Make `Em Pay Up: Document the Scope of an Engagement - and Make Sure the Client Understands
Pacini, Carl, Tucker, Robert, Journal of Accountancy
People don't like to pay bills--it's an incontrovertible fact. The CPA profession has been on the "not yet" receiving end of growing reluctance or even outright refusal of some clients to remit for accounting, tax and assurance services, studies show. For a firm, as for any business, a pattern of missed payments translates into reduced cash flow, impaired profitability, diminished compensation and disputes. It also means CPAs spend more time scrambling and less time practicing and developing client relationships. The purpose of this article is to present ways to help firms sidestep potential problems and expedite collection should accounts become delinquent.
AN OUNCE OF PREVENTION
The first line of defense against risky clients is effective screening. Criteria such as financial distress and management integrity--used to assess litigation risk--relate to payment issues, too. Find out why a potential client is changing accountants, and get permission--in writing--to talk to the previous CPA (see "An Ethics Quiz," JofA, Aug.02, page 41). Ask whether any problems have cropped up. Talk to a sampling of the client's customers, suppliers or vendors. Warning signals relevant to a client's ability to pay range from lack of liquidity, poor profitability, debt load and vulnerability to interest rate fluctuations, industry in decline, poor credit history and reputation; the latter encompasses the personal finances of key members of a business's management.
Because a public company must file a Form 8-K in the month following a change in auditors, the Internet can be a good source of information. The client's filing will be on the SEC Web site, www.sec.gov/edgar, and a record of fee or other disputes is likely to be included there as well. Data bases such as Lexis-Nexis and newsbanks are sources of information that can show whether a company is a risk. D&B (formerly Dun & Bradstreet Corp.) and credit bureaus such as Equifax also provide this type of financial data for a nominal fee.
STRUCTURE THE ENGAGEMENT
If the initial screening shows a green light, the next task is to tell the client what services your firm is going to perform and how it expects to be paid for them. Many CPAs are lax about using engagement letters, particularly with long-term clients. Don't be among them. An engagement letter can prevent many problems. Documenting an agreement with a client is now required for all audit engagements in Statement on Auditing Standards no. 83, Establishing an Understanding with the Client. For more information on engagement letters, see "Get an Assist," page 73.
Address three aspects of the relationship at the outset: the client's responsibility for facilitating the work by providing accurate and timely information, the nature and scope of the engagement and the fee structure. Let the client know that a fee may vary from the estimate if an unexpected development crops up. Describe the situations that could cause additional work and obtain the client's acknowledgement that charges may vary in such instances. Use the letter to give the firm leverage to collect, and have the client sign it before you begin work. Make it more stringent for a new client that shows risk factors.
Identify who is buying your services--and who will pay the bill. Precisely identify the individual, group, entity or portion of an entity that is obtaining CPA services. For instance, if the client is a company with subsidiaries or other corporate affiliations, name which one will pay the bill. If a closely held business hires your accounting firm, have the owner(s) sign a personal guarantee for unpaid or past-due fees. Such agreements generally are void under the statute of frauds unless they are in writing.
Describe the scope and nature of services. Outline the procedures the accounting firm will perform and any reports it will issue. …