Bad billing practices can affect malpractice risk

Consider this: A CPA performed bookkeeping and tax services for a long-term client who was profitable and asset-rich but had challenges with cash flow. Despite the client’s untimely payment of invoices, the CPA rationalized the continuation of services, as the client did make payments periodically. Over time, however, the payments slowed and the client’s outstanding balance grew until it was too significant an amount for the CPA to ignore.

The CPA pressed the client for payment and threatened to terminate services. The client promised to pay the CPA the full amount due with proceeds from an upcoming building sale and begged the CPA to continue services. The CPA relented. Eventually, the client sold the building, but — surprise — did not pay the CPA. The CPA found himself with an even bigger amount due and only bad options: sue the client for fees and risk a counterclaim for negligence; continue providing services and get deeper into the hole; or walk away and learn a very painful, and expensive, lesson.

PROFESSIONAL LIABILITY RISKS

Billing and collection practices may not be perceived as a professional liability risk issue, but proactively managing this risk is important to more than just the firm’s financial health. Why?

• Having a large unpaid balance lurking in the background may unduly influence a CPA’s decision whether to continue working with a client, preventing the CPA from objectively considering the client’s risk and making it challenging to fire them.
• Sending a client to collection or pursuing other aggressive collection efforts, such as a fee suit, often leads to a claim by the client for professional negligence. A CPA firm will likely spend more time and money defending the claim than it would receive from the collection activity. For more on this topic, read “Professional Liability Spotlight: Think Twice Before Suing for Unpaid Fees,” JofA, March 2018.
• A client’s lack of consideration for complying with a CPA firm’s payment terms suggests they might also neglect other responsibilities integral to the engagement. If a claim or other dispute arises, such a client may be quicker to place blame on the CPA rather than accept responsibility for their own decisions.
• Clients in financial difficulty may fail, and parties that lose money often look to the accounting firm to help recoup their losses. Auditors, in particular, face a heightened risk of an expensive lawsuit related to a bankrupt client.
• A client’s failure to pay may signal an underlying service or other issue, providing an early warning sign of a future dispute.

RISK MANAGEMENT RECOMMENDATIONS

To help mitigate the risk of a professional liability claim, or even a mere disagreement with a client, and help manage cash flow and financial risk, consider the following practices:

Evaluate a client’s financial viability and collection risk during acceptance and continuance processes

Run a credit check. Perform an internet search to obtain publicly available information. Contact the client’s previous CPA to inquire about timeliness of payment. Even though the predecessor CPA may not disclose this information, or the client may balk when you ask to contact them, you can learn a lot from both parties’ reactions. Potential clients seeking assistance with delinquent tax filings should be approached with extra caution as should prospects with liquidity or going concern issues.

Require retainers

The use of retainers is becoming a commonly accepted practice for CPA firms. As such, firms should consider adopting this billing protocol for all clients. At a minimum, retainers are strongly suggested for all new clients with unknown payment histories as well as existing, slow-paying clients and high-risk clients.

Outline billing and collection terms in the engagement letter

The engagement letter should clearly communicate the firm’s expectations, including when payment is due, the consequences of nonpayment, the assessment of interest and fees related to any collection action, and more. It should also articulate the firm’s ability to withdraw from the engagement without completing services if the client is delinquent. Consider reviewing engagement letter terms with the client to ensure mutual understanding.

Consider alternative billing practices for different types of services

The traditional practice of billing after hours are incurred may not be appropriate for all services. For ongoing services, such as payroll, bookkeeping, or client accounting services, consider upfront billing at the beginning of a period, such as a month or quarter, for services to be rendered in that period. For audit services, consider milestone billing with amounts due at various points, such as when the engagement letter is signed, when planning and fieldwork begin, and a final installment when the report is delivered. Irrespective of the billing practice or service, the goal is to minimize the balance due at the end of the engagement. This places a smaller amount at risk should the firm have to cease services before the engagement is complete.

Bill timely and monitor collections closely

Bill when services are provided, not several weeks or months later. Once issued, invoices should not be “out of sight, out of mind.” Monitor collections to ensure payment is received on time, and follow up with the client swiftly if not. If possible, choose someone outside of the engagement team to assist with collection efforts and “be the bad guy” so you don’t have to.

Ensure exceptions are truly exceptions

Billing and collection terms exist to help ensure consistency of practice across a firm’s engagements and clients. Adherence to the firm’s billing and collection policies should not be viewed as less important than adherence to other firm policies, such as those related to independence or conflicts of interest. If special circumstances arise, create and implement a process for approving exceptions that is external to the engagement team.

Follow through

As any parent will tell you, threats without consequences are meaningless. If you have warned the client that services will be suspended or discontinued for nonpayment and, yet, the client remains delinquent, cease providing services until the client remedies the delinquency. Consider termination if they don’t.

Nip potential collection or service disputes in the bud

While it may be difficult or awkward, having a direct conversation with the client to resolve outstanding invoices is often the best approach. You may learn about a service issue that needs to be addressed. Or you may find out that the client is experiencing financial difficulties and that you need to adjust to the engagement’s fee structure or scope of services.

Consider a negotiated settlement

If all else fails, rather than continuing to send invoices month after month or taking a gamble with a fee suit, consider negotiating a settlement to accept less than the full amount due.

ENSURE YOUR WORDING IS CONSISTENT

A sometimes overlooked, but important, aspect of a firm’s billing practices is the wording included in the firm’s billing or timekeeping software and/or client invoices. This language should be consistent with the services to be performed as outlined in the firm’s engagement letter or other form of written communication with the client. Avoid indiscriminate use of terms defined in professional standards, such as “audit,” “review,” and “examine.” If billing descriptions are inaccurate, vague, or overstate services provided, you may be held accountable for services you were not engaged to deliver.

Increasing balances

$102,000: Average U.S. consumer debt balance in the third quarter of 2022, a 5.8% increase from the previous year.

Source: Experian, “Credit Scores Steady as Consumer Debt Balances Rise in 2022,” Feb. 24, 2023.

Sarah Beckett Ference, CPA, is a risk control director at CNA. For more information about this article, contact specialtyriskcontrol@cna.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.