H&R Block unit nears settlement with auditor that sought to pull out of business services deal

By Eileen Aj Connelly, AP
Tuesday, December 8, 2009

H&R Block subsidiary nears settlement with auditor

NEW YORK — H&R Block Inc. on Tuesday said it expects a dispute regarding a subsidiary’s deal with an accounting firm to provide consulting to midsized businesses will be settled soon.

Block said a confidential binding arbitration ruling was issued Nov. 24 involving the enforcement of restrictive covenants in the contract between its subsidiary, RSM McGladrey Inc., and the accounting firm, McGladrey & Pullen LLP.

RSM will continue to negotiate with McGladrey & Pullen LLP to change the current arrangements and allow the collaboration to continue, Block said.

“We are very optimistic that this is going to be settled within a few weeks,” Block CEO Russ Smyth told investors during a meeting after Block released its second-quarter financial results earlier Tuesday.

He warned, however, that while it appeared the matter would have a good outcome, “We are not across the finish line yet.”

McGladrey & Pullen said in July it intended to pull out of the deal with RSM that had the two operating under an alternative practice structure. The deal, originally reached in January 2006, calls for RSM to provide tax and consulting for clients, while Blooomington, Minn.-based M&P provides attest services, or auditing. Regulations prohibit Block from providing financial statement attest services.

Block initially responded to the notice by stating the move was “fraught with significant business and financial risk and is not in the best interest of M&P partners, employees or clients.”

Smyth said at the time his company would prefer to continue to work with McGladrey & Pullen, but would replace the firm if necessary.

H&R Block provides working capital to McGladrey & Pullen through a revolving credit facility worth up to $125 million, according to regulatory filings. In July, H&R block said the firm has also received “substantial capital investments from H&R Block affiliates to assist in acquisitions of professional services firms, to develop software and other technology for attest and other practices, and to support the overall development of the business.”

H&R Block shares slipped 58 cents, or 2.8 percent, to close Tuesday trading at $19.90.

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