Use a Client Review to Head Off Potential Lawsuits

by Kim Stone-Vilim, CPA | Feb 28, 2019

Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at irene_walton@ajg.com.

Do you have difficult clients that don’t fit into your firm strategy or culture? Do you regularly debate whether or not you should continue the client relationship? This is a question CPA firms should ponder on a regular basis – ideally every six months, but annually at a minimum.

Client screening is an often-overlooked risk management tool. Reviewing your client list to identify thorny engagements can often prevent future problems. Here are a few ideas to keep in mind during your client review process.

First, consider client behavior. Is the client chronically late in getting required documents to you? Is the record keeping sloppy; is information withheld; are payments late? Does the client treat your staff poorly? Do they try to manipulate you into taking aggressive positions you are not comfortable with? These are all red flags that could lead to future issues.

Also consider possible conflicts of interest when reviewing the client list. Does your firm hold interest in or invest with any clients? This can be troublesome if investments fail or relationships sour. Other problem scenarios can include bankruptcies, mergers, divorcing clients, and trustee work. When reviewing for potential conflicts of interest, consider the perspective of outside parties such as other owners, beneficiaries, spouses, and lenders. Anything that may be perceived as impairing your objectivity could put the firm in a difficult situation.

When examining your client list, be sure to keep in mind changes to your clients’ businesses. Has a client purchased another business? Are any having financial difficulties? Do any clients want to go public? Then ask yourself if you have the staff and expertise to properly service these new facets. Continuing to serve a client in an area in which you are not skilled almost always leads to future problems.

Your firm, too, may have experienced changes. Partners retire, managers move on, and firms merge. These changes also require a review to ensure that existing staff have the necessary skills and expertise to continue servicing all clients. Maybe you decide you no longer want to perform a certain type of service or you want to expand the practice in another area; review your client list to see if existing engagements still fit your firm’s profile.

After you screen your list, you may decide there are some clients that you no longer want to service. The decision to terminate a client relationship is never an easy one. However, trying to accommodate difficult clients or working outside your expertise will make you vulnerable to a lawsuit. It also takes time away from finding new clients and focusing on the profitable areas of the firm.

Disengagement should always be done in writing and in the most positive way possible. Do not let personal feelings play a part in your disengagement letter; it could antagonize the client. The disengagement letter should state that you are formally ending your relationship with the client as of a specific date. It is not necessary to give a detailed explanation for the resignation. You can simply state that you no longer feel your firm is a good fit professionally for that client.

The letter should also include a list of all materials that you will be returning to the client and the current status of any open items, such as tax extensions. Advise the client that you will work with any new accounting professional whom they employ to make the transition as smooth as possible.

You can include a statement about monies owed to your firm for past work, but realize that you might not receive payment if your client is upset about the disengagement.

As a final safeguard, be sure to have the client sign and date the letter confirming that they received the return of all of their original documents and that you no longer have any responsibility to perform ongoing work for them.

Disengagement is never pleasant. But when handled professionally, it can be beneficial to both you and the client. You can proceed with growing your firm in the direction you see fit, and the client is free to find another CPA who is able and eager to meet their needs. As an added benefit, it just might help you both avoid a lawsuit.


Kim Stone-Vilim, CPA, is the accountants program manager at All Risks Ltd. in Geneva, Ill. She can be reached at kstone@allrisks.com.
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