Client screeningClient screening is a crucial step toward controlling losses and enhancing clientele, services, and fee structures. The basic screening process uses a checklist to flag problematic prospective clients.
Some questions about prospective clients may include:
- Is the client the kind of client the firm would like to have? Why? Why not?
- Does the client demonstrate integrity? Why did they choose your firm? Why are they leaving their current firm?
- Is the client financially viable?
Some firms create a list of their top five clients with descriptive attributes which make them attractive. The descriptions help guide firm management in screening the clients they want to entice.
Due diligence for client screening should include the following steps:
- Performing background and credit history checks
- Obtaining and assessing the quality of references, including additional references, when necessary
- Obtaining permission to check with the predecessor firm
The screening process should also help firms recognize higher risk engagements. This will allow firms to plan their billing and collections practices consistent with the risk. Claims experience has shown that higher risk engagements often involve buy-sell transactions, public offerings, limited partnerships, professionals, financial services, real estate, and construction companies. If the potential client raises too many red flags, a firm should not accept the engagement.
Client reviewFirms should also have a process in place to document problems with existing clients. Some questions about existing clients may include:
- Why did the firm choose the client initially? Do those reasons still exist?
- What does the client like about the firm that causes it to stay?
- Are the client and engagement still a good fit for the firm?
If, after an analysis of problems with an existing client, the firm determines the client is no longer a good fit, then the firm should consider disengaging from the client.
Engagement lettersEngagement letters document the understanding with the client and serve as the firm’s first line of defense in the event of a fee or billing dispute. The engagement letter should limit the firm’s scope of services by employing words that limit its responsibility and avoiding words that expand it.
To reduce “payment resistance,” firms should involve their clients in the design and understanding of the terms and conditions of the engagement letter. Billing and payment policies should be clearly communicated during the initial client interview. A firm may find that a client who hesitates over the amount of estimated the fees during the screening or interview process may later discover this same client poses collection issues.
Firms should price their services based on their value in the market. Underbidding or discounting rates to win work can reduce the firm’s resources, increase the chances of shortcuts being taken, often attracts less desirable clients, and expands the firm’s exposure to malpractice disputes.
Different services often require different billing practices. The engagement letter should spell out the fee structures, such as hourly rates, fixed fees, value pricing, refundable retainers and replenishment, or a combination of structures based on a well-conceived billing policy.
Firms should always document their expectations, including billing and payment terms, in the engagement letter. That language, along with other documentation in your file, can be used later to rectify selective client memory.
Additional recommended actions include the following:
- Use standardized letters that may be modified and tailored to fit each engagement.
- State estimates, if applicable, and clarify that they are not fixed fee quotes.
- Use retainers/retainer replenishment for clients that are new to the firm, slow-paying, or financially stressed. Remind clients that retainers are not an estimate of the total cost, do not earn interest and are comingled with other funds, and must be paid before any work begins.
- Include a stop-work clause and create a policy to enforce the clause to prevent unpaid fees from accumulating to the extent that the firm believes it can no longer walk away from the client. Without such a clause, if the unpaid fees become so large that the firm wants to sue to collect, the client may have little to lose by suing the CPA for malpractice. The legal fees incurred from the lawsuits and the billable time lost by the firm almost always exceed the fees owed.
- Include terms for fee collection. Late charges are legal but should be reasonable. Do not structure the agreement to collect “interest” since it may conflict with state usury laws and federal and state truth-in-lending laws. If applicable, consider offering discounts for early payment.
- Include mediation and fee arbitration clauses, which are often successful tools. Mediation is effective for all disputes, and arbitration is effective for fee disputes only.
When the scope of the engagement expands beyond the terms of the engagement, the CPA’s liability exposure also expands. The firm should provide a new letter or an addendum to the existing letter to include additional specific services with a confirmation that the client wants the added services and is willing to pay the additional fees.
Billing tipsIf an invoice is unclear, clients may put it aside to address later, lengthening the time it takes to get paid. Standardized, clear, concise yet descriptive invoices are more likely to be paid sooner.
All professionals within the firm should be accountable for their timesheets and billing deadlines. Firms should aim to reduce their billable time by using administrative staff, with appropriate training and support, to prepare invoices and collect payments.
Timely billing leads to better collections. Consider billing more frequently than monthly, as smaller invoices may be paid sooner.
Collection tipsIt’s often helpful to speak to the person in the client company who’s in charge of authorizing bill payment. If a large balance is due, consider calling 10 days before the due date to be sure the invoice has been received, and request a payment date.
Collection calls are relatively effective, inexpensive, immediate, personal and informative, but they should be documented in the firm’s files. Staff members need to know the rules under the Fair Debt Collection Practices Act (FDCPA) to prohibit unintentional harassment of debtors. Anger management and mediation training may help staff deal with difficult people.
Once a firm has sent out 30-, 60-, and 90-day letters, it should consider turning the account over to a professional collection agency to avoid spending more valuable time and resources. If a client offers a reasonable partial payment in lieu of full payment, take it and disengage. This frees up valuable time to pursue better clients who pay their bills on time and in full.