Editors: Steven F. Holub, CPA, MBA, and Kenneth M. Parker, CPA
John’s day is planned for maximum efficiency:
- Read technical updates;
- Respond to the previous day’s emails;
- Return client calls;
- Clear off desk by reviewing tax returns;
- Spend the afternoon meeting with clients; and
- Leave time to make his son Billy’s soccer game and have dinner out with the family.
John opens his email and starts scouring his inbox for the daily tax updates, but his attention is drawn to the three emails from a client all sent between 5 p.m. yesterday and 8 a.m. today. All of the messages are flagged with a red exclamation mark.
Suddenly John’s shoulders tighten, his stomach quakes, and his temples begin to throb. Despite his well-thought-out plan, he has to open those client emails; after all, they could be important.
As he feared, the client is in a hurry to get his returns filed and is very frustrated. After all, he dropped off most of the tax return documents last week and emailed the remaining items yesterday morning. As he told John when they met last week, this is a very simple return that John should be able to complete with minimal effort, and he wants to get this out the way so it will not be hanging over him.
All too often this or similar scenarios occur at CPA firms. Anyone with more than a year’s experience in a tax practice knows the rest of the story.
John is the fourth CPA this client has hired in as many years. He spoke disparagingly about them (wonder what he will say about you?). The client was not comfortable leaving a retainer when he dropped off the information because he has trust issues. The return most likely contains complex issues that require additional work, and it is likely the client has not provided all relevant information upfront. It is also likely that the client is not willing to pay for the additional work that may be required.
This is an obvious example of a “bad” client, and the decision to part ways should not be too difficult. But, often, the decision is not as obvious. In reality, there are a variety of reasons that clients should be asked to leave the firm. The average CPA can follow certain steps to recognize these situations and take appropriate action.
CPAs are taught to exercise due diligence when bringing on new clients. CPAs should assess whether they have the technical knowledge to perform the work and the available staff and resources. They should also assess whether the potential client’s expectations are reasonable and whether its management team exhibits high levels of integrity.
If a CPA firm does not have a client acceptance policy that evaluates these issues along with many others, it is time to create one. The AICPA has resources on its website that are helpful when deciding whether to accept new clients (see “Evaluating and Firing Clients”). Most professional liability insurance carriers have materials and checklists available. Even a general internet search will produce numerous results on new client screening techniques.
While it is not always possible to weed out bad clients before bringing them on board, it is best to try. Anyone who has had to fire a bad client would probably agree that it would have been better to have never accepted the client in the first place.
This is certainly not an all-inclusive list, but the following are a few warning signs CPAs should look out for when meeting with potential clients. Consider whether the prospective client:
- Has changed CPAs often;
- Is rude to office staff;
- Will not allow contact with prior CPAs;
- Tries to haggle down the fees;
- Keeps records in poor condition;
- Needs a project completed quickly;
- Is not willing to leave a retainer;
- Is hesitant to sign an engagement letter;
- Is currently delinquent in filings;
- Insists on being the only contact; and
- Comes in close to a tax deadline.
It is best to slow the process of bringing a new client onboard and thoroughly vet the client before accepting the engagement. In an ideal world, this would always happen. In reality, most, if not all, CPAs have some bad clients. It is important to identify clients that are not a good fit and ask them to leave.
Identifying Clients to Fire
There is a gentleman named Walter Haig II, who taught annual auditing and accounting updates. Every year he drilled participants with the same simple and clear message: “Bad clients make bad lawsuits.”
Bad clients are generally pretty easy to identify. If partners have any doubt about who their bad clients might be, they should ask the front office staff. Staff members often know exactly which clients are troublemakers.
Bad clients are ones who:
- Are abusive to staff;
- Complain about fees;
- Lie or conceal information;
- Set unrealistic deadlines;
- Do not follow advice;
- Blame others for problems; and
- Monopolize staff time.
However, firing clients is not always about getting rid of bad clients in the traditional sense. CPAs should evaluate their client base regularly and make sure that existing clients are a good fit with the firm’s mission and culture.
A firm that has chosen to embrace new technologies may find that some clients are not keeping up. Implementing a paperless workflow system may require all clients to complete online tax organizers and sign electronic engagement letters. Some clients are not going to be comfortable with this new process, and their accounts will have to be handled differently. This is going to slow processing and may increase both the cost and the likelihood that things will be missed. A firm needs to seriously consider how long it can make exceptions for clients that are not willing to change.
