a tendency to sue, or just don’t pay their bills.
After failure to secure a well-written engage-
ment letter, accepting a troublesome client is
one of the most frequent reasons for claims
against accounting ;rms. A methodical and
systematic approach should be part of an
accounting ;rm’s risk management proce-
dures, and a balance should be struck be-
tween the fees charged versus the potential
for a claim.”
“When you’re assessing new clients, re-
member that risk prevention is always pref-
erable to defending a lawsuit,” said Nancy M.
Reimer, a partner in the Boston o;ce of law
;rm LeClairRyan. “Fee suits are de;nitely a
factor,” she said. “Clients who give trouble at
the outset are more likely to assert a counter-
and each has his or her own client base,” he
said. “;ey may be sharing space and there
may be some overlapping work, but for the
most part each partner is managing his or
her own business. ;at usually means that
each partner can bring in whomever they
want as a client. ;ey don’t feel the need to
run it by anyone or get approval, so you end
up with a group of partners each doing their
“;at needs to be corrected,” he said. “;e
partners need to understand that the work
done by each of them exposes all of them to
risk, and they need to decide collectively what
they will work on.”
Firms need to have a mechanism in place
to accumulate information over the course of
ed getting background searches on signi;-
cant engagements: “It can be a simple Google
search or a full-;edged background search. If
it’s an audit client or there’s a majority share-
holder that has a big part of ownership, we
suggest a professional background search.”
Part of a due diligence investigation should
be communicating with the prospective cli-
ent’s former CPA, suggested Parisi. “By talk-
ing to the predecessor and going through the
;nancials, you can get a fairly good picture of
where the client is.”
A simple tax return would not require
an extensive background check, but more
complex engagements increase the need for
knowledge about the prospective client. “You
need to guard against opinion shopping,” Pa-
risi said. “We see this frequently in complex
industries like oil and gas.”
“And even in the tax area, client acceptance
procedures should be followed,” he said.
“CPAs have been caught in a professional li-
ability trap for tax engagements when there’s
fraud or embezzlement at the client level.”
He also warned of engagement creep: “Just
because you’re only doing a tax return for a
client doesn’t meant you can’t be sued for
business advice during the engagement. For
example, if the client asks certain business
questions while you’re doing the return, it can
turn into more of a consulting engagement
than just a tax engagement. It’s important that
you are cognizant of who the client is and ex-
actly what services you are providing.”
FROM PAGE 1
Some tough questions to ask about
Is the potential client in a high-pro-
file or high-risk business?
What is the potential client’s financial health?
Is there an outside entity with a
Has any regulatory authority investigated the potential client?
Does a person or entity related to
the accounting firm have any interest in
the potential client?
Does the potential client have
financing from unusual sources?
Why is the potential client interested in the accounting firm?
Who was the previous accounting
firm and why are they being terminated?
How often has the firm changed
accounting firms in the past five years?
Was the former firm competent?
Aggressive? What reasons does the
firm give for termination?
Does the information given by the
potential client match what you are
told by the previous accounting firm?
Can we see the previous accounting firm’s work papers?
ASK BEFORE YOU LEAP
Whether serving the
needs of one professional
or an entire organization,
the Accounting Today Institute will give you the
you need to build your
for more information.
Log On & Learn
An accountant wishing to disengage from a
client should put it in writing in a formal disengagement letter, and should do it earlier,
rather than later.
“Often, banks or other lenders are wait-
ing for opinions, and if a CPA disengages at
the last minute it signals that there may be a
problem,” Parisi said. “;e CPA can get sued
for creating insolvency by causing the bank to
take away the client’s line of credit.”
;e disengagement letter should declare
the status of work and any upcoming dead-
lines, so the former client can seek alterna-
tives. “When quality firms disengage from
mediocre clients, there are still ;rms out there
willing to pick up the work,” Parisi noted.
Protection from potential lawsuits begins
before an engagement letter is signed, ac-
cording to Rick Jorgensen, president and
chief under writing o;cer of Jorgensen & Co.
“It starts with posing tough questions to the
potential client,” he said (see “Ask before you
leap,” above). “Tough questions are designed
to identify clients that are in a high-risk busi-
ness, encountering ;nancial di;culties, have
claim for malpractice when they are sued to
collect on a fee.”
“In many cases, it’s easier for an accountant
to just write o; the fee,” she said. “In some
cases it involves a signi;cant amount of reve-
nue, so you don’t want to just walk away from
it. In those cases, we go through the papers
and make sure the records are clean so there’s
a minimal risk of liability if the accountant is
hit with a malpractice claim.”
Reimer recommended going through your
roster of clients at the beginning of each tax
season. “Over time, accounting ;rms change,”
she said. “Make sure the client falls within
your business parameters as they evolve.”
Client risk assessment is the ;rst line of de-
fense against malpractice claims, emphasized
Ralph Picardi, CPA, Esq., a partner at law ;rm
Lapping & Picardi. “It’s the ;rst opportunity
you have to make a major impact on the risk
your ;rm will take on.”
Midsized ;rms and faster-growing small
firms are especially vulnerable, he noted.
“The reason is that they usually start with
a small group of partners that get together,
the year about existing clients, said Picardi:
“Red ;ags such as not paying on time, di;-
cult personnel, or concerns about the integ-
rity of management need to be preserved and
not just committed to memory and forgotten.
;at way, when it comes time to make deci-
sions about whether to keep serving a client,
there’s a resource to tap into.”
A client that presents a high level of risk
shouldn’t necessarily be turned down, indi-
cated Picardi. “It just means there is a need
to make an informed decision based on the
risk. ;ere needs to be some monitoring on
how it’s going. When the ;rm has its monthly
meeting, it should not only consider new and
existing clients, but also monitor how the
risky client is doing.”
“Bring in the partner working with the cli-
ent, and stay engaged,” advised Picardi. “Over
time, there should be fewer uncomfortable
situations with problem clients and a dimin-
ished number of claims or reportable events
to a ;rm’s insurers. ;e partners will be work-
ing together as one ;rm, as opposed to a col-
lection of separate practices.” AT