Client Quality is a Top Risk Concern During Busy Season 

Feb 8th 2018
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The recent high-profile litigation of companies, in which their accounting firm is also named for liability or negligence, is a cautionary tale for every public accounting firm.

There is no doubt, says Bill Thompson, CPA, RPLU, president of professional liability and risk management company CPA Mutual, that today claims against CPA firms are “becoming more difficult and costly to defend,” and the stakes of any potential litigation, both in the short and long-term can be increasingly devastating.

“Not only is time and money lost, but both firm and personal reputations are at stake. Of these, only money is insurable,” Thompson says. “In addition, regulatory agency proceedings, and proceedings with professional governing boards like the AICPA and state boards, can lead to sanctions and penalties, as well as a CPA losing the ability to practice. It’s just not money any more but livelihoods at stake.” 

As the 2018 busy season for accountants begins, CPA Mutual has nominated several areas of risk it believes deserve special mention and attention — most notably the quality of the client. Awareness of these risks and careful practice management can help firms manage liability risks through busy season when the heat is on.

Client Acceptance/Retention

Risk management begins with the selection and retention of the right clients. Specifically, firms should develop sound client acceptance and retention policies. These policies should be tailored for service types and industries, as the risk profiles are likely to be different.

The initial screening of clients should include developing a client profile — financial metrics, management and employee information, industry focus, accounting system framework, accounting software, and the like. In addition, there is more telling data to gather, such as:

  • History with previous accountants or other professional service providers 
  • Recent and significant litigation or customer disputes
  • Recent material events or changes, adverse or otherwise
  • Challenges and risks facing the client or industry
  • Significant management or employee turnover
  • Interaction with federal or state regulators, such as the DOL, IRS or SEC

After a year or two of experience serving the client, an even clearer picture of the quality of the client relationship will emerge. 

  • Is the client forthcoming, honest and cooperative? 
  • Does the client respect and heed advice, or ignore it?
  • Are the day-to-day operations of the client well managed?
  • Are there sufficient internal financial and operational controls?
  • Are books and records properly maintained?
  • Is there timely filing of tax returns, quarterly payments, etc.?
  • Does the client promptly pay the accountant’s invoices?
  • Is the margin on the client work acceptable?

With this and other information, the firm can make an informed assessment of whether to continue to serve the client or resign. While no one likes to lose a client, jettisoning a high-risk client is often — in the end — the best decision.

Engagement Letters

Next to basic client quality standards and monitoring, solid engagement letters are the single most effective risk management tool accounting firms have, notes Thompson. While most firms regularly use engagement letters, they are frequently deficient in a variety of ways.

“Too many engagement letters we’ve seen are missing widely accepted legal protection clauses, such as a limitation of liability, a detailed description of management’s responsibilities, or a tight description of the scope of services and appropriate limitations,” Thompson says. Beware also of engagement creep or de-creep between years.

Many engagement letters also suffer from copious copying. Poorly drafted letters that lack important protective provisions or contain terms unrelated to the present engagement are used over and over again, replicating and increasing the firm’s risk exposure.

“The process used to implement quality engagement letters is key to their success as a risk management tool,” says R. Peter Fontaine, managing partner at NewGate Law. Every accounting firm should consistently use a template engagement letter that is reviewed by an attorney who understands public accounting liability issues.

The template should note common areas for customizing that support alignment with the intent and promised deliverables of the engagement while still retaining up-to-date legal provisions and disclosures. And make sure that each engagement letter is also proofed for typographical errors.

Quality Standards

As more CPA firms expand their scope of services and specialization to stay competitive, it is essential that the right people with appropriate knowledge and skills, including being well versed in applicable client industry regulations, are completing new and complex work.

Business transaction and financial advisory services, health care consulting, the cannabis industry, alcoholic beverage manufacturing and distribution, not to mention wealth management, are some of the areas where firms are finding greater demand and higher margins, but also potentially more liability issues.  

As they begin busy season, leaders need to ask, “What is the condition of our team?” Simply having enough staff to do the work is not sufficient. Personnel must be knowledgeable, properly trained and current with the regulations and professional standards, as well as firm policies and practices.

Although the common practice of using seasonal or part-time employees to meet the busy season surge may appear to be a good solution, firm leaders must have a solid game plan for training, supervising and integrating them into the firm’s regular workflow process.

“Doing work right the first time, rather than doing it over to correct mistakes seems obvious,” Thompson says. “Nonetheless, people take short cuts, rush to get things done, fail to follow established procedures, and inevitably make errors that, hopefully, are caught and corrected.”              

While computers are pretty good at multitasking, most humans are not. Insufficient attention to important details during multitasking usually results in diminished performance and oftentimes errors. As hard as it may be to stay focused and avoid distractions, doing one thing at a time is far more efficient and significantly less risky.

Look at repeat clients with fresh eyes. Client circumstances change, and so should the structure or approach to the engagement.

Ask questions, verify information and demonstrate the requisite amount of professional skepticism. This may precipitate difficult conversations with clients that need to be handled tactfully, but firmly and definitively. Excellent client relationships come from the trust that a CPA is diligently monitoring their needs.

Here are a few additional and noteworthy recommendations to manage risk during busy season:

1. Provide opportunities inside the office and out for employee breaks, personal time and rest. Busy season is synonymous with pressure and stress. While a certain amount of stress helps fuel motivation, too much quickly strips us of energy, acuity, and judgment — and raises our risk quotient. Everyone handles and manages stress differently.

2. Establish procedures for maintaining information security as deadlines increase. Information security, including identity theft, is top of mind for most accounting firms. While there is sophisticated technology that can help reduce the risk of unauthorized access to client and firm information, most studies conclude that human errors, and not technology failures, cause the majority of information security mishaps.

These procedures don’t need to be elaborate, just reasonably calculated to minimize security risks — as well as practical and easily implemented. These procedures should include a combination of administrative controls (including written client information security programs, back up and retention policies, and information security policies); technical controls (such as information classification and password management policies); and physical controls (including hardware management policies, acceptable use policies, and personal mobile device standards). Identify the highest risks and address those first. 

3. Remember federal and state wage and hour laws. Busy season means lots of hours and overtime. Compensation, including bonuses and compensatory time based on the number of hours worked, makes an otherwise exempt employee a non-exempt employee who is entitled to overtime pay — a potentially costly proposition.

A final note: Not every employee will work out. Have a contingency plan to handle proper termination of employee contracts and communication with clients.

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