Make ’Em Pay Up

Document the scope of an engagement—and make sure the client understands.
BY CARL PACINI AND ROBERT TUCKER

EXECUTIVE SUMMARY
A FIRM SHOULD SCREEN NEW CLIENTS for fiscal responsibility and use an engagement letter to describe exactly what services it will and won’t perform, what reports it will issue and the fee structure—hourly billing, project fees or other means of computing fees. The letter should name the entities that will get services and one that will pay the bill.

A MONTHLY RETAINER PLAN CAN PREVENT a client from falling behind, incorporate the client’s payments into predictable cash outflows and reduce haggling. If a client with a questionable credit history balks at paying a retainer, avoid the engagement.

A SIGNED PROMISSORY NOTE IS a client’s written agreement that he or she owes the CPA for services. A firm should get one from a client who wants to wait more than 60 days before making a payment, for example. Have legal counsel draft the agreement.

A FIRM SHOULD HAVE A POLICY for managing late payers and nonpayers and all partners should follow the same procedures. A firmwide approach reduces debate and simplifies handling collections. Firms should maintain accurate records and bill promptly.

SOME FIRMS USE ALTERNATIVE DISPUTE RESOLUTION (ADR) to defuse a malpractice counterclaim by the client if the CPA must sue for unpaid fees. Mediation or arbitration permits the firm to pursue payment in a way that minimizes conflict.

ONCE A DEBTOR-CLIENT MAKES a verbal commitment to a payment schedule, a firm should document the conversation in the client’s file and send a letter confirming the understanding. If a debtor closes off communication, a firm has no choice but to refer the debt to a collection agency or a lawyer for further action.

CARL PACINI, CPA, JD, PhD, is an assistant professor at Florida Gulf Coast University, Fort Myers. His e-mail address is cpacini@fgcu.edu . ROBERT R. TUCKER, CPA, PhD, is an associate professor of accounting at Fordham University, New York. His e-mail address is atucker458@aol.com .

eople don’t like to pay bills—it’s an incontrovertible fact. The CPA profession has been on the “not yet” receiving end of growing reluctance or even outright refusal of some clients to remit for accounting, tax and assurance services, studies show. For a firm, as for any business, a pattern of missed payments translates into reduced cash flow, impaired profitability, diminished compensation and disputes. It also means CPAs spend more time scrambling and less time practicing and developing client relationships. The purpose of this article is to present ways to help firms sidestep potential problems and expedite collection should accounts become delinquent.

AN OUNCE OF PREVENTION
The first line of defense against risky clients is effective screening. Criteria such as financial distress and management integrity—used to assess litigation risk—relate to payment issues, too. Find out why a potential client is changing accountants, and get permission—in writing—to talk to the previous CPA (see “ An Ethics Quiz ,” JofA , Aug.02, page 41). Ask whether any problems have cropped up. Talk to a sampling of the client’s customers, suppliers or vendors. Warning signals relevant to a client’s ability to pay range from lack of liquidity, poor profitability, debt load and vulnerability to interest rate fluctuations, industry in decline, poor credit history and reputation; the latter encompasses the personal finances of key members of a business’s management.

Because a public company must file a Form 8-K in the month following a change in auditors, the Internet can be a good source of information. The client’s filing will be on the SEC Web site, www.sec.gov/edgar.shtml, and a record of fee or other disputes is likely to be included there as well. Databases such as Lexis-Nexis and newsbanks are sources of information that can show whether a company is a risk. D&B (formerly Dun & Bradstreet Corp.) and credit bureaus such as Equifax also provide this type of financial data for a nominal fee.
Avoid Litigation
A 1998 survey on the efficacy of alternative dispute resolution showed 90% of respondents saved money and time when they used mediation to resolve business conflicts.
Source: www.luca.com

STRUCTURE THE ENGAGEMENT
If the initial screening shows a green light, the next task is to tell the client what services your firm is going to perform and how it expects to be paid for them. Many CPAs are lax about using engagement letters, particularly with long-term clients. Don’t be among them. An engagement letter can prevent many problems. Documenting an agreement with a client is now required for all audit engagements in Statement on Auditing Standards no. 83, Establishing an Understanding with the Client. For more information on engagement letters, see “ Get an Assist .”

Address three aspects of the relationship at the outset: the client’s responsibility for facilitating the work by providing accurate and timely information, the nature and scope of the engagement and the fee structure. Let the client know that a fee may vary from the estimate if an unexpected development crops up. Describe the situations that could cause additional work and obtain the client’s acknowledgement that charges may vary in such instances. Use the letter to give the firm leverage to collect, and have the client sign it before you begin work. Make it more stringent for a new client that shows risk factors.

