EXECUTIVE SUMMARY

A FIRM SHOULD SCREEN NEW CLIENTS for fiscal responsibility and use an engagement letter to describe exactly what services it will and won’t perform, what reports it will issue and the fee structure—hourly billing, project fees or other means of computing fees. The letter should name the entities that will get services and one that will pay the bill. A MONTHLY RETAINER PLAN CAN PREVENT a client from falling behind, incorporate the client’s payments into predictable cash outflows and reduce haggling. If a client with a questionable credit history balks at paying a retainer, avoid the engagement. A SIGNED PROMISSORY NOTE IS a client’s written agreement that he or she owes the CPA for services. A firm should get one from a client who wants to wait more than 60 days before making a payment, for example. Have legal counsel draft the agreement. A FIRM SHOULD HAVE A POLICY for managing late payers and nonpayers and all partners should follow the same procedures. A firmwide approach reduces debate and simplifies handling collections. Firms should maintain accurate records and bill promptly. SOME FIRMS USE ALTERNATIVE DISPUTE RESOLUTION (ADR) to defuse a malpractice counterclaim by the client if the CPA must sue for unpaid fees. Mediation or arbitration permits the firm to pursue payment in a way that minimizes conflict. ONCE A DEBTOR-CLIENT MAKES a verbal commitment to a payment schedule, a firm should document the conversation in the client’s file and send a letter confirming the understanding. If a debtor closes off communication, a firm has no choice but to refer the debt to a collection agency or a lawyer for further action.

CARL PACINI, CPA, JD, PhD, is an assistant professor at Florida Gulf Coast University, Fort Myers. His e-mail address is cpacini@fgcu.edu. ROBERT R. TUCKER, CPA, PhD, is an associate professor of accounting at Fordham University, New York. His e-mail address is atucker458@aol.com.

eople 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.

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.”

Describe the scope and nature of services. Outline the procedures the accounting firm will perform and any reports it will issue. Also specify what related services your firm will not provide. State that services not covered in the engagement letter are not included in the fee quote, and if the client requests other services, they will be billed additionally. Inform the client you will issue a revised engagement letter or a change order in such circumstances—and then follow through.

Be clear about billing procedures and nonpayment penalties. Every engagement letter should detail how and when the client will be billed. Give explicit hourly billing rates, project fees or other means of computing fees. Present a payment schedule—such as monthly or interim invoices or an on-completion arrangement. If the firm charges a late fee for balances unpaid after 30 days, say so. (Unlike interest charges, late fees are not subject to usury laws.) Include a provision that gives the firm the option to stop all work or withdraw from the engagement until the client brings the account current.

Use retainers (and other leverage if appropriate). If your firm requires a retainer for all or a portion of a fee before performing any work, let the client know how it will be applied to the bill. A monthly retainer plan has advantages. It can prevent a client from falling behind, incorporate the client’s payments into predictable cash outflows and reduce haggling over hourly bills. If a client with a questionable credit history balks at paying a retainer, avoid the engagement.

Some CPAs spend the first hours of an initial audit aging accounts payable. As you might expect, the professional fees account is one of the first they analyze. If amounts payable to former accountants and attorneys are not up to date, the new firm informs the client that it will proceed with the audit only if its total fee is paid up front.

Build in a system to handle complaints promptly. Have the client agree to notify you within 15 days of an invoice date if a dispute arises over services or a bill. This lets the firm take timely action rather than drift into conflict. Many clients claim that services rendered had not been to their satisfaction when they neglect to pay and are subsequently dunned. If the situation goes before a court, this type of clause helps defuse a client’s assertion that a service was performed unsatisfactorily.

Use promissory notes when possible. Some CPA engagement letters provide that the client must sign a promissory note if fees become past due for a certain number of days. The advantages of a promissory note are that it

Establishes an agreed-on fee and provides for interest, attorneys’ fees and costs of collection.

Limits the client’s dispute if there’s a lawsuit.

Averts rejection by malpractice insurers that consider a promissory note lawsuit low-risk but disqualify firms with a history of suing for fees.

