The New Big Five Accounting Firms

What better way to draw attention away from earnings restatements than by becoming the newest member of the Big Five accounting firms, filling the spot haunted by Arthur Andersen’s fall from grace?

On Monday, August 1, 2005, H&R Block, Inc. announced it will buy the tax and business services division of American Express in a $220 million deal. If the sale goes through, the combined business is projected to have annual revenues of $1 billion, catapulting the Kansas City, Missouri-based company best known for its tax preparation services into the Number Five slot among the nation’s accounting firms. The deal would also add 2,500 employees to H&R Block’s RSM McGlandrey Business Services division, according to Forbes. The Associated Press reports that the deal requires approval from the U.S. Department of Justice and should be complete by September 30, 2005.

“By combining two of the leading accounting organizations in the profession, we’re creating a firm that is uniquely positioned to meet the demands of the middle market,” said Mark A. Ernst, H&R Block’s chairman and CEO.

Ernst is making an informed purchase. According to the Associated Press he led the tax and business services division during his tenure at American Express from 1989 to 1997. Reuters reports that he has also steadily built H&R Block’s tax business since joining the company by acquiring numerous CPA firms in less spectacular deals.

In other news, largely overshadowed by the American Express announcement, H&R Block officials restated earnings for 2003 and 2004. The company cut earnings by more that $91 million – far exceeding previous estimates the Associated Press reports. The restatement centered on accounting errors made during another acquisition, that of Olde Financial Corp. The 4th largest accounting firm, KPMG LLP, who is also H&R Block’s accountant, determined Block had “material weakness” in tracking their own income taxes.

H&R Block spokesperson Linda McDougal told the Associated Press that the company’s internal controls had to be strengthened and “most of that work has already been done.”