Identify who is buying your services—and who will pay the bill. Precisely identify the individual, group, entity or portion of an entity that is obtaining CPA services. For instance, if the client is a company with subsidiaries or other corporate affiliations, name which one will pay the bill. If a closely held business hires your accounting firm, have the owner(s) sign a personal guarantee for unpaid or past-due fees. Such agreements generally are void under the statute of frauds unless they are in writing.

Get an Assist
It’s easy to find a sample engagement letter on the Internet. Type “CPA engagement letter” into the blank field of an Internet search engine such as Google or Altavista. If the engagement is for a new service area or you’re in doubt about the language, consult the AICPA, state CPA societies and your colleagues for an appropriate model.

2001 CPA’s Guide to Effective Engagement Letters is a Camico-produced book by Ron Klein, JD, Ric Rosario, CPA, and Suzanne Holl, CPA. Now in its fourth edition from Aspen Publishers, it covers many types of engagements—from audits, tax preparation and payroll processing to business valuations and assurance services. It comes with a companion CD-ROM featuring engagement letters you can modify for your use. Call 800-447-1717, ext. 383.

The insurers listed below will provide limited help to CPAs who want advice about drafting an engagement letter. Speak to a loss-prevention specialist.

Camico Redwood City, California 800-652-1772
CNA Chicago 312-822-4416
CPA Mutual Gainesville, Florida 800-543-3029
Landy Insurance Agency Needham, Massachusetts 800-336-5422
Singer Nelson Charlmers Teaneck, New Jersey 212-826-9744

Describe the scope and nature of services. Outline the procedures the accounting firm will perform and any reports it will issue. Also specify what related services your firm will not provide. State that services not covered in the engagement letter are not included in the fee quote, and if the client requests other services, they will be billed additionally. Inform the client you will issue a revised engagement letter or a change order in such circumstances—and then follow through.

Be clear about billing procedures and nonpayment penalties. Every engagement letter should detail how and when the client will be billed. Give explicit hourly billing rates, project fees or other means of computing fees. Present a payment schedule—such as monthly or interim invoices or an on-completion arrangement. If the firm charges a late fee for balances unpaid after 30 days, say so. (Unlike interest charges, late fees are not subject to usury laws.) Include a provision that gives the firm the option to stop all work or withdraw from the engagement until the client brings the account current.

Use retainers (and other leverage if appropriate). If your firm requires a retainer for all or a portion of a fee before performing any work, let the client know how it will be applied to the bill. A monthly retainer plan has advantages. It can prevent a client from falling behind, incorporate the client’s payments into predictable cash outflows and reduce haggling over hourly bills. If a client with a questionable credit history balks at paying a retainer, avoid the engagement.

Some CPAs spend the first hours of an initial audit aging accounts payable. As you might expect, the professional fees account is one of the first they analyze. If amounts payable to former accountants and attorneys are not up to date, the new firm informs the client that it will proceed with the audit only if its total fee is paid up front.

Build in a system to handle complaints promptly. Have the client agree to notify you within 15 days of an invoice date if a dispute arises over services or a bill. This lets the firm take timely action rather than drift into conflict. Many clients claim that services rendered had not been to their satisfaction when they neglect to pay and are subsequently dunned. If the situation goes before a court, this type of clause helps defuse a client’s assertion that a service was performed unsatisfactorily.

Use promissory notes when possible. Some CPA engagement letters provide that the client must sign a promissory note if fees become past due for a certain number of days. The advantages of a promissory note are that it

Establishes an agreed-on fee and provides for interest, attorneys’ fees and costs of collection.

Limits the client’s dispute if there’s a lawsuit.

Averts rejection by malpractice insurers that consider a promissory note lawsuit low-risk but disqualify firms with a history of suing for fees.

A signed promissory note is a client’s written agreement that he or she owes the CPA for services rendered. Obtain a promissory note from a client who wants to wait more than 60 days before making a payment, debt collection experts say. It improves the likelihood of prevailing in court. A promissory note may be secured with collateral. Consult legal counsel about the proper way to document a lien if the client agrees to it.

An accounting firm that provides the client with short-term financing or serves as a lender should have written evidence of the client’s indebtedness. Note: Being the client’s lender impairs independence and disqualifies the CPA as auditor.

Seek alternative dispute resolution if there’s a conflict. Some accounting firms now insert mediation or alternative dispute resolution (ADR) provisions in engagement letters. Because a lawsuit for unpaid fees often triggers a malpractice counterclaim by the client, mediation or arbitration can help you to pursue payment in a way more likely to defuse a malpractice charge. There are formal rules for both mediation and arbitration.

