15 Risk Management Best Practices.png

 

Managing risk is one of the pillars of a successful accounting practice. Of course, your firm needs to make money. But, if you don't take care of risk at the same time, one of those unmanaged risks may come back to bite you. At the least, it could cost you some money. It might cost more than that, though. Professional reputation and future income potential are other possible costs. And, those can be big ones. Your top option is to implement accounting risk management best practices at your firm. That way, you've got a plan to avoid mistakes and miscommunications that can lead to unexpected losses.

1. Train and Orient New Accountants

It's exciting to see your firm grow and hire new staff. But, inexperienced team members are a risk. They can make mistakes and tarnish a well-built client relationship. That's why it's essential to train your new hires. And, don't deliver the training in only one way. For training to be effective and "stick," it's crucial to use different mediums of delivery. Audio, video, and print are just three ways. Then, have an electronic manual that can be used as a reference later. Start on Day One with getting staff trained in firm best practices, policies, procedures and professional standards. It helps to educate them and is a great way to start managing risk as soon as they start their career at your firm.

 

2. Obtain Appropriate CPE

CPAs have requirements for continuing professional education (CPE). And, it can be beneficial even for the non-CPAs in the firm. But, be strategic and risk-management-oriented in the CPE you select. If your firm practices in a specific niche area, then make sure that partners and staff have sufficient training in that area. If your firm works in a particular industry, make sure that your team knows the industry and understands the risks involved. Getting CPE in that area can be a vital element in your accounting risk management approach. But, if the CPE topic you're contemplating isn't relevant to current or contemplated work, it may not be the best choice. It might get you the hours you need, but will it move you ahead in your knowledge about the industry and your approach to the professional services you provide? Be smart and strategic about CPE. You'll get more value out of the money you pay and manage your risk better.

 

3. Be Aware

It's always exciting to bring on a new client. But, new clients bring new dangers. It's important to understand a potential client before bringing them on board. Why are they leaving their current service provider? If it's because of fees, make sure that they're clear about your prices before you engage. If there is potentially an issue about paying or being able to pay, make sure you have a plan and agreement regarding money in your pocket before you complete any work. Is the reason for departure from the previous firm due to an error? Make sure you understand the error and why it happened. You don't want the same scenario to happen to you. Being aware of client issues before you take a new one on helps you to manage all sorts of risk. Plus, it can save you lots of heartache down the road.

Part of being aware is being prepared to discontinue a client relationship if needed. If the client's actions or activities become a risk to the firm, it's important to re-evaluate the situation. And, their activities don't have to be something nefarious. If the client's business has outgrown the firm, that's a risk to the firm. You have to decide if the firm can still handle the client. If you determine that the risks involved in maintaining the client relationship are greater than the benefit to keeping the relationship, it's crucial to move quickly to help them find a better fit. You might not maintain the professional link, but you may keep the personal one. Plus, it shows excellent professional integrity when you move a client to a bigger firm when they've outgrown yours.

 

4. Have a Plan

A great way to be able to anticipate risks (and then avoid them) is to have a plan. When you get a project from a client, you should always create a plan for finishing it. Ideally, this is part of scoping a project, which you complete before getting the work. Preparing the action plan for the work will help you to think through the steps and figure out the risk areas. You can then discuss the project with your client to make sure that everyone is on the same page about the work and the risks involved. This discussion can even help increase credibility with a client. Plus, you may find places that will require additional work which can translate into added fees. There is no disadvantage to having a plan. You manage risk, you increase credibility, and you might increase your fees.

 

5. Inform Clients of Project Status

People love to be "in the know." That includes clients. If their project is going to take more than a few days, it's a good idea to give periodic updates. Depending on the type of project being completed, it might be a good idea to set up a regular meeting, say once a week, to go over what's been achieved to date and then get any outstanding questions answered. These meetings are a way to keep the client updated as to the status of the project. But, they're also a way to be assured a specific time where you can ask questions and request any additional needed documents. Everyone is busy, so this provides a time where both sides know that they can interact and keep the project moving.

Keeping clients informed is key, but it's also necessary to understand of what they would like to be informed. Some clients want to know more details than others. So, at the beginning of a project, it's probably a good idea to set expectations regarding how and when clients would like to be informed.

 

6. Document Steps Taken

You've scoped the work and determined an appropriate action plan. You're working the plan and having periodic status meetings with the client. You've discussed and agreed to any out-of-scope items. Your best practice here is to make sure you've got it all documented.

