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The Real
American Express Tax and Business


An Interview with Jerome A. Harris
By James L. Craig, Jr.

American Express Tax and Business Services (TBS), the tax and business consulting subsidiary of American Express Co., has built the business by acquiring accounting practices previously conducted by CPA firms. TBS is in 50 cities in 22 states, with total volume estimated at about $100 million. The total number of CPAs working for TBS recently was reported to be about 700. A goal of TBS is to be in all major markets and to double its current volume by December 31, 1998.

Because in most states, audits, reviews, and other attestation services can only be performed by CPA firms wholly owned by licensed public accountants, TBS has developed an operating model that works as follows: TBS employs all the personnel of the acquired CPA firm, including the partners. The nonattest services previously performed by the CPA firm are conducted under the TBS name. The partnership remains a registered or licensed entity in the state of operation and conducts all the attest services for clients. The partnership leases the staff below the partner level from TBS and pays administrative fees for the use of office space and equipment and administrative services. The partners supervise the work and issue attest reports in the partnership name.

Florida, as have other jurisdictions, has challenged the right of TBS to perform services for the public that are typically performed by CPA firms and to "hold out" to the public that the work is being performed by CPAs. In the mind of the Florida Board of Accountancy and many other regulators, CPAs can only hold out as CPAs while doing work for the public if the firm they work for is owned by CPAs.

The Eleventh Circuit U.S. Court of Appeals recently upheld an earlier, Federal District Court decision that CPAs have a first amendment right to truthfully hold out that they are CPAs while performing services for TBS. The Florida Board of Accountancy has appealed the decision to the Supreme Court.

To date, TBS has not acquired a practice in New York State. Recent news reports indicate that TBS has approached several firms in New York, but that the New York State Education Department, the licensing authority for CPAs in New York, will challenge TBS's right to operate its traditional model in the state. Indications are, however, that TBS, once it has acquired a practice in New York, is prepared to defend in the courts attempts by regulators to attack its model.

Some observers feel that the main reason TBS is acquiring the accounting firms is for them to become feeders to the other Amex companies to sell Amex investment and insurance products. TBS officials, including its president Robert Basten, insist that Amex sees a strong market for tax and business consulting, principally to small and medium-sized businesses,
and wants to operate in
this market.

To find out firsthand the nature of what TBS is doing and how the TBS model operates, The CPA Journal managing editor met with Jerome A. Harris, the senior managing director of TBS's Chicago office. Harris is also the managing partner of Checkers Simon & Rosner LLP, whose practice TBS acquired to establish its Chicago office.

The CPA Journal: Please describe the nature and size of practice of the Chicago TBS office and how you operate.

Jerome A. Harris: As is typical of a TBS acquired practice, we have two entities operating out of this facility. We have the Chicago Metro Area office of TBS, which offers tax, business consulting, litigation, and computer consulting services, and Checkers Simon & Rosner LLP (CSR LLP), which continues to provide the attest services. We also operate a satellite office in Orlando, Florida that specializes in time-sharing, recreational real estate consulting. Additionally, we have a suburban office in Naperville, Illinois.

CPAJ: Does CSR LLP have a physical presence?

Harris: Yes, the Checkers Simon & Rosner main entrance with its own sign is on a separate floor. And the audit practice is conducted primarily on that separate floor.

CPAJ: Does it have any of its own employees?

Harris: Other than the partners, who are also employees of TBS, it has no employees of its own. There is a services agreement between TBS and CSR LLP, that permits CSR to lease people, as needed to work on attest engagements, from TBS. The partners are not leased; they charge their time directly to CSR for the work they do on the attest engagements. The partnership is not required to lease employees from TBS and is permitted to directly engage others who may be needed to provide the services required by the engagement. The CSR partners have control over the attest practice. We have the say over client acceptance and retention. CSR owns and controls the workpapers of the attest practice.

On the other side of this, as part of the acquisition by TBS of CSR's practice, the partners signed noncompete agreements, saying we cannot compete with TBS. Additionally, all employees of TBS signed a one-year nonsolicitation agreement.

CPAJ: How large is the office?

Harris: Approximately 250 professionals.

CPAJ: Did all the CSR partners come over to TBS?

Harris: Yes, they did. And they all remain as CSR partners even though not all of them perform attest work for clients.

CPAJ: Are there any staff that work solely on attest engagements?