In mediation, an unbiased and disinterested third party attempts to assist disputants in resolving their differences. A mediator cannot impose a binding solution. If mediation is successful, it is the parties’ agreement rather than one a court imposed. If it is not successful, the parties may litigate or use another ADR technique.

Arbitration is a more formal ADR procedure in which parties submit their dispute to a neutral third party empowered to reach a binding decision resolving the controversy. It’s used if the parties to an agreement include such a clause in their contract (or when it’s mandated for a particular type of dispute). Unlike litigation, it’s a private proceeding with no public record. A firm and client that resolve a dispute discreetly are more likely to preserve their business relationship, sources say. For more information, see “ Alternative Dispute Resolution ,” at right.

Alternative Dispute Resolution
Accountants interested in an ADR clause in engagement letters should adopt the “Dispute and Related Rules for Professional Accounting and Related Services Disputes,” developed by the American Arbitration Association (AAA). These rules may be found at www.adr.org . The AAA has established standards and training requirements for arbitrators and mediators.

The association has developed language that may be useful to include in an engagement letter. To provide for mediation of potential disputes insert the following clause:

If a dispute arises out of or relates to this contract or engagement letter, or the breach thereof and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its mediation rules before resorting to arbitration, litigation or some other dispute-resolution procedure.

Parties can provide for arbitration of future disputes by inserting the following clause:

Any controversy or claim arising out of or relating to this contract or engagement letter, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Arbitration Rules for Professional Accounting and Related Services Disputes and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

Before putting an ADR provision in an engagement letter, a CPA should consult with legal counsel about its enforceability. An ADR provision in an engagement letter may have insurance coverage implications. For example, while most insurers encourage the use of mediation, under many policies the use of an arbitration clause may limit or void the CPA’s professional liability insurance coverage for arbitrated claims.

Fire difficult clients. Clients that constantly protest fee estimates, question monthly statements, pay late, threaten accountant dismissal or are routinely confrontational on many issues affecting the CPA-client relationship occasionally slip through. Whether you “fire” such a client or are dismissed, the professionalism with which you handle the transition can decide whether you get paid or file a lawsuit. For more information, see “ Just Say No to Costly Clients ,” JofA , Jun.99, page 45.

COLLECTION PLATFORM
Develop a firmwide policy for managing late payers and nonpayers and get all the partners to follow the procedures. A systematic approach clarifies client expectations, reduces debate and simplifies the collection process.

Maintain accurate records and bill promptly. A helpful firm practice for keeping on track is weekly aging, monitoring and follow-up of the firm’s past-due receivables. Call the client if an account receivable becomes past due by even one day—but before doing so, review the account files to be sure you have all the facts. (See “ The Quicker You Bill, the Quicker You’re Paid .”)

Under some circumstances, a CPA can choose to withhold service for nonpayment of fees. However, a CPA must complete an audit that’s in progress unless the engagement agreement links payment to increments of completion. Accountants who withhold client records as leverage put themselves at risk. Numerous courts have imposed liability on CPAs who fail to return client records promptly (see “ An Ethics Quiz ”).

Follow the guidelines contained in the Fair Debt Collection Practices Act (FDCPA). It says that “a debt collector may not communicate with a consumer in connection with the collection of a debt … at any unusual place or time that would be considered to be inconvenient to the consumer.” The law applies to collection agencies and attorneys, but many courts use it to gauge whether abusive collection methods have been employed.

Use common sense, and call when clients are more likely to be cooperative. Wait until they’ve been open for business for at least a half hour and had their morning coffee, for example. Don’t call during lunch hours; even if a client is in, the timing gives an assistant a chance to say the person isn’t available. Most clients will volunteer the best times to call.

If you get an answering machine, assume that someone other than the client will listen to the message so be discreet. Leave your name and number and a request for a return call. When contacting a business office, don’t tell the person who answers the phone that your call is about a past-due bill. Doing so may give a client a basis for a lawsuit.

Your main reasons for calling debtor-clients are to find out why they haven’t paid you yet and to encourage prompt payment. Be tactful; say you are calling to see if they got the most recent invoice, for example. Ask whether there was a problem with the services rendered. Make every effort to avoid being confrontational.

Once a debtor-client makes a verbal commitment to pay—whether in full or a series of payments—send a letter outlining the understanding you’ve reached. It eliminates any potential excuse that the debtor-client won’t remember what has been said. Document all developments in the client’s file; include copies of collection letters and notes of conversations.

