Positive financial results for CPA Mutual
Surplus increased 54 percent in three years
The last three years, 2005, 2006 and 2007, have been good ones financially for CPA Mutual. Policyholder surplus has increased $3.91 million, or 54 percent, to $11.11 million on Dec. 31, 2007, from $7.21 million on Dec. 31, 2004. A large portion of this increase, $2.54 million, or 65 percent, is the result of investment income.
Indemnification of client would impair independence
Just coming off three years as a member of the AICPA's Professional Ethics Executive Committee (PEEC), I had my eyes opened to the many ethic matters facing the profession. A good number pertain to auditor independence and flow from issues surrounding Sarbanes Oxley.
The following Ethics Ruling 102 on independence, integrity and objectivity is, in my opinion, worthy of reminder to everyone:
102. Indemnification of a Client.204 Question – As a condition to retaining a member or his or her firm to perform an attest engagement, a client or prospective client requests that the member (or the firm) enter into an agreement providing, among other things, that the member (or the firm) indemnify the client for damages, losses, or costs arising from lawsuits, claims, or settlements that relate, directly or indirectly, to client acts. Would entering into such an agreement impair independence?
.205 Answer – Yes. Such an agreement would impair independence under interpretation 101.1-A [ET section 101.02] and interpretation 101-1C [ET section101.02].
Note. This ruling pertains only to attest engagements. I will request CPA Mutual's longtime, national defense counsel, Gary Barnes, to write an article in the next issue of OMI on the topic of client indemnification clauses in engagement letters. These clauses may, in my opinion, appropriately limit a CPA’s risk exposure due to fraudulent and negligent acts of a client.
'Down' economic times require more focus on client selection, receivables
In my opinion, after over 20 years as CEO of CPA Mutual and seeing a lot of claims go under the bridge, perhaps the most important risk management action a CPA can take is careful client selection.
A bad client, which I define as a client you can’t trust, a client that takes excessive risks, a client that will not pay the CPA’s fee in a timely manner, a client that doesn’t yield at least 85 percent realization, or a client that is in poor financial condition, is a client that is usually not worth your risk. If this client goes down, there is a good chance they, their lender and/or owners will try to take their CPA with them.
One other piece of “good business advice.” In down economic times, you’d better focus on getting promptly paid … unless you don’t mind working for free. This means, getting advance retainers when you can, billing at least every 30 days and cutting off your work if a client is over 60 days delinquent in payment. Suing for a fee is not a good risk control practice since, more often than not, it usually results in a countersuit against you.
CPA firm growth slowing down
My sense, from talking with many CPA firms across the country, is that 2008 will be a slower growth year in gross fee revenues than 2007 and 2006. My “gut,” the growth rate is down about 15 to 20 percent. We’ll see at year end. However, more mid-size firms are looking at acquisitions and/or mergers of smaller practices which, I think, is their best growth opportunity
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