Harris: We are a traditional middle-market firm, where our staff all wear a variety of hats. I doubt that there are any who work exclusively on attest engagements.

CPAJ: Does that mean each employee and managing director must allocate their time on their timesheets as between work done for TBS and CSR LLP?

Harris: Yes.

CPAJ: What about training time and other administrative and nonchargeable time? Who takes the hit for that?

Harris: TBS. The rate that TBS charges the partnership compensates TBS for absorbing the nonchargeable time, just as we used to do in the partnership in developing billing rates.

CPAJ: Where do reviews and compilations fit in this system?

Harris: We provide these services through CSR LLP. I understand that other TBS offices perform compilations, depending on their locations and local regulatory environment. But not here. Incidentally, as a practical matter, we do very few compilations. Perhaps 10 or 15. The definition of attest services in Illinois is audit and review. But we made the cut based upon what would be covered in a peer review. We talked with TBS and it agreed, for at least right now, to let the partnership do the compilations.

CPAJ: Does CSR LLP have any SEC clients?

Harris: We have a number of broker dealer clients that file under the 1934 Securities Acts. These clients do not have shares that are publicly owned. But we have to follow, as between the two entities and those clients, the full SEC independence rules.

CPAJ: How is client independence, that very essential ingredient in attest engagements, preserved?

Harris: As CPAs, we must ensure independence. That stipulation is as true today as it was prior to TBS. In addition, there are a series of protocols that are designed to make sure we are independent of our clients. There are protocols with regard to whether there can be any investments by American Express in the clients, protocols against clients having investments in American Express securities, and protocols with regard to loans to and from clients, which do permit clients' use of Amex credit cards in the normal course of business. As part of the client acceptance and continuation of our quality control procedures, our quality control partner reviews the protocols for every attest client.

CPAJ: Do the two entities, TBS and CSR LLP, individually and in combination meet the independence standards of the profession with respect to attest clients?

Harris: Yes. As an added step, American Express steps into our shoes to ensure that independence is protected for these clients. Our protocols are designed to give us reasonable assurance that this is the case.

CPAJ: Do the two entities, TBS and CSR LLP, individually and in combination, meet all the regulatory requirements in Illinois?

Harris: Yes, there have been no regulatory challenges in Illinois to our structure.

CPAJ: What are you doing, as a practice through both entities, that is different than you were doing before as Checkers Simons & Rosner?

Harris: As far as the attest practice is concerned, we are not doing anything differently. TBS has no input on how we conduct that practice. CSR LLP develops the audit programs, supervises the work, makes the judgment calls on what's appropriate or what is not, and issues its reports.

CPAJ: That means you will have a separate peer review. Have you had one yet since the TBS agreement?

Harris: We had our last peer review just before the TBS agreement. The changeover, in our mind, has not triggered any need to accelerate the timetable for our next review in three years. Our quality control system remains ours and, except for the protocols because of the the American Express relationship, is basically unchanged.

CPAJ: Who sets the fees? Are there separate billings?

Harris: For attest clients, the partners of CSR LLP set the fees. As a practical matter they also establish the fees for the TBS clients for whom they have engagement responsibility. We have separate engagement letters if both entities are providing services.

CPAJ: Who does the billing? And who maintains the receivables?

Harris: For the attest practice, a partner of CSR LLP does the billings, and the partnership maintains the receivables. The partner is assisted by an employee of TBS. For the tax and consulting practice, TBS does the billing and maintains the receivables. We have separate books of account for the two entities.

CPAJ: Does TBS charge standard rates for the employees leased to the partnership?

Harris: Yes, typically, but the rates may be negotiated with TBS.

CPAJ: In this way, is the partnership guaranteed to make a profit? Or is there some risk of loss here that is not apparent?

Harris: As partners in the firm signing the report, we bear the liability risk of not doing the engagement properly. We, of course, carry insurance in the name of the partnership to protect the public in the event an appropriate third party is damaged. After the agreement with TBS, we increased our insurance coverage to adjust for a reduction in our capital base, thereby giving added protection to the public.

CPAJ: Do you still have a business risk? In other words, can you lose money on an engagement?

Harris: Sure we can. You can lose money on one client and make money on another. It's no different than before. If it takes longer than we estimated to do an engagement and we can't bill for it, it is the partnership that absorbs the overrun.

CPAJ: Does CSR LLP have any separate assets?