Perhaps the firm has had some turnover in staff, and the people who were the strongest in real estate transactions are gone. Evaluate whether the firm has enough clients in this area to make it cost-effective to bring the remaining staff up to speed. If not, or if suitable replacements cannot be hired, the firm may not have the technical competence to continue working with these clients.
An annual assessment of fees earned by each service line may indicate that a disproportionate amount of time is being spent on a low-profit service. Firms may also find that the costs of offering a service that is not routinely performed outweigh the fees the service generates. For instance, a tax practice that has only a handful of clients that require annual reviews may need to consider dropping this service. The cost of educating the staff on the AICPA Statements of Standards for Accounting and Review Services (SSARS), purchasing technical guidance materials, and paying for required peer reviews can cut into any potential profit. Furthermore, the time spent staying up to date on just one service cuts into the time the staff could use to learn more extensive tax planning or compliance techniques.
The firm’s leaders should meet at least annually to review the direction of the practice. They should evaluate the firm’s mission; how many clients the firm can honestly manage while providing exceptional service; what client services the firm performs the best, or at the highest rate of profit; and what is the profile of its perfect client.
The results of this discussion can be used as the basis for criteria to evaluate current and future clients. It can be as simple as creating five to seven questions (must be an uneven number to avoid a tie) that require “yes” or “no” answers. A “yes” means the client meets the firm criteria, and “no” means the client does not. The client list can be formatted in Excel, and a basic formula can be created that says if the “no” answers outweigh the “yes” answers, then the client should be fired.
While the list of clients the formula says to fire must be reviewed before taking any action, the reviewers should also be true to the standards they have set. It may be tempting to decide to keep a client who is enjoyable to visit with each year. However, if the majority of the results are contrary to what the firm values, the client is not a good fit.
Preparing to Fire Clients
Once the firm has determined which clients to fire, it is wise to devise a strategic plan for carrying out the terminations.
It is good to start by contacting the firm’s professional liability carrier to advise it of the plan. Since there may be a few disgruntled clients on the termination list, the carrier may want to be alerted to any potential claims. The loss prevention teams have experience in firing clients and can be a good source of information on best practices for this process. In addition to offering advice on how best to disengage, the insurance carrier may have sample disengagement letters that can be modified to suit the firm. Some insurers may even offer to review the firm’s modified letter before it is sent to clients.
The most common method for firing clients is to send a disengagement letter via certified mail with return receipt requested. However, care should be taken when firing clients who have close personal relationships with members of the firm or those that have some strategic value, but not enough to warrant keeping them as clients. These clients should be told in a face-to-face meeting, whenever possible, or at the very least by phone. A letter should be sent as a follow-up to document the meeting or conversation. It is best to follow the advice of the insurer if the firm is considering firing clients via email.
Before notifying clients, the firm should make sure there are no current projects in process for any of the clients who are to be fired. If current projects are in process, the firm must decide whether to complete the projects or terminate the services immediately. The firm should address the planned level of involvement in continuing the work in the disengagement letter.
Ideally, it is best to disengage in advance of any deadlines, but this is not always possible. If the client has any upcoming deadlines or tax filing requirements, it is a good idea to spell these out in the letter.
To aid in a smooth transition, the client’s files should be prepared prior to notification. The firm should make sure that all original documents have been copied or scanned; all agreements and authorizations have been signed; all fees are paid (if possible); and all client documents are neatly organized, packaged, and labeled to be returned. It is also a good idea to have a staff member prepare authorizations to release information for each client being terminated and place them in the client’s permanent folder. This will speed up the process when the new CPA contacts the office requesting documents. The authorization can be sent to the client for a signature.
If the firm uses a client portal system, the letter should address when the client’s access will be removed. This will allow the client time to download copies of any documents it may need for future reference.
The process is almost complete; now it is time to prepare the firm’s staff.
Firing the Clients
Once the list is complete and the letters are ready, it is a good idea to meet with staff to discuss what is about to happen. While many of the staff members have counted the days to see their least favorite client fired, they may not be truly prepared to handle what is about to happen.
