Setting Standards for Client Acceptance
Source: Partner Advantage Advisor
Risk management starts with client acceptance. Standard procedures can be found in AICPA Practice Alert 2003-3 “Acceptance and Continuance of Clients and Engagements,” (http://www.aicpa.org/download/secps/pralert_03_03.pdf).
All new clients should be evaluated and existing clients reviewed annually. Here are some guidelines:
v A client should not be accepted if the firm is not qualified to do the work. Accepting such clients increases the risk of disappointing the client and third parties. The firm should understand the industry and business of the client and know where the most likely risks lie. When a client is disappointed, the risk is increased. Some firms prepare a formal statement of what they can and cannot do.
v The reputation, integrity, sophistication, financial literacy, and commitment to proper controls of the prospective client should be evaluated. The firm should interview previous accounting firms and third parties for this purpose. The firm should also determine whether the prospective client’s expectations are reasonable. An unsuccessful engagement can result in a lawsuit. Also determine what third parties will rely on the work and who will be damaged if the company fails.
v Certain engagements present higher risks. Some of these are real state, construction, financial, limited partnerships, public offerings, and merger & acquisition transactions.
v Evaluate the complexity of the work. When combined with other risk factors, complex engagements can be the highest risks.
v Make a conflict of interest determination especially in nonattest engagements for attest clients.
v Determine the client’s financial viability by reviewing financial statements, interviewing credit grantors and previous accountants and lawyers, running credit checks, and reading management letters.
v Find out why the client left its previous accountant, why it chose you, how much staff and executive turnover it has experienced, how it pays its bills, and its financial history.
v Understand that the public perception is that CPAs are expected to detect fraud even in review engagements. The recent business and accounting scandals have raised the percentage of the public with this perception from 40 percent to 70 percent. This may also be the perception of juries.
v Your right to disengage should be part of your engagement letter (if the client fails to meet its responsibilities}. Disengaging at the last minute can be risky because it can create additional cost to the client, including the cost for another firm to complete the engagement.
From, Partner Advantage Advisory June 2005, p. 4. Click here for the complete article. Hudson Sawyer Professional Services Marketing Inc.www.hudsonsawyer.com; subscription $279 per year; single issues—$25. Orders,