Harris: Yes.

CPAJ: How do your employees feel about the change?

Harris: This time last year, when it was known that we were negotiating with TBS, the headhunters were all over our staff. Everyone was thinking dire effects were on the horizon. We tried our best to allay their fears. But we did lose some of our people. Since the transaction, we have had the usual losses of people, but to my knowledge not as bad as a lot of firms are experiencing. As you know, every firm is in need of people, and there is mass raiding and movement among all the firms.

Our fringe benefit package is comparable to those in Fortune 100 companies--benefits beyond what CPA firms are able to offer. If an employee doesn't like public accounting, there may be opportunities in other Amex companies--financial planning, travel, credit card, and the like. Job postings from other divisions are searchable by our employees.

CPAJ: Does work that TBS employees do for TBS qualify them for purposes of obtaining the CPA license in Illinois?

Harris: In Illinois, the experience requirement includes an "other" qualifying experience category. The chair of the state board for public accountancy told me that work done by CPA candidates for TBS under the supervision of CPAs would qualify as experience under that category. That very same work if done by Checkers Simon would have qualified, so why not now?

By the way, Illinois is a two-tier state. The CPA certificate can be obtained immediately upon graduation from college and the passing of the CPA exam. But signing a tax return or an audit report requires obtaining a license for which there is an experience requirement. But as I implied earlier, the work done for TBS under the supervision of a CPA would qualify toward the experience.

CPAJ: Do you have staff members who do not aspire to being CPAs? Let's say a lawyer in the tax

Harris: We want experts in the fields in which we advise clients. Our rules are no different than they were before the agreement. We want our people to become CPAs. We also want our tax people to get a masters in taxation. In our consulting practices we have some specialists who are not CPAs and we don't expect them to become CPAs. I'm talking about areas such as computer consulting or litigation consulting. But they have advanced degrees.

CPAJ: To what extent are you
now offering services that you couldn't offer or didn't offer before?

Harris: We have added some capital markets consulting, lending consulting--not making loans--but how to structure loans. And we are looking at adding other kinds of consulting, but things that our existing clients need. In spite of all the rumors, what we are not doing is selling investments, or insurance, or other Amex products. We have a prohibition against selling any type of investment.

CPAJ: Is this a Jerry Harris rule or a TBS rule?

Harris: I'm talking TBS. We are not an investment arm of Amex.

CPAJ: To what extent can a TBS employee earn additional compensation by referring clients to those in Amex who do sell investments or insurance?

Harris: Our people are prohibited from taking commissions. What TBS would like us to do and what we are doing is developing relationships with other Amex companies. The purpose is to learn the types of services they can bring to our clients. We do want to create an atmosphere of one-stop shopping. Where we have the opportunity to refer to our sister operations we will. But only if it is in the best interests of our clients. We are not required to do this.

CPAJ: Do you keep track of the referrals?

Harris: It is no different than what we were doing before when we referred a client to an unrelated business advisor. We kept score in order to see who owed us a favor or two.

One of the reasons to refer work to American Express Financial Advisors is that it has over 300 advisors here in the Chicago area. They are potential referral sources to send work our way. But they are not going to refer work to us if they are not confident that we will do a good job for them.

As an example of what can happen, we are getting five to ten requests for proposal a week for pension administration work. This level of referral was unheard of before. But we still have to compete against other pension administrators.

But understanding the desires and inclinations of the client is foremost. I cannot make a referral or give advice that flies in the face of the idiosyncrasies of my clients. That may mean giving them two or three choices for investment advice. Amex will be one of those choices. This is absolutely no different than pure CPA firms who offer a variety of consulting services. Our job is first and foremost to do what we do best--provide high quality tax and business services and to do what's best for the client.

CPAJ: Is TBS a licensed or registered investment advisor?

Harris: No. I don't know how else to say it. We do not give investment advice. TBS does not want us to give investment advice.

CPAJ: Is the compensation of employees affected in any way by the referrals that they make to other Amex companies?

Harris: Our people earn bonuses based upon the goals we agree to for them for the year. With regard to attest clients, we are not going to put ourselves into a position of doing something indirectly that we can't do directly. Therefore none of our goals would include any factor that in any way rewards them for referring attest clients to other American Express products. Could an American Express financial advisor, unknown to us, sell an insurance product to a CSR LLP client and receive a commission? I don't know the answer. To my knowledge it is not happening.