A signed promissory note is a client’s written agreement that he or she owes the CPA for services rendered. Obtain a promissory note from a client who wants to wait more than 60 days before making a payment, debt collection experts say. It improves the likelihood of prevailing in court. A promissory note may be secured with collateral. Consult legal counsel about the proper way to document a lien if the client agrees to it.

Fire difficult clients. Clients that constantly protest fee estimates, question monthly statements, pay late, threaten accountant dismissal or are routinely confrontational on many issues affecting the CPA-client relationship occasionally slip through. Whether you “fire” such a client or are dismissed, the professionalism with which you handle the transition can decide whether you get paid or file a lawsuit. For more information, see “Just Say No to Costly Clients,” JofA, Jun.99, page 45.

COLLECTION PLATFORM
Develop a firmwide policy for managing late payers and nonpayers and get all the partners to follow the procedures. A systematic approach clarifies client expectations, reduces debate and simplifies the collection process.

Maintain accurate records and bill promptly. A helpful firm practice for keeping on track is weekly aging, monitoring and follow-up of the firm’s past-due receivables. Call the client if an account receivable becomes past due by even one day—but before doing so, review the account files to be sure you have all the facts. (See “The Quicker You Bill, the Quicker You’re Paid.”)

Under some circumstances, a CPA can choose to withhold service for nonpayment of fees. However, a CPA must complete an audit that’s in progress unless the engagement agreement links payment to increments of completion. Accountants who withhold client records as leverage put themselves at risk. Numerous courts have imposed liability on CPAs who fail to return client records promptly (see “An Ethics Quiz”).

Follow the guidelines contained in the Fair Debt Collection Practices Act (FDCPA). It says that “a debt collector may not communicate with a consumer in connection with the collection of a debt … at any unusual place or time that would be considered to be inconvenient to the consumer.” The law applies to collection agencies and attorneys, but many courts use it to gauge whether abusive collection methods have been employed.

Use common sense, and call when clients are more likely to be cooperative. Wait until they’ve been open for business for at least a half hour and had their morning coffee, for example. Don’t call during lunch hours; even if a client is in, the timing gives an assistant a chance to say the person isn’t available. Most clients will volunteer the best times to call.

If you get an answering machine, assume that someone other than the client will listen to the message so be discreet. Leave your name and number and a request for a return call. When contacting a business office, don’t tell the person who answers the phone that your call is about a past-due bill. Doing so may give a client a basis for a lawsuit.

Your main reasons for calling debtor-clients are to find out why they haven’t paid you yet and to encourage prompt payment. Be tactful; say you are calling to see if they got the most recent invoice, for example. Ask whether there was a problem with the services rendered. Make every effort to avoid being confrontational.

Once a debtor-client makes a verbal commitment to pay—whether in full or a series of payments—send a letter outlining the understanding you’ve reached. It eliminates any potential excuse that the debtor-client won’t remember what has been said. Document all developments in the client’s file; include copies of collection letters and notes of conversations.

If the client requests the firm cease all calls, comply. If you persist, a debtor-client may be able to sue for harassment. When debtors close off communication, your firm has no choice but to refer the debt to a collection professional for further action. Before turning the account over to a collection agency or attorney, make a last written request for payment.

WHEN ALL ELSE FAILS
Accountants should use only reputable collection agencies, which are likely to be members of one or both trade associations: Associated Credit Bureaus and the American Collectors Association. Members of them adhere to the
FDCPA. A collection agency may charge as much as 50% of the amount recovered from a debtor but isn’t entitled to a fee unless it succeeds in getting payment.

The last resort is to hire a collection attorney. An attorney will bill by the hour and you must pay him or her whether or not your fee ultimately is paid. If the firm has a strong position—that is, professional services were careful, appropriate and are well documented with workpapers—it may be worthwhile to file a lawsuit. Many debtors can’t afford an attorney to defend them and will offer to settle if they’re being sued. Often the accounting firm can recover attorneys’ fees from the debtor.

Remember, a business’s track record and its management’s character are clues to how it will meet its obligation to your firm, so pay attention. In all cases, an accounting firm must actively manage billing and collections to protect its cash flow and profitability. To minimize problems, use engagement letters, update them as needed, stay on top of billing, get all the partners to follow the house rules—and use common sense and professionalism if you’re forced to collect.