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Trusted brand smacked by irony

Call it a gift to late-night television comedians.

But marketing experts say a $32-million tax mistake by H&R Block could drive away potential customers, and that would be no laughing matter for the nation's largest tax preparer.

"For a firm like H&R Block, credibility is of paramount importance," said James McAlexander, an Oregon State University marketing professor who has looked at how professional services providers appeal to consumers. "If the H&R Block story becomes fodder for late night television, where they become the butt of the joke, that could affect their credibility with prospective clients."

Shares of H&R Block fell $2.18, or almost 9 percent, to close at $23.01 Friday on the New York Stock Exchange. The company Thursday reported a 68 percent drop in third-quarter profits and executives told analysts they were lowering their earnings expectations for the year.

The company also said it was restating earnings for 2005 and 2004 and the first two quarters of this year after discovering it had made a mistake in determining its state income tax rates.

Analysts didn't seem too concerned that the gaffe could persuade potential H&R Block tax customers to take their business to independent accountants or competitors, like Jackson Hewitt Tax Service.

"Given what goes on with stocks, it's understandable for companies to have to go back sometimes and restate earnings," said Mike Millman, analyst with Soleil Securities/Millman Research. "What's important is operations."

On that front, Millman said he's far more concerned about H&R Block's report that through the first month and a half of the U.S. tax season, the company has seen 4.1 percent fewer clients than a year ago. The company has attributed some of the loss to technical glitches at the beginning of the year that drove away an estimated 250,000 potential customers.

"There are some questions about the future of the paid preparer part of their business," said Millman, who doesn't own H&R Block shares. "Whether (the decline in clients) was a bump in the road or a trend is unclear."

In truth, it's much more complicated to work up the tax burden of a company that took in $4.4-billion in revenue last year operating more than 11,000 tax offices across the country, in addition to providing mortgage lending, investment advice and business accounting services, than it is to complete the return of the average individual taxpayer.

"We have advised our field offices that there's no relation between what goes on in preparing the individual tax returns and the corporate returns," said Nick Iammartino of H&R Block, adding that the company doesn't expect the restatement to affect the number of customers.

In addition, customers who don't follow financial news may never even know about the restatement. But that could change if the ironic nature of a tax preparer getting its taxes wrong puts the news before a wider audience.

Jeff Swystun, global director of Interbrand Corp., a New York branding and design consultant, said he was disturbed by the back-to-back bad news H&R Block has suffered recently - California Attorney General Bill Lockyer sued the company last week over its use of refund anticipation loans.

But he thinks the company, with a well-known and trusted brand, will be able to weather the storm.

"Consumers will eventually make a separation between their corporate situation and their history of providing quality and decent service," Swystun said. "It's a story of short interest, but I don't think it's going to cut into their market share."