| |
||
| March 15, 2004 | The
Monthly Newspaper of the NYSSCPA |
Vol.
7, No. 5 |
Client Screening and Acceptance
By John F. Raspante
Many CPAs manage their professional liability risks by following policies and procedures for screening and accepting clients and engagements. Camico, the New York State Society of CPAs–endorsed professional liability insurance carrier, has long recommended such policies and procedures as the first steps in an effective loss-control program, and they are now standard practice in the accounting profession. The American Institute of CPAs’ Practice Alert 2003-03 describes in detail the rationale and components of client and engagement screening processes.
CPA firms should evaluate all potential new clients and re-evaluate all current clients on a regular basis, at least annually. Firms can also stipulate in their engagement letters that the engagements are not binding until client acceptance procedures have been completed.
Know Your Firm
An important part of client screening is to evaluate the expertise of your firm’s personnel.
Ask yourself and your partners what types of services your firm most competently performs.
Know your firm’s strengths and weaknesses. 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 as well ethical violations.
Due care demands that firms: 1) are capable of performing the services required by the engagements they accept; and 2) are performing the services often enough to become proficient at them. 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 percent 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. A jury will expect CPAs to have a thorough understanding of the client’s business and industry in order to identify those stress points. A CPA’s proficiency may also be judged by an expert in the type of engagement in question.
Some CPAs make an annual habit of redefining and understanding the scope of their own practice, going so far as to write out clear statements of what they can and cannot do. If they have clients who don’t fit into that scope, they disengage and refer the clients elsewhere. Spend some time thinking about the question, “What kind of clients and engagements would our firm really like to have?” When you have the answer, explore ways to cultivate that kind of business.
Know Your Client
There are high-risk clients, and there are high-risk engagements. Both can be discovered through careful client screening. High-risk clients and clients representing high-risk engagements include those who:
-
act dishonestly;
-
pay slowly or not at all;
-
have poor credit or insufficient working capital;
-
are in a start-up mode;
-
do not have the required expertise in their field;
-
operate in a litigious or declining industry;
-
have a history of litigation;
-
have poor record-keeping or accounting practices;
-
have weak internal controls;
-
have high staff turnovers;
-
are losing a key partner at work;
-
are going through a divorce; or
-
have had frequent changes in auditors, accountants, attorneys or bankers.
Much of the information you need to screen a new client can be obtained by:
-
running a credit check;
-
examining the past three years of tax returns and audited or reviewed financial statements;
-
examining prior CPAs’ management letters;
-
interviewing the client and the client’s key personnel, banker, attorney, prior accountants and auditors; and
-
utilizing the services of a background investigations firm for all significant engagements.
Make a regular practice of interviewing the predecessor accountant, who can be an excellent source of information. Questions that prior accountants may be willing to answer are:
-
Why did the client leave?
-
Did the client pay bills on time? Meet deadlines? Keep good records?
With corporate clients, credit checks and public-record checks are critical. 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? Is the engagement within our firm’s area of expertise? Is it risky? 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)?
-
Is there a high staff turnover?
-
Is a key partner leaving?
-
Is the client of a litigious nature, judging from our conversations with prior accountants and 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. The best time to conduct it is 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.
By heeding the warning signs that develop from client screening, CPAs can save large amounts of time that may have otherwise been spent dealing with litigation and controlling damage to their firm’s reputation.
John F. Raspante, CPA, is regional representative for Camico’s loss prevention services, and leads the company’s new business efforts in New York state and the Northeast.
