Client Assessment Checklist

Client Assessment Checklist Before you can write an engagement letter, you need to assess your potential client. This checklist is designed to help you conduct the due diligence to make sure that the client is a good fit for your firm, and that you have a comfort level with the client. You may already feel that you have a good understanding of the client s needs, and that the firm can provide the services needed. If so, please use the Engagement Letter Checklist. Checklist Item Determine if There Is a Good Fit for Both Firm and Prospective Client Notes and Suggested Wording CPA firms should evaluate all potential new clients and re-evaluate all current clients on a regular basis, at least annually. This enables the firm to better monitor clients, consider any changes that might affect the professional relationship, and avoid situations that could escalate into crises. Firms can also stipulate in their engagement letters that the engagement is not binding until client acceptance procedures have been completed. Three main considerations in the client acceptance process are: 1) Is the engagement a good fit for the firm s expertise? If the firm accepts an engagement for which it is not professionally staffed or qualified, it runs the risk of disappointing the client, or a third party, and exposing itself to litigation and ethics violations. Due care demands that firms: a) are capable of performing the services required by the engagements they accept; and, b) are performing the services often enough to become proficient at them. CAMICO claims experience shows that firms dabbling in services outside of their areas of expertise are not practicing them often enough to become proficient. Services that represent less than 15% of a firm s service concentration produce disproportionately high loss ratios. Proficiency in any type of engagement includes the ability to identify risk stress points in the engagement. CPAs are expected to possess a thorough understanding of the client s business and industry in order to identify those stress points. Establish a policy for what types of engagements your firm will avoid because of a lack of technical expertise. 2) Is the client the kind of client the firm would like to have? If you re a new firm, you have the opportunity of selecting the clients you want. If you ve been practicing for some time, there s nothing to stop you from changing your clientele. A variety of factors need to be considered in answering this question, ranging from the client s reputation and integrity, to its commitment to appropriate accounting practices and to internal controls. CPAs should communicate with predecessor accountants and third parties to obtain as much information as possible about the client. Are the client s expectations of CPAs reasonable? Does the client appropriately value CPAs services and advice? Background investigations are recommended for all significant engagements. When you have the information you need, explore ways to cultivate the kind of business you want. Other important considerations will depend on the type of client or engagement in question. For some engagements, CPAs will need to consider potential or actual conflicts of interest, as well as whether the CPAs independence and Page 1 of 5

objectivity are impaired in appearance or in fact, especially when considering services for attest clients. 3) Is the client financially viable? The answer to this question is critical, especially in avoiding fee collection problems and disputes. Much of the information you need can be obtained by: Interviewing the client and the client s key personnel, banker, attorney, predecessor accountants and auditors Running a credit check Examining the past three years of financial statements Examining the past three years of tax returns Examining prior CPA s management letters Conduct Background Check Background checks should be considered for all significant engagements. Credit checks and public record checks are critical, but background checks are about more than the financial condition of the client. The questions the CPA firm should ask are: Why was our firm selected for this engagement? What was the source of the referral? What business is the client in? o Is the engagement within our firm s areas of expertise? Is it risky? o Are the rewards of the engagement worth the risk? Will the engagement cause our firm any conflicts of interest (actual or potential)? Are the business and accounting records adequate and in order, or disorganized? Are the financial statements and tax returns for the past three years consistent? What is the client s financial track record? (e.g., bankruptcies, business failures) What is the client s level of financial sophistication? (especially the accounting staff s) Is there a high staff turnover? Is a key partner or employee leaving? Is the client of a litigious nature, judging from our conversations with prior accountants and/or attorneys? Is the financial knowledge of the client acute? Client screening should be done regardless of the nature of the services you are being asked to perform, preferably during the period between the client s first contact with your office and the preparation and signing of the engagement letter (the pre-engagement period). Much of the information you ll need can be asked at the client interview and verified later through other interviews. The more information you get, the better you ll be able to assess the risk of the engagement or the client. In a CPA partnership or professional corporation, it is a common practice for another partner or a client committee to review the client-screening information and to pass judgment on the acceptability of a new client. There are high-risk clients and high-risk engagements. Some CPAs rank their clients according to how cooperative, knowledgeable, reasonable, difficult, or time-consuming they are. Engagements can be ranked as well by the complexity of the work. Generally, difficult clients with complex work pose the highest risk to the CPA firm. CAMICO recommends the services of Scherzer International. Founded in 1992, Page 2 of 5

