There have been many articles about how to avoid law suits and what you should not do to attract problems with clients. So with a tongue firmly implanted in the cheek, we thought it would be fun to tell you what you should do to get sued.
Accept an assignment that is beyond your expertise and resources – Is the engagement within the firm’s areas of proficiency? Is the engagement high risk? Are the benefits of the engagement worth the risk? If the firm accepts an engagement for which it is not staffed or capable, it runs the risk of disappointing the client, or a third-party, and exposing itself to litigation and ethics violations. Some CPAs make an annual habit of redefining and understanding the scope of their own practice, going as far as to write out a clear statement of what they can do and what they cannot do.
Don’t worry if the client doesn’t pay their bill – does your client value your services and pay on time? Is the client financially solvent? What is the client’s financial history (e.g., insolvencies, bankruptcies, business failures)? The responses to this are critical, specifically in avoiding fee collection difficulties and arguments.
A lot of the information can be acquired by:
- questioning the client and the client’s key personnel, banker, lawyer, predecessor CPA and auditors;
- running a credit report;
- examining the past three years of financial statements and tax returns, and the prior CPA’s management letters.
It doesn’t matter clients with a history of disputes/litigation. Does the client have reasonable expectations of the CPA? Is the client especially litigious? What did conversations with prior accountants and/or attorneys reveal? Are they usually dissatisfied with the results of an engagement, even though the services performed are fine? Dissatisfied clients will make allegations of substandard services, especially when they are not happy with the results of the engagement.
So what if the clients are poor financial managers/bookkeepers. Does the client observe deadlines? Maintain good records? Are all accounting and business records adequate and in order, or chaotic? Are the tax returns and financial statements for the past three years consistent? Clients whose don’t own financial affairs are not well managed often encounter problems for which they consider the CPA responsible. inadequate bookkeeping may cause delays in obtaining information, which means that the CPA’s work product could be out of date and useless to the client. Tax returns may also be filed late, causing a client to incur interest or penalties. Poor bookkeeping causes the CPA to put in more work to understand financial information, and increased workloads lead to higher fees, which can lead to conflict.
Take on a client with large debt or low cash – clients who are not financially responsible my try to blame you during time of financial stress. Some clients will end up owing money to creditors and to the CPA and they will assert a malpractice claim to help them avoid or reduce the fees they owe to the CPA. Information can be obtained at the client interview and verified later through other interviews. A background check is crucial for all significant engagements.
You don’t care that the client is uncooperative – Is the client realistic and informed? Or are they clients demanding and time wasting? If a client does not provide information on a timely basis, or who don’t provide documents or data despite repeated requests, are major risks.
You are unconcerned that the client’s internal controls are inadequate – you need to get a good understanding your client’s commitment to appropriate accounting practices and to internal controls. If the client makes it simple for dishonest people to steal from them, the dishonest will steal from them. And the client will then blame CPA for not catching the thief.
You don’t worry about clients with questionable integrity/reputation. Above all is the client’s reputation and integrity. When questioning a client, the predecessor accountant and third parties, look for indications of the client’s integrity and reputation. What interviewees do not say may be just as important as what is not said.
To avoid the foregoing issues it is crucial to implement a thorough and in-depth client screening procedure and has another partner or a client committee to review the client-screening information and to pass judgment on the suitability of a new client.
CPA firms should assess all potential new clients and re-asses all current clients at least annually. This enables the firm to better monitor clients, consider any changes that might affect the professional relationship, and avoid situations that could escalate into crises.
This will be the subject of future articles.