June 2000

When to Disengage from Clients: Recognize the Warning Signs

In life, there is an art to knowing when to leave. Be it a party, a relationship, or an engagement with a particular client, there are always signs that, when read properly, will point CPA firms toward the door. When CPAs encounter some of the following situations, it may be time to consider disengagement.

Unethical or Illegal Client Behavior

Camico's statistics indicate that unethical client behavior is one of the top three reasons CPAs request advice on disengaging. And nearly 45 percent of Camico's significant claims (those that are greater than $100,000) are due to fraud on the part of the client. CPAs risk losing their reputation, license, and lawsuits when continuing relationships with clients they suspect of illegal or unethical behavior.

No Payment or Slow Payment

Do not ignore payment problems; rather, call the client to learn what is causing the problem. Is the client upset about a CPA firm's fees? Does the client understand the bill, or find service unsatisfactory? Is the client experiencing financial difficulties? CPA firms should avoid clients that have had tax returns prepared by a different CPA each year and never paid any of their bills. Also be aware that NYSSCPA and AICPA ethics rulings state that independence is considered impaired if fees remain unpaid (whether billed or unbilled) for professional service provided more than one year prior to the report date.

Uncooperative Clients

Uncooperative clients who do not provide needed information, do not return phone calls, and are otherwise nonresponsive can cause delays in a CPA firm's operation. For example, a small CPA firm had a large, multiple-entity client whose poor record-keeping made it nearly impossible for the firm to complete tax returns. After hours of letter writing and repeated attempts to extract information needed to complete the engagement, the CPA firm chose to disengage, knowing full well that it was losing a big client and fees exceeding $10,000. Despite the loss, the firm did not regret the decision, and in fact felt greatly relieved of the aggravation of dealing with a hopelessly uncooperative client.

Nature of Client's Business Changes

When a client's business changes, the CPA may need to reevaluate the client relationship. For example, a client may buy a business with which the CPA firm is neither familiar nor qualified to perform work. The client may decide to sell much of the business, and the CPA may not wish to work for such a small entity. Additionally, a start-up client may grow to a point when it plans to go public, and the CPA may not want to perform the public work.

Changes in the CPA Firm

The loss of a CPA firm's partner with expertise that the other partners do not possess is just one example of a change that may require disengagement from a client. CPA firms also may decide that they no longer want to continue performing a particular type of work, or they may decide to grow their business in new and different directions. Whenever there are firm changes, CPAs should review their client list to determine whether or not all existing clients still fit the firm's current and future directions.

Potential or Actual Conflict of Interest

CPAs should consider all client situations carefully to spot conflicts of interest that may affect objectivity or independence, even if the CPA is not engaged to do attestation work. Examine potential or actual conflicts of interest from a broad point of view; consider the client's perspective as well as those of other owners, investors, partners, beneficiaries, and spouses. Unfortunately, very often the bottom line is perception. Troublesome or emotionally charged scenarios can include a partnership break-up, a trust, bankruptcy, merger, divorce, or anything else that involves opposing or unhappy factions. It may be difficult to continue preparing tax returns for a divorcing couple, for example, since each spouse could accuse the firm of preparing the return in a manner more favorable to the other spouse. It can also be difficult for the CPA to continue working with two former partners after a dissolution, especially if the partners were not on amicable terms.

Examine the potential for conflict prior to accepting an emotionally charged engagement. If the engagement seems worth the risk, CPAs should protect themselves by not getting caught in the middle. A hold harmless or indemnity clause, letters to both parties about joint and several liability, or a retainer in bankruptcy engagements can help. When working with divorcing spouses, suggest preparing joint and separate returns and determining together the most equitable arrangement.

Deteriorating Relationship

A deteriorating relationship with a client may signal impending liability problems. Abrupt changes in a client's behavior may indicate a failing business, severe financial problems, substance abuse, or other personal problems. Trying to uncover the source of the problem could be beneficial, but whatever the course of action, do not ignore the warning signs of a deteriorating relationship. If a client continually fails to return phone calls or threatens to sue, the CPA firm should take swift action to remedy the situation or disengage before the situation worsens.

Ric Rosario is vice president of loss prevention services at Camico Mutual Insurance Co., the NYSSCPA's affinity partner for professional liability insurance. *