Scherzer International has been providing background investigation reports to corporations across the country to help them assess prospective clients, investment targets, prospective employees and new business associations. While there are standard search strategies in this business, Scherzer International works with their clients to design a background search strategy to meet their due diligence goals, objectives and budget constraints. Their research staff has the experience and expertise to use a variety of data sources and to make decisions during this search of public records. Clients are notified immediately when they find possibly negative information and a decision is jointly made as to the next step to be taken. No additional costs are incurred without the client s authorization. Conduct Credit Check Speak with Client about Relationship with Prior CPA Speak with Prior CPA Determine Why Client Is Changing Accounting Firms (For Larger Clients) Contact Client s Banker Verify All Client Information (Name, Address, Email Address, etc.) Speak with Client about Possible Major Changes in Client s Life (e.g., Divorce, Bankruptcy, Any Litigation) Discuss with Client the Condition and Organization of Financial Records Make Sure Client Has a Good Understanding of Your Firm s Fee Structure CAMICO policyholders will receive discounted rates from Scherzer International. For a list of the services provided by Scherzer International, go to www.scherzer.com. Make a regular practice of interviewing the predecessor accountant, who can be an excellent source of information that many CPAs fail to utilize. Questions that prior accountants might answer include: Why did the client leave? Did the client pay bills on time? Meet deadlines? Keep good records? Q: How can I avoid having a collection problem in the first place? A: The best way is to communicate your billing and collection policies in your engagement letter, including stop-work and/or disengagement provisions that can be enforced if a client doesn t pay you in accordance with the engagement letter. Bill on a timely basis, and do not allow fees to build up to the point where you can no longer walk away from them. When unpaid fees become too large, they provide an incentive for the client to sue for malpractice, especially when the CPA has sued to collect fees. Q: Is there a better option than suing to collect fees? A: CAMICO s claims experience shows that simple fee disputes are better resolved through mediation and arbitration than through litigation. That s why CAMICO recommends mediation for all disputes as a first step and binding arbitration for fee disputes only as a second step. CAMICO also provides a premium credit to policyholders who agree to an alternative endorsement to their Page 3 of 5

policy to exclude coverage for claims arising subsequent to suits for fees. Q: How do I get the client to agree to mediation for all disputes and binding arbitration for fees disputes only? A: The best way is to have a mediation clause for all disputes and a binding arbitration clause for fee disputes only in your engagement letter, which is signed by the client. CAMICO provides suggested engagement letter language on the Members-only Web site. Note that some states do not permit arbitration clauses. Q: What are the first steps to take when a client is not paying? A: Good communication with a non-paying client will either spur payment or set up circumstances that will make a potential demand for arbitration more effective. This involves sending a series of three letters requesting payment and communication from the client: 1) The first letter politely notes the nonpayment of fees owed, requests payment, and asks if there is any reason for the delay in payment. 2) The second letter is a reiteration of the first letter. 3) The final letter notes the continued nonpayment and requests a call to discuss payment arrangements by a specified deadline date, stipulating that if no call is received by the date, the result will be a demand for arbitration concerning the fee dispute, effective as of that date. The purpose of the letters is to show that the client, by not responding to them, did not have any valid basis to claim that the fees were not owed. Had there been any dissatisfaction with the work, the client would have communicated it when given the opportunity. Q: Why does CAMICO believe that mediation and arbitration are better than suing to collect fees? A: CAMICO claims experience clearly shows that suing for fees creates a high probability of a counter-suit by the CPA s client, usually alleging malpractice during the engagement in question. This escalates the situation from a simple fee dispute to a malpractice lawsuit. Q: Does CAMICO cover claims arising subsequent to suits for fees? A: CAMICO policyholders have the option of suing to collect fees, but the policyholder must first consult with CAMICO before suing for fees. CAMICO will cover claims arising subsequent to suits for fees if the policyholder has that option, but the premium credit is not available. Q: Why do I have to first consult with CAMICO before suing to collect fees? A: The consultation enables a CAMICO specialist to assist the policyholder in weighing the risks and consequences of suing for fees. Lawsuits and countersuits almost always result in the CPA spending far more in attorney fees and in lost billable time than is warranted for the fees owed to the CPA. CAMICO believes that it is important for a policyholder to be aware of all of the potential costs and consequences before committing to a lawsuit. Q: Does CAMICO recommend binding arbitration for any other disputes? A: CAMICO does not recommend binding arbitration for disputes other than simple fee disputes. The only exception might be simple individual income tax return preparation engagements (1040 forms), but not complex returns. Page 4 of 5

Q: Can I just use a general arbitration clause in my engagement letters? A: We advise CPAs to not use a general arbitration clause in an engagement letter. Most engagements, when in dispute, tend to produce complex, high-risk, high-dollar disputes that are better managed through litigation than arbitration. An effective legal defense can be restricted and impaired by arbitration. Q: Can I use a collection agency? A: Yes, but the same guidelines apply to the agency. If you are using CAMICO s basic policy form without the alternative endorsement, you must first consult with CAMICO before the agency sues to collect your fees. If you have the alternative endorsement that excludes coverage for counter-suits after suing for fees, counter-suits are still not covered if the collection agency sues for your fees. Page 5 of 5