Suing for fees significantly increases the risk that a CPA firm will face a professional liability claim. Often, a motivated client can develop an argument that a portion of the professional services he or she received failed to adhere to the standard of care. A lawsuit to collect unpaid fees (“collection action”) from the client may serve as a catalyst for the client to pursue that argument – either as a defense to the collection action and/or in a counter claim for malpractice. Collection actions thus place the CPA firm at risk for professional liability claims, as well as business losses in the form of litigation expenses and lost professional time that may outweigh any potential recovery in court.

What should CPAs consider before bringing a collection action?

1. How well will the firm’s performance of the professional services for which fees are being sought stand up against a malpractice counterclaim? Assess the CPA firm’s ability to succeed in the collection action. Then reduce the amount the firm is seeking to reflect the exposure. For example, if the odds of prevailing in the action are 80 percent, reduce the amount sought by 20 percent and then re-evaluate whether the collection action should be pursued.
2. If after considering the firm’s ability to succeed, the fees are still worth pursuing in a collection action, the firm should re-evaluate the reasonableness of the fees to be recovered. Consider whether the fees could be considered excessive and, if so, reduce the amount sought to an amount more likely to be considered reasonable.
3. If the firm believes that a collection action should be pursued, it should consider the following, which may affect the net value of any recovery in such an action:
• The legal fees that will be required to pursue collection, and the value of the time spent by the firm in litigation. Typically coverage is not provided for the expenses incurred in pursuing the collection action, even if a covered counterclaim results thereafter.
• Certain professional liability insurance policies may not provide coverage for a counterclaim that is brought in response to a collection action. Even if the counterclaim is covered by the policy, a deductible may apply.
• The amount which must be paid by the firm in income tax, if the firm is seeking to recover amounts owed for fees rather than expenses.
• Damage to public relations and goodwill.
• Does the firm know the reason why the client has failed to pay the outstanding fees? Often, a client does not pay due to the inability to pay. If collection litigation is pursued under such circumstances, a judgment may be entered in favor of the firm. However, the client still may not be able to satisfy the judgment, and enforcement of the judgment may be expensive. Therefore, a judgment in favor of the firm ultimately may result in uncollectible amounts.
4. If the adjusted value of any potential recovery is sufficient to justify filing a collection action suit, the firm should consider reassessing its approach to receivables management. The best way to avoid fee disputes is through effective client communication, implementation of appropriate billing and collection controls, and effecting timely, prudent business decisions.

Strong billing and accounts receivable management practices are important tools to help address fee issues before a collection action is deemed necessary. In analyzing its own procedures, a CPA firm should ask itself the following questions:

Do client and engagement acceptance and continuance procedures include consideration of the potential or continuing client’s ability to pay for services, and the track record in paying bills in a timely manner?

To achieve long-term solutions to collection problems, firm management should focus on credit worthiness in client and engagement acceptance and continuance. While some CPAs may feel uncomfortable requesting financial or credit information from prospective clients, they would never recommend an existing client extend credit to its customers without first obtaining this information. Ironically, that is exactly what many CPAs do in their own firms. Investigate the credit history of potential clients. Ask prospective clients why they are switching CPA firms, and advise the client that you will be asking the predecessor accountant about the prospect's track record regarding bill payment. If a prospective client balks in the face of such questions, or asks the firm not to contact the predecessor firm, service and collection problems may develop during the engagement.

Are retainers required under certain circumstances?

The circumstances surrounding some engagements increase the risk of non-payment of fees, and may present heightened liability risk as well. Prospective clients may approach the firm seeking help to address tax delinquency problems, to "clean-up" tax or bookkeeping work quickly to meet a deadline, or to perform a special project, such as litigation support work. In addition to employing appropriate client and engagement acceptance procedures, when asked to undertake significant work under a deadline, or for clients not previously serviced, estimate the time and expenses to be incurred and require a cash retainer prior to undertaking the engagement. Additionally, if an existing client is unlikely to be able to pay for services on a timely basis, consider requiring a retainer.

Are fees and payment obligations discussed at the outset of the relationship, in the engagement letter, and during the engagement?
Discussing these matters with the client before initiating services and addressing them in the engagement letter can help avoid fee disputes later. During the engagement, keep clients informed about prices, billing policies, payment terms and the need for additional work in excess of the original estimate. When client expectations are guided, the likelihood of encountering collection problems later is reduced. Such protocols are especially important for clients with little experience in working with CPA firms. Alert clients when fees are expected to exceed the estimate previously provided, and be prepared to explain in detail what additional work is needed and why.

Does billing occur promptly and at regular intervals?
Long delays between the completion of work and billing increase the risk of experiencing collection problems. The best time to present a client with a bill is concurrently with the delivery of the work product. In ongoing engagements, bill at least monthly, depending on the volume of work performed.

Does the firm manage accounts receivable collection?
Fee disputes sometimes result from poor receivables management. Establishing firm policies regarding collections and write-offs and assigning billing and collection responsibilities to a firm administrator, rather than professional staff, can help ensure collection practices are administered on a consistent basis across the firm. This is not an easy task, especially if compensation is tied to billable hours. However, this procedure will permit engagement personnel to devote their time to billable services and reduces the risk that small delinquencies turn into large ones. Examine the firm’s attitudes regarding billing and incentive programs and engage firm management in a discussion on this subject. If the firm is not large enough to support a firm administrator, consider assigning this task to other administrative personnel.

Is the firm willing to walk away from a bad situation before it gets worse?
In addition to managing accounts receivable collection, one of the most effective ways to avoid the issue of pursuing fee recovery through a collection action is to resign from a client engagement before the outstanding bill grows large. Clients with high outstanding bills often attempt to pressure their professional service providers to defer billing, arguing that their business is seasonal or they expect to receive payment from a key customer on some future date. For some clients, this is a never-ending story. In addition to the need to "stop the bleeding" in such situations, CPAs also should recognize that the AICPA Code of Professional Conduct (ET Sections 191.103 -.104) provides that independence is impaired if billed or unbilled client fees remain unpaid more than one year prior to the date of any report issued in connection with an attest engagement.

A CPA firm’s approach to fee management should be examined carefully and objectively. Develop and apply fee management policies and procedures that are suitable for the practice in order to diminish the risk of losing hard-earned fees and facing malpractice claims. In the end, avoiding fee disputes is both a good business proposition and a good risk management practice.

Additional Resources: Pricing, Billing and Collecting Fees, Edward Mendlowitz, Journal of Accountancy, February 2012

Updated January 2013

Accountants Professional Liability Risk Control, CNA, 333 South W abash Ave., 36S Chicago, IL 60604.

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