Billing for defense (and payment)

Many CPAs consider billing an unpleasant task, and that distaste leads to procrastination and lax practices. However, poor billing and collection practices may adversely affect the defense of a professional liability claim.

Kerry Callahan, a principal and chairman of the litigation department of Connecticut-based Updike, Kelly & Spellacy PC, told of a CPA engaged by a wealthy client to temporarily serve as a “financial manager.” Because the CPA had lax billing practices, the client continued to receive invoices for these services after they had ended. Over the next several years, the client lost millions and sued the CPA for providing poor investment advice. The case was settled because of the difficulty of defending the billing discrepancies.

WHERE TO BEGIN

Good billing practices start before services commence. Consider the following:

Client and engagement acceptance and continuance. During the client acceptance process, CPAs can identify slow payers or nonpayers by contacting the predecessor CPA. Even though the CPA may not disclose this confidential information, the successor should gauge the predecessor’s reaction.

In addition, the CPA can check the prospect’s credit history. Unsolicited prospects seeking assistance with delinquent tax filings should be approached with caution. Prospects with a history of regularly changing CPA firms also should be avoided.

Long-standing clients may experience financial hardships leading to slow payment. CPAs should require regularly scheduled payments. To avoid fee disputes, practitioners should consider making the continuation of services contingent upon obtaining a signed promissory note for outstanding fees. Promissory notes should be drafted by legal counsel to ensure enforceability. If necessary, services should be suspended. If the problem persists, the CPA should terminate the engagement before outstanding receivables become unmanageable.

Engagement letters. The engagement letter should clearly communicate billing and collection terms, including the consequences of nonpayment, such as assessment of interest and fees related to any collection action. It should permit withdrawal from the engagement for nonpayment. Engagement letter terms should be reviewed with the client to ensure mutual understanding.

Retainers. The risk of nonpayment is heightened with new clients, slow payers, or clients with delinquent tax filing obligations. In such cases, CPAs should obtain an upfront retainer, and then bill and collect monthly. Practitioners should consider obtaining a retainer for services related to a prospective or expected transaction or outcome, such as merger and acquisition services, forecasts, projections, valuations, and forensic or litigation services. Obtaining a retainer and maintaining a positive retainer balance helps minimize the risk of nonpayment.

DURING THE ENGAGEMENT

It is not possible to identify and address all potential contingencies before an engagement begins. If a change in services is required during the engagement, a CPA should obtain the client’s written approval before rendering services.

Gregg Weinberg, a shareholder and leader of the professional liability group of the Texas-based law firm Roberts Markel Weinberg PC, said the engagement letter can be a key to winning a case that involves scope and billing disputes. A CPA can get into trouble if he or she acts outside of the scope of the engagement letter and bills for it. Instead, Weinberg said the engagement letter should be like the Constitution—a living, breathing document. If something is outside the scope of the engagement, it needs to be documented, even in an email, and the terms of the original engagement letter should apply.

IT’S TIME TO BILL

When. Generally, billing should be issued concurrently with the engagement’s completion. For example, invoices for payroll and bookkeeping services should be issued monthly, and those for tax return compliance should be sent with the tax return. For larger projects, such as audits and consulting services, bills should be sent monthly. This procedure provides the firm with an opportunity to suspend services if collections lag.

Who. The engagement team should be held accountable for generating accurate and timely bills. The team members will know what services were provided, what, if any, changes in scope occurred, and how the client will react to the invoice.

What. The billing narrative should clearly define services performed, or, alternatively, the engagement letter may be attached to the invoice. CPAs should avoid indiscriminate use of terms defined in professional standards, such as “audit,” “review,” and “examine.” The scope of services defined in the engagement letter and workpapers should be consistent with the invoice. When the descriptions in invoices, the engagement letter, and workpapers align, the collectibility of outstanding fees and defense of a professional liability claim are strengthened. If billing descriptions are inaccurate or overstate services provided, CPAs may be held accountable for services they did not perform.

John Elzufon, managing director of the Delaware-based law firm Elzufon Austin Tarlov & Mondell PA, said CPAs should not view a bill solely as an invoice for services performed. Instead, it is an additional way to professionally communicate with a client. “Like any form of communication, when it is thorough and accurate, it’s useful,” he said. “When it is incomplete, slipshod, and full of errors, it’s not.”

Elzufon added, “An inaccurate bill raises in your client’s mind the quality of the services performed. Like any other form of communication, it also needs to be timely and consistent.”

How. For some clients, a phone call to inform them a bill is coming is appropriate, especially if the client previously did not pay timely or objected to additional billings. This gives the CPA an opportunity to discuss issues early and prevent future collection problems.

AFTER THE BILL IS MAILED

Aggressive collection efforts, including hiring a collection agency or suing a client for outstanding fees, can result in a countersuit from the client that alleges negligence. CPAs should be proactive and prevent receivables from becoming past due. They should consider establishing standardized administrative processes to escalate delinquent accounts for further action by an executive committee within the firm.

IN THE END

Accurate billing records can prove valuable in defending a malpractice claim—such as indicating that a conversation between the CPA and the client occurred. Elzufon said that a bill is a contemporaneous document and billing software can prove valuable since nobody can remember a conversation that occurred five years ago.

Such documentation will result in better cash management, avoiding the time and expense of suing for unpaid fees and risking a countersuit.

Deborah K. Rood (deborah.rood@cna.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.