Looking for Trouble -- Check Out Clients Before You Take Them On

Source: Accounting Today

Conducting a client risk assessment is your best defense against fee disputes, malpractice claims, and other risks. It's particularly important for smaller or rapidly growing firms. It's common in these firms for partners to bring in any clients they want and to manage their own engagements. But one partner's work exposes the entire partnership to risk, so it's important for the new client vetting process to be a firmwide endeavor.

To spot and avoid trouble from the beginning, firms should conduct background searches for all significant engagements. The extent of due diligence – which can range from a simple Internet search to a professional background search – depends on several factors, including the size of the engagement, the nature of the work, and the client's ownership.

Potential red flags include clients in high-risk industries, clients experiencing financial difficulties, and clients with a track record of suing their accountants or not paying their bills. Other trouble signs include difficult personnel and concerns about management integrity. Firms don't necessarily have to reject every high-risk client, but it's important to understand the nature and magnitude of the risk and to include appropriate protection in the engagement agreement.

If you decide to end a client relationship, execute a formal disengagement letter and do so as early as possible to avoid disrupting the client's relationships with lenders or other business partners.

For the complete article, read “Beware reckless engagement.”

From Accounting Today, February 1, 2011, SourceMedia Inc., One State Street Plaza, 27th Floor, New York, NY 10004, 800-221-1809.