Working with clients may not always be smooth sailing. The voyage may begin in calm seas, but a squall may disrupt your journey. Being alert and prepared to address unforeseen challenges can represent the difference between a pleasure cruise and becoming seasick.
Similarly, risks can arise with existing clients, catching the CPA off guard. Client continuance, the process whereby the firm "reaccepts" the client on at least an annual basis, is designed to identify and address those risks.
Why is client continuance a good practice for all engagements, irrespective of the service? For the same reason as client acceptance — it provides the firm with additional insights regarding the risk of an existing client so the firm may respond accordingly.
As a firm delivers services to a client, additional information may be provided or discovered, which validates or refutes what was learned during the acceptance evaluation. The firm may identify client behaviors that differ from initial expectations, thus increasing the firm's risk or at other times reducing it. Client management or ownership may turn over, or its business model may change, effectively resulting in a client that bears no resemblance to the client initially accepted by the firm. A firm's strategies, areas of practice, and risk appetite may change over time, and existing clients may no longer fit its business model or risk appetite, causing lost opportunities to serve clients who do.
Performing regular client continuance evaluations is not only a sound business practice but also an effective risk management practice. Equipped with the information gleaned from the continuance process, the firm is able to respond to the client's evolving risk profile to help ensure a pleasant voyage.
WHY DON'T CONTINUANCE EVALUATIONS OCCUR?
While CPAs may understand the benefits of continuance evaluations, the evaluations may not be consistently performed or may lack formality. CPAs may defer continuance evaluations because they mistakenly believe that if risks are identified, the only method to address them is client termination, and the indirect "costs" to the firm, such as lost referrals or standing in the community, are too costly. However, recall that the purpose of the evaluation is to identify and assess risks and determine if there are methods to reduce them to an acceptable level. While termination may be one response, it is not the only response.
CPAs also may believe that longtime clients are inflexible and will resist change. Or the CPA believes that it is easier to retain a difficult client rather than attempt to rehabilitate the situation or replace the lost revenue with a new client.
Irrespective of the reason, not performing continuance evaluations may result in unaddressed risks to the firm, which may negatively affect staff morale, hurt financial results, or, worse, result in a professional liability claim.
WHEN SHOULD CLIENT CONTINUANCE EVALUATIONS OCCUR?
CPA firms should evaluate clients whenever a significant change occurs at either the client or the firm. What constitutes a significant change is something the firm needs to determine. A routine evaluation should be performed at least annually. Common times for this to occur are shortly after busy or extension season, when the memories of client interactions are fresh, or shortly before busy season, when the firm's capacity to meet client needs is better known.
COMMON RISK INDICATORS IDENTIFIED DURING CONTINUANCE
What factors should be assessed during a continuance evaluation? The same areas that are evaluated during the client acceptance process. Risk indicators that may prevent the firm from accepting a prospective client are the same warning signs that may cause a firm to pause and respond in some manner for a continuing client. Those include, but are not limited to:
- Management/ownership characteristics:
- Questionable integrity;
- Evidence that accounting/fiscal oversight is not a priority for the client;
- Disputes among the client's owners; or
- Failing to follow and/or ignoring the CPA's advice.
- Client characteristics:
- Lack of internal controls;
- Difficulty in obtaining requested information; or
- Turnover in management or accounting staff.
- Firm matters:
- Firm or client business model changes resulting in misalignment between the client and the firm's ideal client profile;
- Disagreements or disputes between the CPA and the client over issues such as aggressive tax positions or accounting treatments;
- Potential conflict of interest between the CPA and the client that exceeds the firm's risk threshold;
- Unprofessional treatment of CPA firm staff;
- Nonpayment or late payment of fees; or
- Frequent price or service complaints.
Consider using the PCPS Continuing Client Evaluation Tool in the evaluation process.
The continuance process is likely to identify some clients requiring further review. The next step is determining what to do about the risks identified during the evaluation.
RESPONDING TO IDENTIFIED RISKS
Implement changes to the engagement
After identifying clients with new or changed risks, the response is not necessarily client termination. Rather, the firm may be able to implement risk management practices to help reduce the risk to an acceptable level.
For example, if a client perpetually provides information late, the firm could discuss with management how it increases pressure on the firm's ability to complete services within the agreed-upon time frame and fee. Discuss what could be done by the client to provide information in a more timely manner. If the client is not paying bills on time, the firm may require a large retainer to be paid before work begins.
Perhaps a longtime client recently hit it big and is now a "celebrity." Knowing that providing professional services to celebrities often results in large claims, consider whether adding a limitation-of-liability or limitation-of-damages clause to the engagement letter will reduce the risk to an acceptable level. Or maybe a decades-long family business client engaging multiple firm services has family members in conflict with one another. Could this risk be addressed by using different engagement teams to deliver the different services, obtaining conflict-of-interest waivers from the parties involved, and including risk allocation provisions in the engagement letter?
Unfortunately, the firm may be unable to mitigate certain risks, such as those related to management integrity, or lack thereof. In these cases, client termination may be the only alternative.
When client termination is the firm's response, it should be done formally and in writing. Why? To help prevent the client from asserting it was unaware of the firm's termination and missed a filing or other deadline.
The termination communication should include the following elements:
- Nature of services;
- Effective date of termination of the services;
- 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; and
- 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.
A note of 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 its attorney and professional liability insurer before proceeding.
Nothing is risk-free, including CPAs providing services to clients. When you go boating, you may not always choose to don your life vest, but if the waters become choppy and you see storm clouds on the horizon, you change that plan and wear one to successfully navigate potential rough seas. Providing services to clients is the same — when risks appear, you address them so the firm is not left adrift in a sea of risk.
Deborah K. Rood, CPA, is a risk control consulting director at CNA. For more information about this article, contact email@example.com.
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.