The people involved will vary depending on the size of the firm. In a small firm, it is probably best to include everyone in the discussion. Larger firms are more likely to include only the key staff on the engagement, although it is generally advisable to have some members of the firm who are not directly involved with the client participate in the decision-making process. Staff should be made aware of what is happening and why. Staff should also be given examples of how to respond if contacted directly by the terminated clients. The fear of confrontation makes many people uneasy, so helping them prepare for any possible conversations may alleviate unnecessary anxiety.
This is also a great opportunity to remind staff of the firm’s mission and future direction. It is human nature to be concerned about job security when sources of revenue are going away.
Some staff may fear that losing key clients, even bad ones, will have an effect on their job. It is important to focus on the positive elements of the change. For instance, the stress level will most likely decrease; work hours will drop; and the team can spend more time focusing on delivering exceptional service to the clients the firm retains, and bringing in new and (hopefully) better new clients. The result should be that everyone has a better quality of life, is happier, and is more productive. This should also result in bigger profits.
The firm should decide ahead of time if it is going to provide referrals to other CPAs. It is probably not a good idea to send bad clients to someone you like. On the other hand, if a client is fired because of a business motive, it would be helpful to assist in finding a replacement.
Prior to giving out names, it is best to contact potential referral sources to make sure they are interested in accepting new clients. If they are accepting new clients, it is a good idea to find out what their ideal client looks like. A list can then be prepared of possible CPAs with their client criteria. All relevant staff can have this list available when they are asked to provide a referral.
The Client Has Been Fired, Now What?
The feelings that accompany firing clients may vary widely. Certain staff members may be elated that they are finally unburdened from difficult clients. Some may be sad at the loss of relationships and the uncertainty that awaits them or the practice. Others will be anxious, wondering how terminated clients will receive the news and what those clients may say or do in response.
It is best to remind staff why the clients were fired and the benefits the process should reap. Posting the firm mission statement and goals nearby could provide support. It will also help if clients call and want a personal explanation or ask the firm to reconsider. If the clients do call, it is best to be polite but firm. The client must be reminded that this was a business decision and not personal. If the firm has opted to offer names of potential new CPAs, this would be a good time to present those names.
On an administrative level, clients that have been fired need to be removed from the firm’s client management system. It is best to create a checklist of tasks to be completed when clients are terminated. It should include things such as removing them from client email and mailing lists; changing them to inactive in the billing system; archiving their client files; removing their access to client portal systems, etc.
Make sure all client records are handled properly and in accordance with firm procedures and professional and legal retention rules. CPA professional standards require that all original client data be returned, and most states have specific requirements for how long client data must be kept.
It is always best if the relationship can end on good terms, so remain professional through the process regardless of the client’s behavior. Remember that this decision was best for the firm, the staff, and the client.
What to Do With All of the Free Time?
The process of pruning a practice is by no means simple and without challenges. It is difficult to end relationships of any kind, but the reality is that getting rid of the wrong clients makes room for the right clients. Chances are good that if a firm has been struggling under the strain of bad clients’ demands, the good clients have suffered.
This is the perfect time to reconnect with the good clients. Find a way to reach out to them with a handwritten note or get together with them for coffee or lunch. Let them know about the changes the firm has made and the renewed purpose in serving only those clients aligned with the firm’s mission. The firm should ask how it can serve them better, and the chances are good that they will give honest answers. This feedback should be useful in providing more and better services to those clients. When they are satisfied, ask them to refer others who they believe will be a good fit. Use free time to become more involved in business, professional, and civic and charitable groups as these activities are often personally fulfilling and may lead to potential new client engagements.
Finally, take some time to reconnect with the family and friends who have likely been neglected. A rewarding life outside of the firm is important in keeping everyone happy and healthy.
AICPA resources for Tax Section members:
Steven Holub is a National Director in the Professional Practice Department of Cherry Bekaert LLP in Tampa, Fla., and is a former chairman of the AICPA Tax Division Tax Practice Management Committee. Kenneth Parker is with Parker and Associates, CPAs, in Jackson, Miss. Cari Weston is a sole proprietor with a tax practice in Austin, Texas. Mr. Parker is chairman and Ms. Weston is a member of the AICPA Tax Practice Management Committee. For more information about this column, contact Ms. Weston at email@example.com.