CPAJ: What about contingent fees?

Harris: In Illinois, contingent fees are permissible for nonattest clients. We have not done much with contingent fees either before or after the
TBS arrangement, but would consider them if the circumstances make sense.

CPAJ: Do you give you client lists to any of the other Amex companies?

Harris: Absolutely not. Our conduct relative to client confidentiality in both entities meets the standards of the profession.

CPAJ: Bottom line, you are basically doing what you were doing before, but because of the regulatory requirements in two distinct entities.

Harris: But with having the marketing resources of TBS while seeking other complementary consulting services, we can add profitably to our menu of services. And we can't overlook the availability of TBS capital to expand our business in Chicago.

CPAJ: Is it working?

Harris: I'm out talking to other firms in the area. I have my own goals for acquisitions. We are going to grow this office.

Let me give you an example of a new business opportunity because of TBS. I received a call from an Amex vice president who asked us to join American Express Financial Services in a proposal to provide certain financial consulting services as perquisites to the executives of a regional Bell telephone company. Our part of the proposal would be for tax planning and preparation services. This is the kind of opportunity I just didn't get before. This is the benefit of the TBS marketing at work.

CPAJ: Do all the CPAs who work for TBS, even those who do not do any attest services, maintain their active licenses in Illinois? That would mean they would have to take the required continuing education?

Harris: That is correct. And forget the CPE minimum licensing requirements. All our CPAs obtain substantial hours in excess of the minimum requirements. We spend a fortune on education. This is not going to stop.

CPAJ: All the training is done under the TBS banner? I saw a group of people leaving a classroom area when I came into your office this morning.

Harris: The cost is borne by TBS. But we here in the local office decide what the training will be. The partnership pays its share through an administrative charge, which covers the whole bundle of services TBS provides the partnership.

As an example of what it covers, the partnership recently decided to reengineer its methodology for performing audits. We selected a third-party vendor developed product for use--which involved retraining the staff. TBS provided that training.

CPAJ: How do your colleagues in the profession deal with you and your staff. When you walk into a meeting at the Illinois Society, do you feel any resentment or sense of betrayal?

Harris: I currently am the secretary of the board of directors of the Illinois Society. I don't feel that my colleagues there view me any differently than before. Some have given me a lot of credit for doing something innovative and are waiting to see what happens. A partner of a Big Six firm at a recent all-day strategic planning session for the Society remarked to me that he felt the profession in Illinois seemed to be reacting favorably to our move.

CPAJ: Does TBS pay for the Society and AICPA membership dues of its CPAs?

Harris: Yes. We pay for both. And our people are active on committees. We expect our people to give back to the profession. That is not going to change.

CPAJ: What is the nature of the TBS organization? Does it have technical people on its staff with whom you would consult?

Harris: The home office in Minneapolis performs primarily administrative functions. When it comes to technical issues, we consult among the TBS offices. TBS is very much interested in developing healthy professional relationships among the offices. It has designated "centers of excellence" at offices that have a high level of experience and expertise in niche markets. At the centers, those in that specialty gather and discuss best practices.

Please keep in mind, however, that we have been part of the TBS group for a relatively short time and we are still learning our way. The agreement with TBS was signed a year ago, but no operating changes were made during last year's tax season.

CPAJ: How did your clients react to the change?

Harris: We met or spoke with substantially all our clients just before the public announcement of the transaction. The truth of the matter, most clients already knew about it. The first question our clients asked was whether the arrangement would be good for the partners. The next question was would the partner continue as the contact person. And finally they asked what was going to change for them. Since that time, we have not had client attrition because of the TBS name. In many ways, their reaction showed us it has been more of a big deal within the profession than with clients.

CPAJ: Does TBS have publications, client newsletters, and the like?

Harris: Yes it does. We had a brochure for clients on the 1997 tax act. We had a Checkers newsletter, which now bears the TBS label. TBS is coming out with a personal tax book that we hope will make a big splash and increase public awareness of our professional services firm. The lead spokesperson is the managing director of our tax practice--Craig Minnick.

CPAJ: Are you pleased with how the arrangement has worked out?

Harris: Yes. It has meant a lot of hard work for me and has created its share of stress. We are the acquired party, and we have to learn new ways. And there is so much to do. My personal goal is to triple the size of the office over the next several years. But I like the prospects that it holds. I think it carries the promise of being able to deal with many of the problems facing the profession. The profession should not be looking down on what we are doing. It should be evaluating it on its ability to move the profession forward, working through the challenges it faces.