If the client requests the firm cease all calls, comply. If you persist, a debtor-client may be able to sue for harassment. When debtors close off communication, your firm has no choice but to refer the debt to a collection professional for further action. Before turning the account over to a collection agency or attorney, make a last written request for payment.

WHEN ALL ELSE FAILS
Accountants should use only reputable collection agencies, which are likely to be members of one or both trade associations: Associated Credit Bureaus and the American Collectors Association. Members of them adhere to the
FDCPA. A collection agency may charge as much as 50% of the amount recovered from a debtor but isn’t entitled to a fee unless it succeeds in getting payment.

The last resort is to hire a collection attorney. An attorney will bill by the hour and you must pay him or her whether or not your fee ultimately is paid. If the firm has a strong position—that is, professional services were careful, appropriate and are well documented with workpapers—it may be worthwhile to file a lawsuit. Many debtors can’t afford an attorney to defend them and will offer to settle if they’re being sued. Often the accounting firm can recover attorneys’ fees from the debtor.

Remember, a business’s track record and its management’s character are clues to how it will meet its obligation to your firm, so pay attention. In all cases, an accounting firm must actively manage billing and collections to protect its cash flow and profitability. To minimize problems, use engagement letters, update them as needed, stay on top of billing, get all the partners to follow the house rules—and use common sense and professionalism if you’re forced to collect.

CASE STUDY
The Quicker You Bill, the Quicker You’re Paid
By Edward Mendlowitz

H ere’s how we handle the billing and collection process at Mendlowitz Weitsen. We use fixed fees as much as possible for new clients, and our fixed-fee engagement letters state what we will do, what we don’t include and what the payment schedule is. New clients pay us retainers—as do existing ones if we provide services apart from our regular work for them.

We try to time payments to the work flow, so for a job expected to take three months, we ask for a retainer of about 25%, followed by three equal monthly payments. We’ve found that billing frequently for smaller amounts gets us paid faster with less resistance. No tax return or financial statement leaves the office without a bill unless it is already paid for or covered by regular retainer billings.

Clients, especially new clients, that don’t pay bills within 15 days get a telephone call from a partner asking them if they received the bill, if there is any problem and telling them that we expect timely payment. That reminder sets a tone to the arrangement—and it works.

For frequent late payers, we hold up completing their work—and sometimes don’t schedule any of it—until they pay us. For people who are long past due, we “freeze” the arrears amounts, and they have to pay us in full, in advance, for new work. That way we don’t lose the current work they would pay someone else for anyway and—it’s hoped—we collect all of what they owe at some point. We also ask arrears clients for a series of postdated checks (for any amounts) for as much as a year in advance, so the past-due balances can be settled gradually.

Getting paid isn’t just a business function, it’s a marketing issue. How you present bills can make a difference to how and when you get paid and whether you retain the client. For example, if we perform an extra service when we do a tax return, it goes on the bill as a separate item instead of lumped with the tax preparation fee. This shows the extra work is special and the charge won’t recur. Occasionally we list multiple extra items—such as financial planning, a yearend tax planning meeting, additional services in connection with the sale of rental property, researching cost basis of mutual funds sold, calculation of S corporation basis, preparation of the next year’s estimated taxes, prior years’ income annualization for estimated tax penalty reduction, alternative minimum tax credit calculation or any of a few dozen other items. If during an engagement we find a need for something that isn’t covered, we call the client and send a “change order” or new engagement letter describing the extra work.

Having a clear fee arrangement helps us collect more efficiently. We even have minimum fee schedules for individual tax returns that we send to people “shopping” for accountants. We never discuss the fees with them—we tell them we will send (e-mail, fax or mail) a fee schedule and will be glad to discuss it if they want to make an appointment after they’ve seen it. It saves time and eliminates many bargain hunters. We also have fee schedules for QuickBooks consulting and financial planning services, and we’re developing them for several other services.

Over the years we’ve seen most everything. We have a client who pays us once a year just before the Chinese New Year, when her traditions say she is supposed to settle her debts. We have a megarich client who pays us in four installments, no matter what the size of the bill, while another client pays his bills only after a third telephone call.

Getting paid is near and dear to our hearts. We approach managing it seriously, diligently and professionally—and think our systems encourage clients to do it pleasantly and quickly.

EDWARD MENDLOWITZ, CPA, is a partner at Mendlowitz Weitsen, LLP, East Brunswick, New Jersey. He is the winner of the 2002 Lawler award for “ Nine Ways to Make Your Firm More Exciting ,” JofA , Mar.01, page 63. His e-mail address is EM@mwllp.com .

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