July 2001

Stepping through the Portal

The first recollection I ever had of the term “portal” (other than in the context of a doorway) was on StarTrek. Yes, let it be known to all that I am a Trekkie. Now, years later, there is the American Institute of CPA’s portal, CPA2Biz. Unlike on StarTrek where only Spock stepped though the portal to meet Mariette Hartley, the AICPA expects all state societies to step forward together in unison.

You need to understand the cast of characters in this scenario. There is the AICPA and its formerly 100 percent-owned portal, CPA2Biz. And there is SSNI, State Society Network Inc., which is a nonprofit organization whose members are the 50 state societies plus the societies in Washington, D.C., and Puerto Rico. SSNI was formed to be a “shared services company” for the state societies. Shared Services LLC (SSLLC) is a for profit limited liability corporation jointly owned by the AICPA and SSNI.

There are ongoing negotiations among CPA2Biz, the AICPA, SSLLC, and SSNI, which is serving as a collective bargaining device on behalf of its member state societies. Those negotiations are to arrive at an arrangement that delivers shared services, such as combined membership database management and royalty income to state societies, while giving CPA2Biz a ready-made customer/referral base. The stage of the deal currently under negotiation is referred to here as “Phase II.” “Phase I” began in mid-2000, scheduled to be completed by May 31, 2001. Since Phase II was not completely negotiated by May 31, all state societies were asked to extend and expand the terms of Phase I, something they all did except for New York and Vermont.

At its June 10 board meeting in Hershey, Pa., the Society’s Board of Directors tackled the issue of whether the New York State Society of CPAs should sign the Phase I extension until Dec. 31, 2001, or until Phase II is fully negotiated, if earlier. The board was more than happy to sign up to an extension of the existing Phase I terms, but that’s not what was offered. The expansion of Phase I proved very controversial to the board.

There is no question that we benefited from a two-hour presentation by Clarke Price, president and CEO of SSNI and the Ohio Society of CPAs, Brent Johnson, COO of SSLLC, and Larry Beaser of the Philadelphia law firm of Blank Rome Comisky & McCauley LLP, which represents SSNI and SSLLC. Our outside counsel for this matter, Jonathan Howe of the Chicago law firm of Howe and Hutton, followed with a detailed analysis of the SSNI/SSLLC/CPA2Biz transaction. The state Society engaged Howe & Hutton as outside legal counsel to review the Phase II agreement with respect to the fiduciary responsibilities of the board in determining its approval of the Society going forward. Howe’s task was daunting since Phase II is not nearly fleshed out.

We invited the SSNI/SSLLC representatives to discuss their plans and had also asked for a demonstration of CPA2Biz. However, the near contemporaneous timing of bringing the CPA2Biz website live precluded the demonstration.

A bit of history. New York was the only state society to initially resist the portal Phase I agreement. Our objection was based on a strong level of discomfort with the portal equity interests being granted to the AICPA staff. While this is common in the “for profit” world, we believed it inappropriate for the senior staff of a nonprofit membership organization, especially when the senior staff, in this case, would significantly influence CPA2Biz. We also believed that we had not been provided with enough information to assess the proposal and make an informed decision. Nevertheless, in the interest of coming together with the other state societies we signed the initial Phase I agreement after it was agreed that we could retain our affinity relationships, such as those with CAMICO, our other members’ insurance programs, eMind, and MBNA America Bank.

Historically, the NYSSCPA strategy with affinity relationships is to bring you alternatives to those offered by the AICPA, wherever possible. We may be required to abandon that strategy when and if we sign on to Phase II. You should know, however, that our refusal to enter into Phase II carries with it the cost of a reduced member discount for goods and services you purchase from CPA2Biz.

