HR Block 2011 Annual Report Download - page 18

Under state accountancy regulations, a firm cannot provide attest services unless it is properly licensed which
requires that the firm be majority-owned and controlled by licensed CPAs. As such, RSM cannot be a licensed CPA
firm and cannot provide attest services. Since 1999, RSM and M&P have operated in what is known as an
“alternative practice structure” (APS). Through the APS, RSM and M&P offer clients a full range of attest and non-
attest services in compliance with applicable accountancy regulations. In fiscal year 2010, RSM and M&P entered
into new agreements related to the operation of the APS.
An administrative services agreement between RSM and M&P obligates RSM to provide M&P with
administrative services, information technology, office space, non-professional staff, and other infrastructure
in exchange for market rate fees from M&P. In addition, the agreement allows for professional staff to be
sub-contracted between RSM and M&P at market rates.
All partners of M&P, with the exception of M&P’s Managing Partner, are also managing directors employed by
RSM. Approximately 84% of RSM’s managing directors are also partners in M&P. Certain other personnel are also
employed by both M&P and RSM. M&P partners receive distributions of M&P’s earnings in their capacity as
partners, as well as compensation from RSM in their capacity as managing directors. Distributions to M&P
partners are based on the profitability of M&P and are not capped by the APS. Pursuant to the Governance and
Operations Agreement, effective May 1, 2010, the aggregate compensation payable to RSM managing directors by
RSM in any given year generally equals 67 percent of the combined profits of M&P and RSM less any amounts paid
in their capacity as M&P partners. Historically, RSM followed a similar practice, except that the compensation pool
for managing directors was based on 65 percent of combined profits, less amounts paid to M&P partners. In
practice, this means that variability in the amounts paid to RSM managing directors under these contracts can
cause variability in RSM’s operating results. RSM is not entitled to any profits or residual interests of M&P, nor is it
obligated to fund losses or capital deficiencies of M&P. Managing directors of RSM have historically participated in
stock-based compensation plans of H&R Block. Beginning in fiscal 2011, participation in those plans ceased and
was replaced by a non-contributory, non-qualified defined contribution plan.
See additional discussion in Item 8, note 17 to the consolidated financial statements.
SEASONALITY OF BUSINESS –Revenues for this segment are largely seasonal in nature, with peak revenues
occurring during January through April.
COMPETITIVE CONDITIONS –The tax and consulting business is highly competitive. The principal methods of
competition are price, service and reputation for quality. There are a substantial number of accounting firms
offering similar services at the international, national, regional and local levels. As our focus is on middle-market
businesses, our principal competition is with national and regional accounting firms.
GOVERNMENT REGULATION –Many of the same federal and state regulations relating to tax preparers and the
information concerning tax reform and tax preparer registration discussed previously in the Tax Services segment
apply to the Business Services segment as well. RSM is not, and is not eligible to be, a licensed public accounting
firm and takes measures to ensure that it does not provide any services that require a CPA license. In addition to
tax and consulting services, RSM provides wealth management services and, through a separate subsidiary, capital
market services. Accordingly, RSM is subject to state and federal regulations governing investment advisors and
securities brokers and dealers.
M&P and other accounting firms (collectively, the “Attest Firms”) operate in an alternative practice structure
with RSM. Auditor independence rules of the SEC, the Public Company Accounting Oversight Board (PCAOB) and
various states apply to the Attest Firms as public accounting firms. In applying its auditor independence rules, the
SEC views RSM and its affiliates and the Attest Firms as a single entity and requires that RSM and its affiliates be
independent of any SEC audit client of the Attest Firms. The SEC attributes any financial interest or business
relationship that RSM or its affiliates has with a client of the Attest Firms as a financial interest or business
relationship between the Attest Firms and the client, and applies its auditor independence rules accordingly.
We and the Attest Firms have jointly developed and implemented policies, procedures and controls designed to
ensure the Attest Firms’ independence is preserved in compliance with applicable SEC regulations and
professional responsibilities. These policies, procedures and controls are designed to monitor and prevent
violations of applicable independence rules and include, among other things: (1) informing our officers,
directors and other members of senior management concerning auditor independence matters; (2) procedures
for monitoring securities ownership; (3) communicating with SEC audit clients regarding the SEC’s interpretation
and application of relevant independence rules and guidelines; and (4) requiring RSM employees to comply with
the Attest Firms’ independence and relationship policies (including the Attest Firms’ independence compliance
questionnaire procedures).
See discussion in Item 1A, “Risk Factors” for additional information.
6H&R BLOCK 2011 Form 10K