Increasing Audit Profits Series No. 6—Profiles in Courage (Purging Your Client Portfolio!)

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Many practitioners have realized that the character of their clients often determines the quality of their engagements.  Character flaws may translate into misstatements due to errors and fraud.  Completing client acceptance and continuance forms to comply with quality control standards has become a routine, non-effective compliance function for some CPA firms.  The main purpose of evaluating clients is to reduce a CPA firm’s risk of association with clients having unacceptable character and integrity.  A secondary purpose is to cull out the bad apples!

In January, 2004, the AICPA issued Practice Alert 2003-03, Acceptance and Continuance of Clients and Engagements.  The purpose of the Practice Alert was to reinforce the importance of a CPA firm establishing policies and procedures:

“….that should provide the firm with reasonable assurance that the likelihood of association with a client whose management lacks integrity is minimized.”

Other paragraphs in the Practice Alert state:

“The firm’s client acceptance and continuance policies represent a key element in mitigating litigation and business risk.  The firm must be aware that the integrity and reputation of a client’s management could reflect on the reliability of the client’s accounting records and financial representations, and therefore on the firm’s reputation or involvement in litigation.

The firms should perform an evaluation of all potential new clients.  The firm should strive to be associated with only those clients that have the following characteristics:
•    Management possessing competence and integrity.
•    A financial and accounting officer who is knowledgeable about the business and the decisions made by the top operating management.
•    Management that is committed to the application of appropriate accounting principles.
•    Appropriately comprehensive and sound internal controls that are consistent with the size and organizational structure of the business.
•    An appropriate corporate governance structure.

The firm may also wish to consider the future business prospects of the prospective client including whether it has a viable business with good long-range prospects and is adequately financed.

….Risks similar to those involved in new client acceptance pertain to the firm’s continued association with certain existing clients.”

Most practitioners will agree that problem clients are almost always the least profitable.  The biggest complainers about billings are usually the clients that consume the most time to service.  The clients that don’t hire competent employees often ask the most questions and demand the most attention.  Smaller clients generally are the least capitalized and are most prone to financial difficulties.  Management personnel of clients with financial difficulties are most likely to override internal controls and to perpetrate fraud.  Clients with threats to continued existence are most likely to fail…and to sue their auditors or accountants to try to recover losses!

Terminating client relationships is difficult for most of us.  It requires great courage! Many of our clients are old friends and we don’t want to lose those relationships (or maybe our golf partner!). Mostly, the potential loss of cash flow strikes fear into our hearts!  We often are afraid we can’t replace these problem clients and that we’ll have to give up eating one day a week!  So, we grin and suffer with the problems.

The truth is that CPA firms that annually terminate their least desirable clients have more time to develop new, higher-quality client relationships that increase engagement and firm profitability.  As the quality of a firm’s client portfolio improves and profits increase, firm personnel also enjoy more satisfaction and fulfillment from serving clients’ needs.  Many practitioners can attest that annually purging their client list has made direct contributions to their firm’s growth, both in total revenues and in employee compensation. Do you have the courage to take this important step to increasing your profits from audits and other services?  The right time to do so is now!

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