Background Checks Can Help You Spot Problem Clients

Source: Pennsylvania CPA Journal

To avoid costly litigation and collection issues, screen potential clients and look for warning signs of possible trouble ahead. Questions to ask include:

• Why is the client changing accounting firms? If the reason is service issues, dig deeper to be sure the client isn't shopping around for a CPA firm that will go along with questionable accounting or tax practices. If the issue is fees, carefully consider whether you can complete the work within the client's desired budget.
• Has the client sued previous accountants?
• What is the state of the client's internal controls and accounting practices? Watch out for clients who aren't willing to consider changes.
• What is the client's financial condition? Financially troubled clients often pay late, demand fee reductions, or cause collection problems.
• What is the purpose of the engagement? If a financially troubled client simply seeks tax returns or monthly statements for bankruptcy proceedings, there may be little concern about liability. If the client will use financial statements to apply for a loan or raise money in a private offering, however, additional due diligence is required. Be sure your engagement letter limits your liability in the event the client fails to secure financing and that financial statement footnotes contain appropriate disclaimers.
• Is your firm equipped to furnish the requested services? Does the client's industry require any special expertise or present any unique tax concerns? Do you have the manpower you need?

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From Pennsylvania CPA Journal, Summer 2010, “Liability Avoidance Starts With a Good Match.”