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By James Dolinar, CPA

One of your clients has had another poor year. The bonding company or lender is pressuring them for better results. They have developed a new accounting policy, and, as you expected, it increases income and equity. But you are concerned the new policy does not follow GAAP. This is a key client of the firm and brings in significant fees. What do you do?

This problem is occurring more and more. And, when it does, it forces you to make some difficult decisions. In weighing these decisions, you need to understand how awkward your position really is. You are required to tell the client, who hires you and pays your fees, that it is wrong and should not be done.

How to Tell a Client It Is Wrong

1. Get all facts in the situation.

2. Summarize the key points and discuss them with your client.

3. Have the client explain why they believe their position is preferable.

4. Fully understand the business reasons and economics of the client's position.

5. Research the applicable rules, regulations, and laws involved.

6. If your client is not knowledgeable about accounting rules, explain them clearly and logically in terms your client understands.

7. If your client doesn't care about the rules:

* Ask yourself some hard questions about whether this is a client worth keeping.

* Ask others in your firm and in the profession if the client's position is viable.

* Have a heart-to-heart talk with the client.

Above all, never compromise your and the firm's reputation no matter how tempting the fees may be.

Now compare your role to that of other professionals, such as a doctor or a lawyer. When they advise a client against doing something and the client does it anyway, the lawyer or doctor isn't required to tell the whole world about it. But if your client decides not to follow your advice, you must describe the incorrect action in your auditor's report, where all who have access to it will know.

Your client now has the option of staying with your qualified report or finding a new CPA. Unfortunately, more and more clients are shopping for CPAs who are willing to accept their positions. Although there are no easy answers to these problems, there are some guidelines you should follow.

Understand the Facts

The first step is to make sure you understand all the facts. Summarize the key points and discuss them with your client. Have the client explain why it believes its position is preferable. It may be helpful to include other members of your client's management team in the discussion since they may be the real source of the proposed change. They may also add clarification and help you understand the economics of what is being proposed.

It is critical you understand the business reasons and economics of what the client is proposing. At some point it may become evident to you there is or isn't a clear business reason for this new policy. If it hasn't come up already, ask what authoritative accounting literature supports the client's position.

Some clients may be well prepared with the accounting rules while others may say, "This is what I want to do: You figure out how to support it." You may get this response from small clients to large clients. They may tell you this because they are either client type A, not knowledgeable about accounting rules, or client type B not interested in complying with the rules. This is your first real hurdle.

Do Your Homework

Your next step should be to research the applicable accounting rules. Due to the proliferation of accounting standards and rules, the chances are high you will be able to find some information on point.

In addition to the accounting standards in the current text, some sources to consider are Emerging Issues Task Force abstracts, statements of position, practice bulletins, AICPA technical practice aids, audit and accounting guides and even text books.

Telling Your Client What It Doesn't Want to Hear

Once you have researched the issue, it is time again to meet with your client. If it's a type A client, make sure you explain the rules in a clear, logical manner and use terms your client understands. For example, don't use words like accumulated benefit obligation, per capita claims cost by age, and health-care cost trend rates to explain pension and other post-retirement benefit obligations. Most clients want to follow the accounting rules but because of their complexity may not know or understand what that requires.

If you have explained things in a language your client comprehends and you understand the motivation and real reason for the requested changes, there is a chance you can turn this process into a consulting engagement and improve your relationship with your client. You do this by helping them meet with the bank, developing cash-flow projections, or introducing new lending sources.

Saying "No" to a type A client usually results in an amicable conclusion with the client following your advice and leaving your relationship intact.

On the other hand, if you are dealing with a type B client, you need to ask yourself some serious questions. It is always difficult to tell a client you no longer want to work for it, and many times a firm waits too long before making a decision. When evaluating whether to continue working with this client, ask your self these questions:

* How often has this client tried to stretch the rules?

* Is the client clearly violating GAAP
or is it a gray area, for which there
are some reasonable arguments?

* What are the implications of the client's new position in this year and future years?

* Would my partners support this

* Are there other management integrity issues that, when combined with this latest issue, raise doubt about the client?

