CPAs in all areas of practice encounter client screening, acceptance, and termination (CSAT) scenarios daily. CSAT is without a doubt the first line of defense against a malpractice claim and an important part of a firm’s quality control process. The ten considerations discussed below are those the authors have seen most in their particular areas of expertise.

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Client Acceptance Committees

Many CPA firms have formal client acceptance committees, while others form ad hoc committees for certain highrisk clients or unique engagement circumstances. In addition, other committees specifically prohibit excluding any partner who brings in a prospective client from the decision-making regarding that client’s acceptance. Regardless of the particulars, the process should ensure that new clients are not accepted without careful thought and consideration. A firm should document the committee’s discussion, including final acceptance, using a checklist that includes each committee member’s sign-off. In larger firms with multiple locations, the use of electronic documentation and signatures may be the most efficient and timely way to manage the process. The use of client acceptance committees should not be limited to large firms; small firms can use less formal committees and still accomplish their objectives.

Client Acceptance Procedures

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 ( and U.S. Treasury Circular 230, “Regulations Governing Practice before the Internal Revenue Service,” section 10.51 ( A firm should carefully consider the time required to complete the engagement, make sure the client’s expectations are consistent with the engagement letter, perform background checks, communicate with the prior tax preparer (after obtaining consent), carefully monitor clients with delinquent filing histories, identify any conflicts of interest, and approach with caution any clients who have changed preparers frequently. A review of prospective clients’ websites may also reveal significant details. If the firm performs engagements in accordance with PCAOB standards, it should consider maintaining a list of individuals who meet the definition of a person in a financial reporting oversight role at issuer clients, in order to avoid impairing the firm independence under PCAOB Rule 3523, “Tax Services for Persons in Financial Reporting Oversight Roles.”

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.

Background Checks

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.

Code of Ethics and Circular 230 Issues

There are many issues surrounding the CSAT process, such as competency and conflicts of interest, already mentioned above. Conflicts most often arise from divorce proceedings and transactions where the same firm represents both parties. Of extreme importance is the issue of client omissions, covered by Circular 230 section 10.21 and AICPA Statement on Standards for Tax Services (SSTS) 6, Knowledge of Error: Return Preparation and Administrative Proceedings.

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. Finally, the reasonableness of fees, commissions or referrals, and contingent fees may be an issue in a CSAT process, and ethical guidance is available.

Successor Tax Preparer Issues

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?

Tax preparers should be wary of a prospective client who refuses to allow for open and candid communication with the prior preparer; the client may be concealing an important issue, such as nonpayment of fees.

Access to Records

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 to CSAT. 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.

Start-up Businesses

Start-up businesses present unique complications, as they have no historical track records. In screening these types of entities, CPAs should familiarize themselves with the client’s business plan, the other professionals in the organization, and the prior track record of the principals. Care must be taken in the selection of entity (e.g., partnership, LLC), especially regarding the tax consequences in the event of failure. The tax treatment for start-up costs and capitalization of various expenses should be analyzed in conjunction with current tax regulations. The scope of services rendered to a start-up business should also be well thought out and documented in an engagement letter. In many cases, the client’s expectation is that the firm will also provide certain accounting services, file initial tax elections, and register the business in certain states. Ongoing screening of these clients is critical.

Firm Alliances

Firms that are part of strategic alliances or firm associations approach client screening and acceptance in a more relaxed manner. Because the referral often comes from a delegate firm in the alliance, the typical due diligence steps are relaxed. But it is good practice not to slacken procedures based on these types of referrals, nor should the ultimate success of the alliance or network supersede any obligation to the client. Firms in alliances or networks should also consider their risk of vicarious liability exposure.

Record Retention and Destruction

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. Prudence suggests doing this for all clients annually and notifying clients at the time the firm decides to purge records. A sample caveat for record retention and destruction is as follows:

It is my policy to retain engagement documentation for a period of seven years, after which time I will commence the process of destroying the contents of my engagement files. To the extent I accumulate any of your original records during the engagement, those documents will be returned to you promptly upon completion of the engagement, and you will provide me with a receipt for the return of such records. The balance of my engagement file, other than a copy of your income tax return, which I will provide to you at the conclusion of the engagement, is my property, and I will provide copies of such documents at my discretion, unless required by law, and if compensated for any time and costs associated with the effort.

It is important to monitor which documents should be purged from a firm’s records. If a firm maintains its documents in electronic format, they should ideally be organized by year so that those documents eligible for destruction can be identified and timely purged. Firms should also avoid ad hoc client document storage on laptops or within e-mails, which may be subject to subpoena even if the main documentation was purged.

Client Termination

Client termination creates the most difficulty for CPA firms and has historically caused significant professional liability exposure. Once the decision is made to terminate the professional relationship, the CPA is no longer in charge of the engagement. Clients often feel a sense of disloyalty and begin to point fingers. The client might even allege breach of contract if the CPA terminated the relationship prematurely. In addition, the successor tax preparer may fuel the fire with accusations of errors, overbilling, and incompetence. CPAs should exercise caution in any eleventh-hour termination and seek assistance from their professional liability carriers or legal counsel. Note that either the CPA or the client can terminate the relationship, and each scenario requires a different course of action. 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.

A solid CSAT program can mitigate claims, enhance quality control, and create a more enjoyable atmosphere for practice. The more formal the program is, the greater the chance of achieving the firm’s objectives, whatever they may be.

Michael Pescatore, CPA is a partner with MSPC, Certified Public Accountants & Advisors, PC, in Cranford, N.J.
John F. Raspante, CPA, MST, CDFA is a director of risk management at the North American Professional Liability Insurance Agency in Framingham, Mass.