There are numerous reasons to document thoroughly the work being completed. First, it helps you to make sure that you're planning things out correctly. You have to slow down and think about how and why you plan to complete a project. Then, you discuss with the client and document the keys points and any changes that might need to be made before you get into the project. Then, as the project proceeds, you keep documenting. Often, the bulk of the documentation is the work papers. But, don't forget about meeting notes, emails, texts, and messaging. These days, there are numerous ways to communicate, so thorough documentation may include reviewing those mediums used to make sure that relevant messages are included.

Another reason to document the steps taken and other items that are part of the process is to pinpoint critical issues to consider for the next time. There may be processes that you determine are great to include next time (or with many other projects). But, there may be a way that you did something that needs to be done differently next time. It's important to get that history down so that any after-project evaluation can include those items.

Once a project is complete, be sure to include in the final documentation those items required by either firm policy or professional standards or both. And don't wait to complete that part. Do it as part of the project and not as something you do in the summer. Memories fade and documenting is much better if completed at the time of the project.

 

7. Billing Procedures

Billing procedures are necessary for several reasons. First, billing can be a sensitive issue, so always proceed with caution. If it works for your practice, consider having set fees for most work. If you work hard at scoping and planning the work up front, having a set fee should not be a huge issue. Always include a provision in your engagement letter that you will let the client know as soon as possible if the scope and fees need to be expanded. That way, you can discuss best next steps before incurring any extra time in the project. One of the reasons that billing can be so sensitive is that nobody likes to get a surprise in a bill. But, billing discussions can be tricky, so some practitioners have opted for sending the surprise and then waiting to see what happens. Rest assured, it's not typically the most comfortable discussion if you choose this method. Instead, keep the lines of communication as open as possible. If you're having regular status meetings with your clients, you can keep them informed as to potential roadblocks that you may see coming. That way, if the roadblock does occur, it's not a surprise. You can discuss possible resolution paths, and the time it might take to complete the additional work. So, instead of an uncomfortable discussion about a surprise billing, you can have a calm meeting to discuss how you can help resolve an issue that has arisen. You might get additional fees either way but using the second method helps lessen the risk of misunderstandings that could result in a lost client.

Another reason that billings are vital is that they help you generate cash flow. If you don't issue an invoice, it's hard to get paid. Having a regularly-scheduled billing process enables you to make sure you're invoicing for either finished or in-process work. Also, consider pre-billing for work. There is usually a significant effort that must be put in even before getting the client's information. If you aren't already doing it, get clients used to paying for at least a portion of the fee up front. And, if the project is going to last several billing cycles, discuss having an invoice and payment schedule that splits the fee up over time. That can certainly help both the client's and your cash flow, especially if the cost is somewhat hefty.

Billing can be more of an art than a science, but it's essential to get good at it. You probably bill mostly for your brain power, so make sure that you get paid what you're worth. But, make sure that your clients are comfortable with the fees you want to charge. Discuss invoices with them before issuing them. That way, you can answer any questions they might have. And, you also take away a vast majority of the collection problems. If the client agrees to a bill before it's issued, you can count on getting paid, and usually promptly.

Even with the above practices, fee disputes can sometimes occur. Your best bet in this situation is to address it as quickly as you can. If a client hasn't paid you within thirty days, call to find out if there is a problem. Often, clients will withhold payment because they know you will eventually call to check. Get the call made early. You can get things resolved and receive payment then.

 

8. Use Due Diligence

Often you see the term "due diligence" as part of a business purchase process. But, due diligence should be exercised whenever performing professional services. It's all about helping you make an informed decision about how to handle a particular situation or transaction. For example, let's say you have a client who is purchasing a new building for his business. To provide top-notch tax services relating to that transaction, you need to understand all the facts and reasons behind the transaction. If you don't have all the facts and understand why the client wants to purchase the building and what he wants to do with it, you can very quickly provide wrong or misdirected advice. So, understand not just the costs involved but the thoughts and reasons. Analyze the situation from many sides. That way, your insight will be valuable and correct for the situation. And, you will have lowered your professional risk.

 

9. Use Caution and Avoid Conflicts of Interest

This point goes hand in hand with exercising due diligence. Use caution in how you approach your work. Don't take on projects for which you don't have enough time to complete. Think about the end of busy season, and someone comes in and wants their work done before the deadline. This should be a red flag. If you don't have time to do a thorough and complete job, you shouldn't do it. It's not worth it.

