Client screening is an important practice management tool and is the first step in an effective loss prevention program. It can also be used to identify less desirable clients that may be keeping your firm from developing the type of clients you want.

Re-evaluate your relationships with clients on a regular basis—at least annually, or semi-annually. An added benefit that comes from regularly evaluating clients is that you place yourself in a better position to gauge their changing business needs and to better sell new or different services that complement the clients’ growth or change.

The following checklist highlights some of the signs that it may be time to disengage from certain clients—ideally after they have paid their bills.

Difficult Behavior

Does the client pay your firm on time? Do they provide the documents you need and on a timely basis? Do they return your phone calls? Or, is the client non-responsive, causing delays? We recommend that difficult or manipulative behavior on the part of any client be examined. It may be an indication of a failing business, financial problems, or personal problems. Uncovering the source of the problem might be helpful, but consider taking swift action to remedy the situation or disengage before the situation worsens and puts the firm in a position that would make it much more difficult to disengage.

You may have some clients that pay well but are unpleasant to your staff, make unreasonable demands, complain excessively, argue about how the scope of services is being performed, threaten to sue you (or make an insinuation to do so), or are generally obnoxious, creating turmoil for you and your staff. Is this client worth keeping? Often the answer is “no,” so the CPA should consider disengaging sooner rather than later.

Withheld Information

When a client does not provide the information you need, carefully consider the problem. Is the problem sloppy record keeping, or is the client deliberately withholding information? If it looks deliberate, be cautious, especially if you are urged by the client to proceed with work without having proper documentation. Client behavior such as this may be a red flag, and repeated delays could be the result of unethical, illegal or fraudulent activity. If fraud or misappropriation of assets is suspected, consult with an attorney or risk advisor experienced in CPA professional liability.

Changes in Client’s Business

When a client changes or goes in a direction that is new for the client, you may need to reconsider the relationship. A client may, for example, buy a business that requires work you are not qualified to perform (e.g., work with an international component). Or the client’s start-up may grow, and the client decides to take it public—you may not be sufficiently experienced or interested in performing the public work. When a client expects more from you than what your experience and staffing enable you to provide, the resulting expectation gap could lead to a deterioration of the professional relationship, or a claim, or both, if the client’s expectations are not met.

Changes in Your Firm

When your firm changes, you may also need to change your client base. The loss of a partner with expertise that the other partners don’t possess will require a decision by the firm regarding continued service to the clients formerly represented by that partner. Additionally, you may decide that you no longer want to continue performing a particular scope of service, or you may decide to grow your business in new directions. Review your client base whenever your firm changes in order to determine whether or not all existing clients are still a good fit for the firm.

Potential Conflicts of Interest

Consider all client situations carefully to spot potential conflicts of interest which may affect your objectivity or independence, or both—even if you are not engaged to do attestation work or to deliver financial statements. Examine potential or actual conflicts of interest from a broad point of view, considering the client’s perspective as well as those of other stakeholders such as owners, investors, partners, beneficiaries and spouses. Troublesome scenarios can include an entity break-up, a failed investment, bankruptcy, assets or businesses moved to a trust, a merger, a divorce, or anything else that can create opposing or disappointed factions.

Disengagement

When you decide to disengage, seek to terminate the relationship professionally and formally, and follow-up in writing. At a minimum, the disengagement discussion and subsequent letter should always contain the following:

• A clear statement that you are disengaging and the effective date of the disengagement (e.g., “We must formally end our relationship with you as your accounting firm [effective immediately, or as of [date]].”);
• A description of any work that is in process or unfinished; and
• A statement of any due dates or filing deadlines that exist with regard to the work, whether finished, in process, or unfinished.

Care needs to be taken when disengaging or withdrawing from an engagement after it has started, especially when the scope of the engagement includes audit, review, or compilation services. Since financial statement and attestation engagements are often used by the client for obtaining financing or satisfying loan covenants, disengaging while the engagement is in process requires careful attention to potentially negative effects in light of the surrounding facts and circumstances resulting in the decision to disengage.

Review and edit your disengagement letter carefully to ensure that it is professional, objective, and rational. Situations that provoke disengagements are often emotionally charged. Don’t let your possible discussion with the client and the subsequent letter reflect your personal feelings. Your client needn’t feel antagonized in any way. When done effectively, disengagement can leave your client feeling that you have acted in the best interests of both parties.

In the end, disengaging is simply good practice management, and knowing how to do it skillfully and professionally will help you grow your practice and avoid liability.

CAMICO provides comprehensive advisory services to CAMICO policyholders, including engagement and disengagement letter review services.