Perhaps most importantly, the haste with which many of these transactions are consummated does not afford adequate time to negotiate an acquisition agreement which addresses and resolves critical issues. The very motivations for this type of transaction are the genesis of increased levels of professional risk. For example, expansion of a firm's client base will often bring higher risk clients operating in unfamiliar industries, requiring services which the existing firm has little experience in providing. Similarly, a desire to absorb overhead through staff expansion will often bring individuals whose professional credentials are weak, whose work ethic is poor, or whose values are questionable. Although a degree of risk is inherent in all such transactions, it must be identified and evaluated before the transaction is consummated, so that appropriate steps can be taken to minimize and control subsequent exposure.
Due diligence is a necessity.
It should encompass far more than a financial analysis of assets, liabilities and earnings potential. The quality of personnel, control procedures, and clients must also be evaluated, along with insurance coverage and claims potential. This is particularly true with respect to lateral partners as they are essentially unknown quantities that are likely to be allowed to work under the firm's banner with little or no supervision. This reason alone explains why some of the most serious liability cases ever brought against accounting firms arose out of recently acquired practices.