Another way to demonstrate caution is to avoid conflicts of interest. They often come from being involved in other businesses or ventures with your clients. This is an absolute no-no in an assurance situation. But, even if your practice doesn't include assurance-type work, it's still relevant to avoid conflicts of interest in many cases. If it's deemed that a conflict of interest is not avoidable due to other factors, be sure to document everything thoroughly. A conflict of interest is a potential risk, so recording things and being as transparent as possible helps with accountants risk management.

 

10. Issue Disclaimers

Part of your job as a tax or accounting professional may involve writing and giving opinions regarding transactions that have or will occur. It can be a very lucrative part of professional practice. But, one reason it can be profitable is that it can also be risky. For example, in the case of a tax opinion, a client is paying you to give your opinion that a certain set of facts would or will be handled by the taxing authorities, often the IRS, in a certain way. Frequently, an opinion of this type is only tested if the client's transaction comes under scrutiny during an IRS exam. But, the conclusion must be written assuming the transaction will be examined. Examinations are risky. One way to manage risk here is to include a disclaimer with the opinion. That disclaimer provides clarity on what you are and are not providing an opinion. You must make sure that you keep the scope of the opinion manageable. You can only do that with a disclaimer. Otherwise, you are leaving yourself open to trouble, especially if the facts change from the time the opinion is issued and when the transaction occurs.

 

11. Ensure Compliance

One of the most important ways to manage risk in your practice is to follow the applicable standards required for the type of services being performed. If you deliver tax services, Circular 230, which provides the rules and regulations for practice before the Internal Revenue Service (IRS), must be followed. Also, if you're a member of the American Institute of Certified Public Accountants (AICPA), you have agreed to follow the professional standards related to tax services as put forth by that organization. Those rules, regulations, and standards were set in place to help you. Follow them, and you're taking another step toward managing not only your risk in providing services but also risk related to dealing with regulatory bodies. These bodies impact your ability to practice your trade. So, pay attention to your compliance here.

 

12. Avoid Specific Guarantees

The nature of tax and accounting work doesn't lend itself to the provision of specific guarantees. Of course, you want to provide the highest quality services to your clients. But, giving specific guarantees or warranties is not advisable. There are too many variables and unknowns that can cause an issue. It's too hard to assess whether the risk would be low enough to warrant a guarantee. If you can't evaluate the risk, it's probably best to avoid it.

 

13. Peer Review

Public accounting firms with CPAs as their owners may be subject to peer review. If the firm provides services that involve issuing reports relating to financial statements and is a member of either the AICPA or a state society of CPAs, then the firm is required to have a peer review. But what is the reason for a peer review? And, how does it help manage risk?

According to the AICPA, a peer review "helps to monitor a CPA firm’s accounting and auditing practice." This practice monitoring helps "to promote quality in the accounting and auditing services provided." Part of a peer review typically involves reviewing work papers and the reports issued to make sure that such work papers and files support the conclusion of the report that was issued. If the results of the peer review show the firm needs to improve its processes and procedures around the work, then steps are taken to make the improvements. Often, there are little tweaks that can be made to help the firm improve its quality and decrease its risk of performing sub-standard work.

 

14. Seek Advice

You might have all these best practices in place. Sometimes, though, things happen. If you run into a situation where you've made a mistake or run afoul of a rule or regulation, consider seeking advice. An attorney who specializes in accounting malpractice can provide you with guidance as to the best next steps. Depending on the situation, it may be easiest to try to work something out with the client. Nobody's perfect, and if the mistake is not huge, clients are sometimes willing to take a fee cut as part of the settlement. Or, maybe reduce the bill by the penalties or by the penalties and interest. It's usually something that needs to be negotiated. If the issue is more significant than that, you need help. Violations and their accompanying penalties tend to build on each other. So, it's important to know the potential consequences before agreeing to accept one onto your record.

 

15. Maintain Adequate Accountants Professional Liability Insurance Coverage

Let's face it, we all make mistakes. And, errors mean risk. If you earn your living by providing professional services, then professional liability insurance is a way to decrease that risk. Sometimes clients bring legitimate lawsuits and occasionally frivolous ones. Accountants professional liability insurance can be a way to address both types of situations. Don't discount the value of such coverage. Transferring risk when the financial outcome could be devastating is a best practice. We live in a litigious society today. You have to protect yourself. You can never be too careful.