As the final countdown for the start of the 2020 busy season begins, it is important to take a moment to reflect on how your firm will make this a reduced risk year. We have nominated several areas we believe deserve special mention and attention during the 2020 busy season. They are, in no particular order, the following.
Risk management begins with the selection and retention of the right clients. Accordingly, firms should develop sound client acceptance and retention polices. The policies should also be tailored for service types and industries; as the risk profiles are likely to be different. The initial screening of clients should include developing a client profile – financial metrics, management and employee information, industry focus, accounting system framework, accounting software, and the like. In addition, there is more telling data to gather, such as the following.
- History with previous accountants.
- Recent and significant litigation or customer disputes.
- Recent material events or changes, adverse or otherwise.
- Challenges and risks facing the client or industry.
- Significant management or employee turnover.
- Interaction with federal or state regulators, such as the DOL, IRS, or SEC.
After a year or two of experience serving the client, an even clearer picture of the quality of the client relationship will emerge.
- Is the client forthcoming, honest and cooperative?
- Does the client respect and heed advice, or ignore it?
- Are the day-to-day operations of the client well managed?
- Are there sufficient internal financial and operational controls?
- Are books and records properly maintained?
- Is there timely filing of tax returns, quarterly payments, etc.?
- Does the client promptly pay the accountant’s invoices?
- Is the margin on the client work acceptable?
With this and other information, the firm can make an informed assessment whether to continue to serve the client or resign. While no one likes to lose a client, jettisoning a high risk client is often -in the end – the best decision.
Next to basic quality standards and monitoring, solid engagement letters are the single most effective risk management tool accounting firms can have. While most firms regularly use engagement letters, they are frequently deficient in a variety of ways.
- Standard engagement letter need to be comprehensive and up-to-date. Too many engagement letters are missing widely accepted legal protection clauses, such as a limitation of liability; a robust description of management’s responsibilities; or a tight description of the scope of services and appropriate limitations.
- Many engagement letters suffer from copious copying. Poorly drafted letters that lack important protective provisions or contain terms unrelated to the present engagement are used over and over again, replicating and increasing the firm’s risk exposure.
- The process used to implement quality engagement letters is key to their success as a risk management tool. Unfortunately, the process is often awkward, inefficient, and not consistently applied.
It is axiomatic that the quality of the work performed by CPA firms should be its highest priority – and in most cases, it is. Here are some areas where we think firms need to pay particular attention.
- An increasing number of firms are expanding their scope of services and specialization. Transaction and financial advisory services, health care consulting, cannabis industry, alcoholic beverage manufacture and distribution, not to mention wealth management, are areas where firms are finding greater demand and higher margins. Before undertaking a new service line, it is essential that the right people with appropriate knowledge and skills, including being well-versed in the applicable regulations, necessary to complete new and complex work.
- Accounting firms have two assets – people and clients. Accordingly, an important question during busy season is, “What is the condition of our team?” Having firm personnel that are prepared to take on the challenges of busy season is critical. Simply having enough staff to do the work is not sufficient. Personnel must be knowledgeable, properly trained, and current with the regulations and professional standards, as well as firm policies and practices. Also, while using seasonal or part-time employees to meet the busy season surge may appear to be a good solution, it is important to have a solid game plan for training, supervising and integrating them into the firm’s regular workflow process.
- Doing work right the first time, rather than doing it over to correct mistakes seems obvious. Nonetheless, people take short cuts, rush to get things done, fail to follow established procedures, and inevitably make errors that, hopefully, are caught and corrected. Approaching the work diligently and deliberately, planning and prioritizing, and following the processes designed to ensure quality should all be firm imperatives, and part of its cultural values.
- While computers are pretty good at multitasking, most humans are not. Insufficient attention to important details during multitasking usually results in diminished performance and often times errors. As hard as it may be to stay focused and avoid distractions, doing one thing at a time is far more efficient and significantly less riskier.
- It is important to see each year with fresh eyes, and not presume that this year is the same as the prior year(s). When client circumstances change, so should the structure or approach of the engagement. This requires asking questions, verifying information and demonstrating the requisite amount of professional skepticism. It may also precipitate difficult conversations with clients that need to be handled tactfully, but firmly and definitively. Excellent client relationships are a prerequisite.
Here are a few additional and noteworthy recommendations to help ensure a risk free busy season.
- Busy season is synonymous with pressure and stress. While a certain amount of stress helps fuel motivation, too much quickly strips us of energy, acuity and judgement – and raises our risk quotient. Everyone handles and manages stress different. It is very beneficial to for each of us to understand what generates stress, and how we can keep it in check. Remember, busy season accountants are people too, with competing priorities inside and outside of the office.
- Information security, including identity theft, is top of mind for most accounting firms. While there is sophisticated technology which can help reduce the risk of unauthorized access to client and firm information, most studies conclude that human error, and not technology failures, cause the majority of information security mishaps. Establishing procedures for maintaining information security is a necessity. These procedures don’t need to be elaborate, just reasonably calculated to minimize security risks, as well as practical and easily implemented. Finally, identifying the highest risks and addressing those first with a few easy fixes can significantly reduce risk.
- Busy season means lots of hours and overtime. It’s important to remember the federal and state wage and hour laws. Compensation, including bonuses and compensatory time, based on the number of hours worked, makes an otherwise exempt employee a non-exempt employee who is entitled to overtime pay – a potentially costly proposition.
About the Author. R. Peter Fontaine is the managing partner of NewGate Law, which provides legal and risk management services exclusively to the accounting industry. NewGate Law is a Risk Management Partner of CPA Mutual. Peter can be reached at (312) 626-2791 or at firstname.lastname@example.org. Or visit website the NewGate Law website – newgatelaw.com.