While a checklist is the ideal method for client screening, some firms may use something less formal. Whatever the process, firms should determine the prospective client’s industry (or occupation, if an individual) and the necessary skills or competencies to complete the engagement. Firms should also be mindful of the ethical considerations regarding competency and refer to the AICPA Code of Professional Conduct section 1.300.010 (http://pub.aicpa.org/codeofconduct/Ethics.aspx) and U.S. Treasury Circular 230, “Regulations Governing Practice before the Internal Revenue Service,” section 10.51 (http://1.usa.gov/1LCri50). CPAs should inquire as to whether a client has current or former foreign bank accounts, which would trigger certain tax compliance matters not initially considered by many businesses and individuals. Finally, if the client was referred to the firm, the referral source should be reviewed. If the referral source is of high character, chances are the prospective client will possess the same. Firms should be skeptical of a client who has no referral source.
Despite the ease and speed with which it can be performed, an astonishing amount of firms fail to conduct even the simplest kind of background check. As with a client acceptance committee, the process can be quite formal, such as with the use of a third-party background check company, or it can be as simple as a review of public information available on the Internet. The results of a simple Google search can be revealing and could prevent the firm from engaging an undesirable client. In addition, the engagement team should discuss speaking to the prospective client’s prior tax preparer (consent is required), legal counsel, bankers, and other strategic professionals. Increased competition amongst background check companies has driven down the cost of such services, and firms should consider trying them.
Reviewing the prior tax returns of a prospective client is quite common, and doing so may reveal errors in prior returns. Consequently, tax preparers should be familiar with the rules governing their responsibility once an error is found. Requests for records are governed by state-specific rules, which can be quite strict, as well as Circular 230. Successor preparers should be mindful of what records a prior preparer may or may not provide and the difficulties this may present.
While much guidance regarding communication with predecessor auditors exists (e.g., AICPA Statement on Auditing Standards 84 and AU section 315), very little exists regarding communication with predecessor tax preparers. Nevertheless, written authorization must be received prior to speaking to the former preparer. Once obtained, the successor should consider the following questions:
· ▪ Did the client accept and take the previous preparer’s advice regarding tax positions?
· ▪ Were fees paid in a timely manner?
· ▪ Did the client suggest tax treatment without support?
· ▪ What was the quality of their records?
· ▪ Has the client switched preparers often?
While review of the previous preparer’s records may be limited by both regulatory guidance and firm policies (e.g., many firms will only permit access to records on a secured laptop and prohibit making copies), due diligence still cannot be overlooked. Ensuring the proper maintenance of records on an ongoing basis is critical. Where access to records is prohibited, successor tax preparers should refer to the ethical guidance regarding the use of estimates as delineated in SSTS 4, Use of Estimates.
Each individual firm is bound by record retention rules mandated by its state’s board of accounting. Despite this, many firms do not utilize a standard record retention and destruction policy. As professional relationships with clients develop, CPAs should articulate the firm’s record retention and destruction policies, preferably in the engagement letter. It is suggested to do this for all clients annually and notify clients at the time the firm decides to purge records.
CPAs who decide to terminate a relationship should always use a termination letter.
Reasons for terminating a client can include the following:
· ▪ Conflicts of interest;
· ▪ Unethical behavior by the client;
· ▪ Refusal to adhere to the tax preparer’s advice;
· ▪ Repeated nonpayment of professional fees;
· ▪ Incomplete, messy, or lacking records;
· ▪ Continuous disrespect of the staff and the partners;
· ▪ Engagements outside the CPA’s or firm’s comfort level; and
· ▪ Frequent last-minute demands for services.
CPA firms should screen all clients annually and, presuming the above characteristics apply, consider terminating at least one. Based upon the authors’ experience, making termination a policy increases the likelihood that deserving termination will actually be carried out rather than merely debated.
