An effective way to avoid having a collection problem in the first place is to communicate with the client regarding your billing and collection policies, and to include stop-work or disengagement provisions, or both, in your engagement letter. Such provisions can then be enforced if the client doesn’t pay you in accordance with the engagement letter.

A stop-work clause in the fees section of your engagement letter enables your firm to stop work in the event the client fails to pay in a timely manner. The enforcement of this clause will help prevent your firm from completing too much work without receiving payment from the client. Stop-work clauses must be enforced in order to be effective.

Bill on a timely basis, and do not allow fees to build up. When unpaid fees become too large, they provide an incentive for the client to sue for malpractice, especially when the CPA sues for fees. CAMICO claims experience clearly shows that suing for fees creates a high probability of a countersuit by the CPA’s client, usually alleging malpractice during the engagement in question. This escalates the situation from a simple fee dispute to a malpractice lawsuit. Lawsuits and countersuits almost always result in the CPA spending far more in attorney fees and in lost billable time than is warranted for the fees owed to the CPA.

Claims experience also shows that simple fee disputes are better resolved through mediation and arbitration than through litigation. That’s why CAMICO recommends mediation for all disputes as a first step and binding arbitration for fee disputes onlyfee disputessigned by the client

as a second step. Include a mediation clause for all disputes and a binding arbitration clause for

only in your engagement letter, which is

.

Confirm with your legal counsel and liability insurer the applicability of agreements for mediation and arbitration (also known as Alternative Dispute Resolution) in your state.signed by the clientsigned by the client

In some states these agreements are effective only if they are used as part of an engagement letter or a separate contract

, but the engagement letter always needs to be

in order to be effective.

Billing and Collection Tips

If the bill or its description of services is unclear, clients will be inclined to put it aside and to call about it later, lengthening the time it takes to pay the bill. Bills that are standardized, clear, concise and descriptive are more likely to be paid sooner.

Communicate frequently with the client, and speak to the person in charge of authorizing the bill payment when it’s due. If it’s a large balance due, call 10 days before the due date to be sure the invoice has been received.

Collection calls are relatively effective, inexpensive, immediate, personal and informative. Staff should be trained on the rules under the “Fair Debt Collection Practices Act” (FDCPA), which prohibits unintentional harassment of debtors. Anger management and mediation training will also help staff deal with difficult people.

Once you have sent 30-, 60-, and 90-day letters, turn the account over to a professional collection agency to avoid spending valuable time and resources on deadbeats. If a client offers a reasonable partial payment, consider taking it and disengaging. This will free up more of your valuable time to pursue better clients who pay their bills on time and in full.

Client Screening:

Re-evaluate your relationships with clients on a regular basis—at least annually—to identify problematic or less desirable clients that may be keeping your firm from developing the clients it wants. Post-tax season is a good time to screen clients for actual or potential problems, as there is ample lead time for a tax client to replace you in the event you decide to disengage.

Retainers/Deposits:

Retainers or deposits may be the best option for clients that are slow-paying, financially stressed, or new to the firm (until they have established some credit with you). Remind clients that retainers are not an estimate of the total cost of the engagement, do not earn interest, and must be paid before work begins.

Disengagement:

If you decide to disengage, terminate the relationship professionally and formally with a disengagement letter. The letter should always contain clear statements, a description of your work, and a list of any due dates or filings. Try to provide ample lead time before a client’s deadlines to better protect yourself. Your client need not feel antagonized in any way. Done effectively, disengagement can leave your client feeling that you have acted in the best interest of both parties.