Tax inspector investigating financial documents through magnifying glass, forensic accounting or financial forensics, inspecting offshore company financial papers, documents and reports.

Identifying High Risk, Difficult and Otherwise ‘Bad’ Accounting Clients

In the lead up to the end of any financial year, accounting firms can expect a raft of enquiries from new clients, and similarly, an increase in the pressures associated with the influx of extra work from their current client base and referral networks.

With the 2018 financial year having just passed us by and with 2019 in full swing, now is a good opportunity to be reminded that bad, or unwanted accounting clients do exist.  It is therefore important to ensure that effective strategies are put in place to both assist with the identification of such unwanted clients, and to protect your business from those who may potentially damage your firm’s profits, reputation and/or staff.

Without trying (and failing) to ascribe too closely to stereotypes and broad-brush descriptions, bad clients can essentially be grouped into two camps: difficult and high-risk clients.

Unfortunately, at one point or another almost all professionals will find themselves dealing with difficult clients, which by my definition, would typically include those who argue over bills, bully staff or otherwise adopt a flippant attitude towards their compliance and reporting obligations.  On the other hand, I would define high-risk clients as those who have either adopted poor internal accounting and/or bookkeeping procedures, or those who work in either volatile or diminishing market spaces (a la video-rental stores) and are thus at a real risk of becoming insolvent.

Whilst it is true that not all bad clients need to be identified and jettisoned from your books, and that most can be managed appropriately and with minimal impact on your business, professionals will sometimes need to put their foot down and make the call that enough is enough.  It is this type of situation that highlights the importance of staff receiving training specifically focussed on both when and how clients should be turned away.

With the above in mind, it is extremely important for firms of all sizes to have a risk-management strategy in place for screening new clients, as well as mandatory periodic client reviews and appropriate dispute escalation policies.  Such formal procedures must be easily understood, accessible and adopted by all staff.  Of course, it’s not all doom and gloom – such risk-management strategies do present opportunities to protect your firm’s bottom line, and can be leveraged to increase margins, or expand your referral network.

As an example, your initial client interview could be enhanced to develop a deeper understanding of your clients’ wants and needs.  This could include their experience and expectations, industry type, level of sophistication (e.g. the type of internal software being used), their relationship with previous service providers (the internet can help supplement this knowledge) and any previous litigation or adverse regulatory action that they have been involved in.

Any up-front costs associated with developing your internal procedures will not only help to form client profiles and identify/avoid bad clients (consequently providing long-term savings), but will also assist in your organisation developing a deeper understanding of what we might refer to as a good client’s business.  If implemented effectively, such changes may also facilitate the investigation of any additional revenue streams and referrals.

Likewise, periodic reviews can strengthen client relationships and help to build your referral network.  Dispute escalation procedures will give staff the confidence and security of knowing that they have full managerial support throughout their dealings with difficult clients, and will equally help to avoid situations where junior staff simply do not want to deal with such clients.

Taking the time to assess your organisation’s client review and dispute escalation processes will present important and ongoing opportunities to identify any in-house issues (such as staff knowledge gaps, or creep and de-creep in relation to the scope of work agreed upon in the letter of engagement), and will ensure the continued delivery of high-quality services.  These client reviews (and any necessary updates) will also assist in the identification of clients who may be in breach of their reporting or compliance obligations.

Indeed, whilst there are a myriad of possible opportunities to explore with regard to the updating of internal procedures, although it is important not to feel daunted by the thought of developing such strategies.

As a final word of warning, bad clients may also seek financial savings through ‘dodgy’ or plainly illegal accounting practices, or may otherwise try to pressure you into providing advice outside of your area of expertise (potentially jeopardising your reputation and exposing you to litigation).  In early February 2016, the Fair Work Ombudsman stated that they had “been concerned about the role of key advisers, such as accountants and HR professionals, in some serious and deliberate contraventions”.

These comments were backed up in November of 2017, when the Federal Circuit Court penalised the firm Ezy Accounting 123 Pty Ltd $53,880 under the accessorial liability laws.

In March 2018, the Fair Work Ombudsman conducted a campaign in Western Sydney, which found that almost two-thirds of businesses audited were non-compliant.  Whether any action will be taken against the advisors of these businesses waits to be seen.

In summary, Coleman Greig urges accounting firms to invest in developing relevant risk-management strategies, and to conduct periodic reviews of your client books.  These review strategies can be used as opportunities to not only protect your margins, cash-flow and worker retention rates, but to explore alternative revenue streams, expand your referral network, and conduct self-audits.

As a final bonus, if implemented correctly, you may also avoid the need to seek legal advice. However, if you or your clients do require legal advice, Coleman Greig Lawyers are able to provide a wide range of legal services, such as litigation and dispute resolution, debt collection, liquidation and insolvency advice, commercial law advice and employment law advice.  If you have a query with regard to any of the information in this article, or you would like to speak with a lawyer in relation to issues that you are facing with a client, please don’t hesitate to get in contact with:

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