The Importance of CPAs on an M&A Advisory Team

I am pleased to welcome back to the (blogging) stage, Pete Hauser, National Practice Leader at RLI Insurance and an expert in transactional insurance. This is part two in Pete's series on what underwriters look for on an M&A Advisory Team. In part 2 of our series he will focus on the CPAs. — Emily

During an M&A transaction, there are multiple layers of concerns starting with the target company itself all the way to the legal packaging of the transaction—and insurers want to know that all the layers are receiving the right attention to detail. In my last post, I covered how to assemble an expert attorney team to satisfy underwriters when issuing representation and warranties insurance for an M&A. Today, I’ll talk about the financial team that needs to be in place—the CPAs.



An important aspect of the insurance underwriter’s review revolves around the target company’s financial statements. Outside of management, no party to the transaction has such an intimate knowledge of the target company and in such detail.

The underwriters rely heavily on the knowledge and the assurance the CPA brings to the completeness and accuracy of the financial statements.  Let’s go over several things insurance underwriters look for in the target company’s CPA:

1. Professional qualifications are important.

Are they truly CPAs, possessing the requisite training and knowledge of their profession? CPAs are licensed.  Bookkeepers are not. CPAs have considerably more training and knowledge. The CPAs also need to show they are experienced in handling M&A transactions due to the volume of materials that need to be covered in the due diligence process.

2. The quality of the financial statements.

The underwriter is concerned that the appropriate presentation format is being followed, that the information is supported with data, and that the disclosures in the footnotes match the information being presented—both numerical and verbal information. Bottom line: Are the financial statements accurate?

As the underwriter digs down on the financial information being presented, the underwriter starts to review the underlying schedules and assumptions. The concern is that the CPA is making reasonable assumptions and judgments. The underwriter wants to see that there is sufficient information to support the conclusions.

3. The CPA firm has the resources to perform its responsibilities.

Does the CPA have sufficient staff and other support infrastructure? Does the CPA firm have sufficient expertise in the target company’s business? A CPA firm with expertise in the fashion industry may not be an expert in the software industry. The target company needs to ensure the CPA firm can support them.

4. The CPA is independent of the target.

Are they able to exercise independence of judgment in presenting the financials to third parties so that the veracity of the financial information can be trusted? CPAs have a code of conduct, and you should expect that they follow that.

5. Others rely on the CPA’s statements.

Do other third parties rely on the financials? Is there money extended to the target due to someone relying on the financial statements? In the old days, lenders would perform bank checks on CPAs by calling banks to ascertain the banks’ view of the CPA.

Other Experts

 There are, of course, other experts you’ll want to assemble into a team for an M&A transaction when the target company operates in a specialized niche. For instance, oil and gas drillers need geologists and petroleum engineers in order to prudently conduct their business. A geologist firm with expertise in the Colorado fields might not be the best choice for a company operating in Louisiana.

The same concerns exist for the professional qualifications of these experts in the same way they exist for attorneys and CPAs. Each professional community typically has an organizational body that may or may not be a licensing body, and sets the standards and maintains the professionalism of the community. Are they properly educated? Licensed? In good standing with their professional community?

Ensure they also have the required resources to effectively perform the job efficiently and professionally, and that they are acting independently.

At the end of the day, M&A transactions are too dangerous and the stakes are too high to have unqualified advisors involved. The quality of the advisory team is of paramount importance. And while quality advisors are not cheap, the old adage, “Penny wise and pound foolish” is right on point here.

The sooner you can assemble these teams, the better. It is to everyone’s advantage to have these teams in place prior to the start of M&A negotiations. These professionals can provide sound guidance in identifying good transactions, structuring them and executing on them.


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