The initial Phase I agreement required the Society to provide its membership database to SSNI to be combined with other state societies’ and the AICPA’s databases. In addition, NYSSCPA was required to pay $3 per member as “membership” dues for its activity within SSNI. In turn, the Society granted a nonexclusive license to relicense to SSLLC the Society’s logo and membership databases in return for a royalty payment of $5 per member. This, in fact, was paid in January 2000 to the extent of more than $160,000. The Phase 1 agreement did not authorize any use of the membership databases by CPA2Biz for e-commerce or for any other purpose.

The discussion by our board and guests brought additional concerns to the surface. The gist of Howe’s analysis is that CPA2Biz’s rush to market with its attendant state society agreements would leave a state society unprotected in several respects. The board voted 15-10 not to sign the Phase 1 extension ,with three abstentions. I have shared our rationale, Howe’s letter, and the following summary of the most important of those concerns as they now exist with the presidents of the other state societies to explain why we are again the odd man out:

• As explained to us, Phase II was contemplated to have a 10-year term, which would automatically renew for 10 more 10-year terms. If a state society was to extricate itself from Phase II at the end of one of the terms, it would not be without significant cost. It appears to us that this isn’t really a 10-year agreement, but instead a 110-year agreement. Entering into such an agreement must necessarily affect the future of the organization. Our board feels the decision to continue down the path toward Phase II really is a decision that will determine our organization’s future, a decision it must deliberate very carefully.
• A transaction such as this, including exclusivity provisions, raises serious questions about compliance with antitrust laws. There have been oral assurances that these issues have been addressed in the transaction design. For the NYSSCPA to enter into such a transaction, the agreements would need to include indemnities from the principals (SSLLC, AICPA and CPA2Biz, and CPA2Biz venture investors) to hold the Society harmless from penalties that could arise in this area.
• We have been asked on two occasions now—with the original Phase I agreement and with the Phase I continuance agreement—to sign agreements with a significant portion of the final transaction still under negotiation. This expects too much when the transaction could radically alter the future course of a state society. A society’s board needs to know the whole transaction before making such a decision. We have significant revenues from affinity programs, including an arrangement with eMind that would be violated by our entering into the Phase I continuance agreement. Our board feels it must have a clear understanding from SSNI and SSLLC as to how these arrangements would be handled. As stated earlier, we are more than willing to extend the existing Phase I agreement, but have been told by Price and Johnson that this is not possible.
• With a transaction as fraught with risk as a dot.com business, an item of absolutely critical importance is an exit strategy. We realize that this is not news to Price, Johnson and Beaser, who have been negotiating to tie up as many loose ends as they can. But before a board bets its society’s reputation and future, those terms need to be worked out and thoroughly studied by the state Society board. Questions come to mind such as what happens if CPA2Biz doesn’t succeed on its own? What would happen if it goes bankrupt? What would happen if it becomes insolvent and is bought out by one of the venture investors, currently, Thomson, Microsoft, and Aon?
• If our Society agreed to expand its participation in Phase I or enter into Phase II, we would be doing so because of our faith and trust in the AICPA, CPA2Biz, SSLLC and SSNI. In a transaction like this—where one party (a state society) is relying on the oral assurances of persons the second party (SSNI) is doing business with—it is prudent to ask those persons (SSLLC, AICPA, CPA2Biz, and CPA2Biz venture investors) to express those assurances in writing and sign them.

The Phase 1 extension differs in that it permits relicensing of the Society’s intellectual property to CPA2Biz for use in e-commerce. It authorizes the payment of a 1.75 percent of gross revenue royalty from CPA2Biz to SSLLC—a feature of the Phase II agreement—with the provision that the royalty be escrowed until the state societies sign the Phase II agreement. It also provides for state societies to receive a $2 per member commission for each member who signs up for InfoBytes, the AICPA’s on-line CPE product currently being marketed on cpaweb.org, the SSNI/SSLLC website, and soon to be marketed by CPA2Biz. The agreement removes from SSNI, SSLLC, and CPA2Biz any obligation to return or destroy the membership database it received during Phase I.

While our logic may not measure up to Spock’s, we have again chosen to go where no other state society has gone before. And I’m proud of that.