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| September 2005 | The
Newspaper of the NYSSCPA |
Vol.
8, No.16 |
Dealing With Difficult Fee Issues
By Hunter Colby, JD
A study by the Commercial Collection Agency Association (www.ccaacollect.com) reveals interesting data on the probabilities of collecting on late accounts. After three months, the probability of collecting drops to 70 percent; after six months, 52 percent; after one year, 23 percent; and after two years, 9 percent.
The message is clear that CPA firms should expect prompt client payments and take action when payments are not made on time. The best way to avoid a collection problem is to:
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include billing and collection policies as well as stop-work and disengagement provisions in engagement letters;
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bill on a timely basis;
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not allow fees to build up to the point where you can no longer walk away from them; and
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enforce the stop-work and disengagement provisions if the client doesn’t pay you in accordance with the engagement letter.
When unpaid fees become too large, they provide an incentive for the client to assert malpractice in an attempt to avoid or reduce fees. CPAs should not ignore such assertions, which often end up as allegations in a lawsuit.
At the same time, claims experience shows that suing for unpaid fees creates a high probability of a countersuit by the CPA’s client, usually alleging malpractice, thereby escalating the situation from a simple fee dispute to a lawsuit. CPAs should carefully weigh the risks and consequences of suing for fees. Lawsuits and countersuits often create situations in which everyone spends far more in attorney fees than is warranted for the fees owed to the CPA. It is important to be aware of all of the potential costs and consequences before committing to a lawsuit.
Camico recommends binding arbitration only for simple fee disputes and simple income tax return preparation engagements (1040 forms), but not for complex returns. An arbitration clause can be included in your engagement letter, which should spell out the scope of the work you will perform for the client, including the limitations and responsibilities of each party. Consider including a fee estimate, noting that unforeseen circumstances or changes in the engagement could make a revision necessary, and have the client sign the letter.
We advise CPAs to avoid using a general arbitration clause in an engagement letter, except for simple 1040 tax return preparation engagements. Most engagements, when in dispute, tend to be complex, high-risk, high-dollar, and better managed through litigation than arbitration, which can restrict and impair an effective legal defense. An excellent resource for engagement letters is the CPA’s Guide to Effective Engagement Letters. An order form for the book can be found at www.camico.com. Click on “Services,” scroll down to “Practice Management Tools,” click and scroll down to the order form link.
Despite repeated requests, some difficult clients don’t provide information on a timely basis. Other clients have poor bookkeeping practices that cause the CPA to work harder and longer to get a handle on financial information. Increased workloads then lead to higher fees, which can lead to conflict.
The delays caused by poor bookkeeping can also cause the CPA’s work product to be out of date and to be useless to the client. Tax returns also might be filed late, causing the client to incur interest or penalty fees. In these instances, options include:
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sending a letter to the client to confirm the problems, explaining that disengagement may be necessary if the client doesn’t cooperate; or
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disengaging if you’ve already determined that the client can’t remedy the situation and isn’t worth the extra work and exposure.
Clients who are divorcing couples or are partners in litigation with each other will sometimes assert that their CPA gave the other spouse or partner a benefit that worked to their detriment (conflict of interest). This is true especially when the CPA appears to be biased by the fact that one of the spouses or partners is paying the CPA’s fees. Marriages and partnerships require equal treatment of each partner by the CPA, regardless of ownership percentages or who is paying the fees.
It may be appropriate for the CPA to obtain a conflict-of-interest waiver letter signed by the clients. At the same time, the CPA shouldn’t get too comfortable with disclosure as a form of protection, as it can be argued later that the clients’ consent was not “informed” by a third party such as an attorney. It also may be appropriate to disengage from one or both parties.
As in all situations involving disputes with clients, it is a good idea to contact your legal or risk advisor if you perceive any potential problems.
Hunter Colby, JD, is a claims specialist with Camico and has more than 19 years of experience in claims. He earned his bachelor’s degree from State University of New York at Stony Brook and his law degree from Peninsula University in Mountain View, Calif.
