Evaluating clients annually is good practice management for a professional services firm. A firm’s strategies, areas of practice, and risk profile change over time. As a result, certain clients may no longer be a desirable fit for the firm. Similarly, some client behaviors become problematic and can harm the staff’s morale, creating issues for partners, and causing lost opportunities to serve clients who complement the firm’s business model.
Effective practice management includes recognizing the need to discontinue certain client relationships. The art of identifying when to end a relationship and how to terminate a client requires experience and should be embedded into firm culture.
When the need to terminate a client is identified, a firm can limit its risk by informing the client in writing of its decision to end the relationship. If a firm fails to effectively communicate the termination, the client and third parties may operate under the impression that the CPA firm still serves the client. Even if the client realizes that the relationship is over, many may state they “thought” the CPA was coming back to perform “the annual work as usual” when there is no documentation of a termination.
RATIONALIZING A RELATIONSHIP
CPAs may rationalize the perpetuation of a poor relationship with a client because the firm is reluctant to lose the revenue or dismiss a longtime client. Often, if the CPA has provided services to a client for a long time, the CPA also may serve the entire family in both professional and business matters.
The client may be an acquaintance outside of the professional relationship, and their paths will cross in the community. The client may be a good referral source, a “good person who is just experiencing financial trouble,” or well-respected in the community. Nevertheless, if the client places stress on the practice, the firm should consider ending the relationship.
COMMON INDICATORS OF A PROBLEM CLIENT
Timely termination is critical to mitigating litigation risk involving a problem client. Firms should implement an annual assessment of the client portfolio shortly after busy season when client interactions are fresh. Client behaviors and circumstances indicating the need for termination may include, but are not limited to:
- Nonpayment or consistently late payment of fees;
- Frequent price or service complaints;
- Disagreements or disputes between the CPA and the client (over issues such as fees, aggressive tax positions, or accounting treatments);
- Disputes among the client’s partners or shareholders;
- Difficulty in obtaining or consistent delays in receiving requested information;
- Patterns of failing to follow and/or ignoring advice;
- Consistently negative reactions to points of improvement raised by the CPA firm;
- Lack of management integrity;
- Lack of internal controls;
- High accounting and management turnover;
- Poor treatment of CPA firm staff;
- Poor treatment of the client’s own accounting department or evidence that accounting/fiscal oversight is not a priority for the client’s management;
- Potential and actual conflicts of interest between the CPA and the client (e.g., divorcing or divorced clients).
In addition, a client’s strategies, structure, complexity, or business relationships may change, adding layers of risk to the engagement that the firm may not be willing to assume. In the end, the firm must make a judgment call to determine the time to walk away. The decision should include an assessment of business goals, personal values, and risk mitigation.
TERMINATING THE RELATIONSHIP FORMALLY AND EFFECTIVELY
Once the decision is made to terminate a client relationship, it should be communicated in writing. It is risky to ignore the client until the client’s departure from the relationship. The experience of the AICPA Professional Liability Program demonstrates that this approach leads to malpractice claims. Moreover, complaints to state boards have arisen when a client was unaware of the firm’s termination and missed a tax compliance or regulatory filing deadline, or a commitment to submit financial statements to a shareholder, lender, or other third party as a result.
Additionally, negative actions taken by clients after a termination decision is made, and in the absence of proper notification, may harm the firm if third parties operate under the impression that the firm continued to serve the client. Without written documentation, it becomes difficult to prove the firm was no longer associated with the client at the time of any alleged wrongdoing.
Written evidence can strengthen a CPA’s defense against a claim as long as it is factual and includes the following elements:
- Nature of services and when those services ended (generally the date of the termination letter);
- Issues regarding any work-in-process;
- Fees due to the firm;
- Status of original client records;
- The firm’s record retention policy and guidelines for responding to a request for copies of client records;
- Items requiring follow-up or completion by the client, such as the due dates for tax returns and the need to engage another accounting professional or tax attorney to assist the client going forward.
Ultimately, the client termination letter should clearly inform the client of the date on which the service(s) ended and should be limited to the points noted above.
This process requires caution. If the client is facing an imminent tax or regulatory deadline that will be difficult to meet due to the termination, the firm should consult with an attorney and its professional liability insurance carrier before proceeding. If there are exhaustive matters that require the client’s follow-up, such as internal control deficiency observations and recommendations, potential noncompliance with tax law, or misclassification of independent contractor vs. employee status, a separate findings letter may be necessary. The findings letter should accompany the client termination letter. The letter(s) should be sent using a delivery method that allows for evidence of receipt, including the date.
DISCUSSING LESSONS LEARNED
The firm should evaluate lessons learned from the client termination experience. Were red flags ignored in the acceptance process? Did the client contact the firm after working with several other accounting professionals in the past? Did the client refuse to allow the firm to contact the predecessor CPA? Was the client averse to agreeing to terms of the engagement through use of a formal engagement letter? Was the client significantly delinquent in tax compliance (income, payroll, sales, etc.)? Was the client responsive to follow-up inquiries and/or requests for information?
When a firm says in hindsight, “I should never have taken this engagement in the first place,” the red flags ignored in the acceptance process should be reflected upon in developing future client acceptance practices.
A HEALTHY BREAKUP
Firm time freed up by no longer providing services to problem clients presents an opportunity to begin and build relationships with good clients that meet the firm’s acceptance criteria. The dedication to developing and modifying, as needed, a strong client acceptance and continuance policy should ultimately benefit the firm. Remember that problem clients lead to unnecessary firm stress whether it is placed on firm professionals, workloads, or billings and collections.
In the end, poor client relationships have a long-term negative effect on the firm regardless of the short-term effects of walking away. By eliminating such clients, the firm can focus its resources on providing high-quality services to clients who follow the firm’s advice, pay invoices on time, and are consistent with the firm’s business model. Properly terminating a client relationship can also help CPA firms avoid potential costly professional liability insurance claims.
Amy Waldron (email@example.com) is a risk control consulting director at CNA.
Continental Casualty Co., one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit cpai.com.
This article provides information, rather than advice or opinion. It is accurate to the best of the author’s knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.
Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured.