving or closing an accounting practice is more complex than you think. In this article I try to give both sides of the story, that is, the perspectives of both the individual accountant and the group practice.
Both the accountant and the surviving practice should look over their contracts when the accountant leaves, primarily the employment agreement and the shareholders (buy-sell) agreement if you have one. The latter 2 contracts become important if the accountant wants to continue to practice accounting.
Employment Agreement. Most accountant employment agreements require a notice period before termination of employment. The consequence of failure to give the contracted notice is that the employer / practice might sue the accountant for breach of contract. Usually the practice wants to recover the costs of hiring a temp accountant to cover for the departing accountant’s absence until the practice replaces him or her. Further, if the practice must pay deferred compensation, the practice might try to offset its damages against the compensation to be paid. Lastly, beware any non-competition or non-solicitation clauses in the employment agreement; for more information see Accountant employment and independent contractor agreements.
Shareholders Buy-Sell Agreement. If the practice has a shareholders buy-sell agreement, check it for any buy-back of the accountant’s shares in the practice. Accounting groups frequently require a mandatory buy-back of shares. The buy-sell agreement also will provide for the share price, either by a formula or through an arbitration process. Once again, beware any non-competition or non-solicitation clauses in the buy-sell agreement. For more information read Shareholder buy-sell agreements for accountancy corporations.
Compensation after Termination
When an accountant leaves a practice, usually the practice will pay compensation after the termination date. First, there is salary owed to the date of termination plus accrued vacation pay. Second, there might be (i) compensation owed for the accountant’s share in accounts receivable or collections; (ii) a pro-rated share in year-end bonuses; and (iii) a pro-rated share in the practice’s contributions to the accountant’s retirement plan.
Word #1 to the wise: The latter 2 items (pro-rated share in bonuses and retirement plan contributions) frequently create timing issues, specifically, whether the termination date falls before or after vesting in the particular payment.
Word #2 to the wise: Consider using an exit / severance agreement (discussed next) to require that the practice give financial data, and permit inspections, that make clear its calculation of post-termination payments.
Exit / Severance Agreement
Exit / severance agreements are useful when an accountant leaves a practice to tie up loose ends and prevent misunderstandings, all of which can lead to litigation. Typical matters for an exit / severance agreement are:
1. The content of any notice that the departing accountant and the practice give to clients and referral sources. Both sides should discuss who is responsible for the mailing, its costs, and the deadline for the mailing. I talk more below about notices to clients.
2. Mutual access to client records.
3. Who keeps the client records. Retaining client records is a significant burden. Your retention period is a product of state law and private contract (e.g. malpractice insurance policies). Keep in mind the retention period for audit documentation — 7 years from the report date.
4. The buy-out of shares in the practice and post-termination payments (all discussed above).
5. Mutual liability releases.
6. The departing accountant might buy a malpractice insurance tail.
7. Indemnities in favor of the departing accountant for any guarantees that he or she gave for practice debts.
Word #3 to the wise: Identify and resolve (as best you can) any personal guarantees that the departing accountant signed to secure financing given to the practice. Guarantees are the wild card when leaving a practice.
An accountant who leaves or closes a practice should notify a host of persons of the change in status.
Notice to Clients. An accountant should give notice to clients of his or her leaving or closing a practice. The notice to clients should be a minimum of 30 days. The notice should specify the date of departure, the accountant’s new contact information if applicable, and who the clients can choose for future accounting work.
Accounting Records. Be sure to include in the notice a client authorization form that states where accounting records will be stored. For example, the notice might have 2 boxes that can be checked – one that keeps records at the practice, and one that transfers the records to the departing accountant. As I discuss above (at exit / severance agreements), it is best that the practice and the departing accountant agree in advance to the form of notice and the retention of records.
Notice to Malpractice Carriers. The insured (whether the practice or the departing accountant) should notify its insurance carrier of the change.
Notice to Board of Accountancy. Notify the Board of Accountancy within 30 days of the change in status.
A tail policy covers malpractice claims for incidents that occurred while the departing accountant was still with the practice (even though the claim was filed after the accountant left the practice). Someone must pay for the tail policy, be it the practice and/or the accountant, and this is why an exit / severance agreement is so useful. The practice can consider deducting the costs of the tail policy from any deferred compensation or buyout amounts owed to the departing accountant.
As I mentioned in the introduction, I’ve given you only a brief outline of the topic of leaving or closing an accounting practice. It’s a complex topic, so please get competent legal counsel to help you.