Don't answer these questions in a vacuum. Talk to your partners. Call experts at your state society or the AICPA's Technical Hotline.

If, after answering these questions and consulting with others, you conclude the client's position is not correct, it is time for a heart-to-heart talk with your client. It's best to do this in person. If possible, include another member of your firm. You can try to help your client with the real problem as you would help a type A client. Chances are high, however, this client won't want that kind of help.

In the end, don't compromise your firm's standards and risk your and your firm's reputation for one client, no matter how big the fee. Your reputation is worth too much.

Saying No Before Becoming a Client

Related to this issue is when to say no to a prospective client. Everyone is looking for new business and no one wants to turn work away, however, there are some early warning signs you need to be aware of.

We like to think our firm is better in some ways and can serve the prospective client better. You should know, however, early in the process why the prospect is terminating their old accountants and looking for new ones. Don't believe it is just because of your reputation.

Generally accepted auditing standards require that successor auditors contact the prior ones. Contacting the existing accountants is easier said than done if you want to do it in the fact-finding stage of the proposal process. Many times the prospective client doesn't want you to do that until they have decided on the new firm. In these situations you might qualify your proposal by stating you cannot officially accept the engagement until you contact the prior accountants. Once accepted, be sure to contact the prior accountants as soon as possible. In your discussion, ask them about--

* management's integrity,

* unusual accounting policies,

* disagreements with management,

* their understanding as to why the client changed auditors (or ask them to confirm the reason you were told by the client), and

* what type of client they were.

Most accountants will be very open with you. Be sure to read between the lines. If the prior accountants resigned instead of being dismissed, be careful you fully understand why and the implications that might have on whether you accept the engagement.

In addition to contacting the prior accountants, ask for references and call them. Talk to as many of the key management group at the company as possible. Ask for access to financial statements and tax returns. If they are hesitant about allowing access, let them know that you will return the information without photocopying it or review the information at their offices.

Not all prospective clients will look good on paper. Besides the obvious red flags such as qualified audit reports, going concern disclosures, and significant uncertainties, discuss any unusual accounting or litigation matters with management. Also ask about the extent of transactions with related parties. Small, closely held businesses often have significant related party transactions. If the company does have significant related party transactions, are the related entities audited or unaudited? Is there a dependency on the related parties?

Find out how many times the prospect has changed accountants in the past. Be aware of how open and candid it is in discussing sensitive issues. Relationships with clients are built on trust and honesty and you must have confidence your client will be up front with you. If you sense you may not be getting the whole story, this may be an indication of future trouble.

In addition to the references the potential client gives, there are other sources for obtaining information on a specific client. In this age of technology, you can access information about companies and individuals using information retrieval companies, the Internet, and Dun & Bradstreet. Some services also can give you information regarding litigation a company, its officers, or its owners are a party to.

If your firm requires another person to approve all new clients, make sure you give them all the facts so he or she can make an informed decision. Occasionally, in the excitement of bringing in a new client, we sometimes overlook some of the negatives, and another person's assessment will be more unbiased. If your firm doesn't require another person to approve new clients, you may want to consider doing so or at least ask for input from another person.

After getting all the information, asking the above questions, and assessing the answers, you now can weigh the information and, hopefully, come to a decision. Consider how many of the previously mentioned questions were negative. What are your gut feelings about the prospect?

Hopefully, you included others in the process and have gotten their impressions. If there are more negatives than positives, if your gut feeling is not the best, and if others in your firm are wavering, this may be a prospect you politely turn down.

Obviously, deciding to turn down a new client is not always easy to do. More times than not, there will be both positive and negative factors that will complicate the decision. A prospect that receives high marks on integrity and reputation and low marks for financial condition may be a better risk than a prospect with the opposite marks. In the end, it all comes to whether you are comfortable with the level of risk you are undertaking. *

James Dolinar, CPA, is partner in charge of quality control at the Oak Brook, Ill., office of Crowe, Chizek and Company, LLP.

Reprinted with permission of Insight--the magazine of the Illinois CPA Society, February/March 1996

Michael Goldstein, CPA
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