Client Acceptance and Retention Evaluations--the Good, Bad and the Ugly

Over the past year or so, the AICPA has alerted CPA firms to the importance of client acceptance and retention evaluation. As a defense for preventing association with less-than reputable clients and potentially erroneous or fraudulent financial statements, these evaluations are an integral part of the financial statement audit process.

One of the first quality standards formulated by the AICPA, these evaluations were treated as a compliance function by many CPA firms. Practice aids were filled out and signed as a matter of routine, only to be initialed and carried forward for many years simply to comply with the quality control standards. Intended to help CPA firms cull their client portfolio to separate out the bad and the ugly, the process resulted in little more than a few extra pieces of paper in working paper files.

One of my business partners decades ago, Don Istvan, was a practice management consultant for hundreds of smaller CPA firms. The starting place for most of his consulting engagements was a required evaluation of a CPA firm’s clients. After completing a questionnaire evaluating client quality, CPA firm partners and managers assigned points to favorable attributes of each of their clients. The point awards were placed on a spreadsheet in descending order to help identify the bad and the ugly. One of Don’s first recommendations was to terminate 10% of the clients ranking the lowest. His second recommendation was usually to complete a similar evaluation for prospective clients and to accept only those with point awards higher than the previous year’s terminations. The results of this process over the years produced client portfolios of the highest quality for Don’s clients.

AICPA quality control standards were intended to accomplish the same end. In our current unstable economic environment, the client acceptance and retention evaluation is still the key to producing a high-quality client portfolio. It may also be the key to our survival!

What do you think about these required evaluations? Are they serving their purpose in your CPA firm or do they simply add more paper to engagements? Please post your comments.