I'm on a national advisory council for TBS whose goal is the development of a national culture to serve the middle market. This cannot be a franchise operation. And it cannot squelch the entrepreneurial spirit of the acquired firms.

CPAJ: How do your partners like being part of TBS?

Harris: I think they are tired of all the meetings. But I think they also see the

CPAJ: Is the TBS arrangement good for the profession as a whole?

I view the TBS acquisition of firms as a positive for the profession. Many of those in the profession today see increasing capital needs, uncertainty about pensions, competitive market forces that they don't know how to handle. They recognize the viability of a TBS type solution. But this is not for everybody. Some want no part of a large organization. They want to do their own thing. That's OK too. But those of us who choose
to consolidate and take advantage of
new opportunities should be allowed
to do so.

Also, the profession needs to understand who American Express is and its approach to business. It doesn't use underhanded tactics. It has a reputation to sell and protect.

CPAJ: When you think about it,
the regulators in trying to preserve and protect the attest services
have forced TBS to create a two-headed monster. The two entities are basically doing what one
did before. Is that the right answer?

I think the way we regulate the attest practice has to change. I think the regulation should be directed to the individuals who perform the attest services and not at the ownership level, much like we have with the medical profession. Yes, the medical industry has problems and is not perfect. But there are parallels there. We should allow the firms to obtain the necessary capital through any ownership system that the market provides, but protect the public by regulating those who serve the public. We are talking about a need to revitalize the profession, take advantage of technology, introduce new kinds of services, and reengineer how
the services are provided. This will
take capital.

As a result, we need to take a fresh look at how we regulate. That may mean putting aside the recent joint agreement developed by the AICPA and the National Association of State Boards of Accountancy. That agreement is just a Band-Aid and does not provide the solutions that are needed.

By the way, if TBS could have acquired the attest practice, they would have.

CPAJ: Any closing comment?

Harris: TBS sees a fragmented industry, with promise, that can benefit from consolidation under a brand name. The TBS model gives the opportunity to small and medium-sized firms to merge--join ranks--and stay in the business. I'm not sure such an opportunity has previously presented itself. *

My staff does not get paid commissions!

In Brief

Still Just a CPA Firm

American Express Tax and Business Services (TBS) is the tax and business consulting arm of American Express that seeks to serve the small and medium-sized business market. TBS has reached its size by acquiring CPA firms, operating the nonattest side of the acquired practice in the name of TBS, and, through contractual arrangements, continuing the attest services through the partnership from which the practice was acquired.

Many practicing CPAs feel threatened by TBS and the position it is acquiring in the marketplace, and quite legitimately so. But TBS appears to be here to stay. The largest practice acquired to date is Checkers Simon & Rosner LLP of Chicago, Illinois. Managing editor James L. Craig, Jr., visited the offices of TBS/Checkers Simon to meet with Jerome A. Harris, managing partner of Checkers Simon and senior managing director of the Chicago TBS office. The purpose of the visit was to find out exactly how the TBS office and Checkers Simon partnership operate and what is the real threat to practitioners competing in the same market.

Editor Craig asks Harris about client independence, referral of work to other American Express companies, attitude of the profession toward the former partners and staff of Checkers Simon, and more. The purpose of the questions is to help practitioners and others in the profession to understand exactly how TBS operates. It will be up to the marketplace to evaluate the ultimate success of what TBS is attempting to do.

About Jerome A. Harris

I've been in public practice, with Checkers Simon and Rosner LLP since 1966, except for a three-year period when I was in industry. I became managing partner in 1978, when our volume was at about $2 million. I helped grow the practice, through mergers and internal growth, to the $23 million dollar level it attained at the time we entered our relationship with TBS.

I am currently the secretary of the Illinois Society of CPAs. Previously I served as a vice president and director of the Society, chairman of its professional liability task force during the insurance crisis a few years ago, and chairman and active member of a number of other Society committees. I presently serve on the AICPA Council. I was involved in the formation of ALAC, the mutual company that reinsured the Group B firms. I presently serve on the board of directors of Amerinst Insurance Co., the reinsurer for the AICPA's program. I also have been supportive and active in a number of charitable organizations. *

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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