Think twice before suing for unpaid fees

Being stiffed stings. Feelings of injustice and frustration can compel even the most risk-averse CPA to initiate a fee suit or utilize the services of a collection agency. However, such actions can serve as a catalyst for a counterclaim for negligence or a regulatory complaint to be asserted against the CPA firm in response. The risk of a counterclaim or complaint is multiplied if the client or former client hires an attorney to help them respond to the CPA’s action.

GUIDING THE THOUGHT PROCESS

Before initiating a collection action, CPAs should ask themselves a few questions, placing aside any personal grudges and feelings of being “wronged.” Consider whether the time and expense incurred to defend a counterclaim outweighs the benefit of any potential recovery.

How well will the engagement stand up against a professional liability counterclaim? Assess the CPA firm’s ability to defend the counterclaim. Evaluate the engagement from the perspective of a plaintiff attorney. Are there gaps, ambiguities, or wording in documentation that could be misconstrued? After this assessment, reduce the amount the firm is seeking to reflect the exposure. For example, if the odds of prevailing in the counterclaim are 80%, reduce the amount sought by 20%.

Are the professional fees being sought reasonable? Consider whether the fees charged by the firm could be considered excessive or inconsistent with the scope of the work. Are there time records or other documentation, such as an engagement letter, to support the amount charged? If not, a reduction in the amount sought to a more reasonable figure may be warranted.

Have the costs of the collection action and any resulting counterclaim been considered? The following considerations may reduce the net value of any recovery sought by the firm:

• The firm’s legal fees that will be required to pursue collection. Professional liability policies do not typically cover the firm’s expenses in pursuing a collection action, even if a covered counterclaim results thereafter.
• Lost revenue due to time spent by the CPA firm to pursue a collection action or defend a counterclaim.
• Professional liability insurance policy impact. Does your professional liability insurance policy even provide coverage for a counterclaim resulting from a fee suit? Some don’t. Even if the counterclaim is covered by the policy, the firm’s deductible probably applies.

Will litigation damage the firm’s reputation or affect the goodwill of other clients? Litigation may be messy, protracted, and public. How will this affect the firm’s relationship with its clients or its reputation in the business community?

What about the tax impact of any recovery? If the recovery sought relates to professional fees rather than expenses, consider applicable income taxes.

Can the client even afford to pay? Sometimes, the reason clients do not pay is that they cannot afford to do so. Even if the firm is successful and judgment is rendered against the client, the client still may be unable to satisfy it.

REAL-LIFE EXAMPLE

A CPA firm brought suit against a client to collect $115,000 in unpaid fees related to income and sales tax return preparation. The client filed a counterclaim against the firm alleging more than $6 million in damages related to taxes owed, interest, and a lost opportunity to sell its business. The client pursued litigation against the firm for over four years. The CPA firm ultimately prevailed but incurred defense costs well in excess of its uncollected receivable.

AVOIDING THE PROBLEM IN THE FIRST PLACE

The best way for a CPA firm to avoid a tough decision regarding a collection action is to not get into a bind in the first place. Taking proactive steps with existing and prospective clients can help avoid future collection challenges. Evaluate the firm’s protocols in the following areas:

Client acceptance

Acceptance procedures should include an evaluation of a prospective client’s ability to pay for services and its payment history. Ask why the prospect is switching CPA firms, and request permission to speak to the predecessor accountant or other service providers about the prospect’s payment history. Prospective clients that balk or ask the firm not to contact the predecessor may represent a sign of future service and collection problems.

Client communications

Are fees and billing policies, including the firm’s ability to suspend or terminate services for nonpayment of fees, discussed at the outset of the relationship, confirmed in the engagement letter, and reinforced during the engagement? Doing so can help avoid fee disputes and collection problems later. Alert clients when fees are expected to exceed the estimate previously provided, and, if possible, obtain the client’s written approval prior to proceeding.

Billing and collection practices

Retainers: Consider obtaining retainers for all new clients and existing clients that are slow-paying or that have had previous collection issues. Certain engagements or clients may also increase the risk of nonpayment of fees, in addition to heightened liability risk. These include engagements to help clients with tax delinquency problems or to “clean up” their taxes or books to meet an impending deadline or to perform a special project. Consider retainers for these engagements, too.

Invoice timing and methodology: Long delays between the delivery of work and billing increase collection risk. In general, invoices should be issued concurrently with the engagement. For example, invoices for ongoing services such as payroll or client accounting services could be issued at the beginning of each month, and those for smaller tax return compliance engagements could be provided and collected upon delivery of the tax return. For larger projects, such as audits and consulting services, bills should be sent at regular intervals. The use of value pricing can also help avoid client confusion regarding invoice expectations.

Collection practices: Fee disputes sometimes result from poor receivables management. If possible, assign collection responsibilities to a firm administrator rather than professional staff. This helps ensure collection practices are administered on a consistent basis across the firm. Address delinquent invoices immediately with clients. Perhaps it is a simple oversight, or it could signal a client’s dissatisfaction with services. Irrespective of the reason, it’s best to address the issue expeditiously.

Client continuance

One of the most effective ways to resist the fee suit temptation is to suspend or terminate services before a client balance grows so large that writing it off is not perceived as a viable business option. Delinquent clients may attempt to pressure the CPA to continue to provide services, arguing that their business is seasonal or they expect to receive payment from a key customer soon. For some clients, this is a never-ending story. However, their story does not have to be the CPA firm’s ending. Editing delinquent clients from the firm’s client portfolio can help strengthen the firm.

A FINAL NOTE

If a CPA firm is contemplating a fee suit against a client, it is very likely the relationship is already significantly strained or, more likely, has ended. If not, consider what impact a fee suit may have on the ability to work with the client, especially an attest client. Threatened or actual litigation between an attest client and CPA firm may create self-interest or adverse interest threats to independence. The existence of unpaid fees for professional services previously rendered to an attest client may create self-interest, undue influence, or advocacy threats to independence. Consultation with the Independence Rule and its related interpretations of the AICPA Code of Professional Conduct, specifically Interpretation 1.290.010, “Actual or Threatened Litigation,” and Interpretation 1.230.010, “Unpaid Fees,” is recommended.

Sarah Beckett Ference (sarah.ference@cna.com) is a risk control director at CNA.

Continental Casualty Company, 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. All products and services may not be available in all states and may be subject to change without notice.