One of the major problems facing tax practitioners-and many other individuals--these days is litigation, whether actual or threatened. The costs of defending oneself and one's practice, as well as the insurance costs of protecting that practice, are ever-increasing. To remain in business and be successful, a tax practitioner must make a strong effort to manage this risk.
One basic way in which CPAs can lessen their risks is by evaluating individuals and businesses on the likelihood of litigation before doing work for them. This process begins at the start of a CPA-client relationship (if there is to be one); a practitioner must carefully examine the risks and benefits before deciding to become associated with a particular client.
CLIENT EVALUATION PROCESS
Obviously, entering into a relationship with any client can involve some degree of risk. By the same token, most client arrangements do not end up in court or under the threat of litigation. However, CPAs may need to carefully evaluate some perspective clients to ensure the rewards outweigh the risks of working with them.
The most important element the CPA should consider is the prospective client's integrity. Reputable clients are more likely to be open, accessible and easy to work with. Such clients are likely to pay their bills on time and work out potential differences in an amicable fashion.
Practitioners must also consider other risk factors: the prospective client's financial condition; the client's level of tax and business sophistication; business conflicts (or other conflicts of interest); the level of cooperation anticipated from the client and the ease of obtaining necessary information; and whether the practitioner has the adequate resources, skills and experience to serve the client competently.
TAKING ON A NEW CLIENT
Engagement letters. Once the CPA decides to provide services for a client, the key to the relationship is communication through the engagement letter. That document should go a long way toward preventing confusion or miscommunication leading to problems.
The engagement letter establishes the relationship between the CPA and the client; it sets forth the specific terms and conditions of the engagement and delineates the scope of the practitioner's responsibility and the other parties' respective obligations.
A well-crafted engagement letter should