When it becomes necessary to terminate a client relationship, it is important to memorialize this action in a confirming letter to the client. Even if you decide to inform the client of your resignation through a discussion, a follow-up letter provides written evidence of the termination date. The letter also should include instructions to the client pertaining to requisite follow-up actions regarding tax, accounting, and other matters about which your firm previously advised.
The letter should be concise and factual. It should document when services ended, any outstanding issues regarding work in process, fees owed to the CPA firm, client records, and items requiring follow-up or completion by the client. In most situations the termination should become effective as of the date of your letter. Upon deciding to terminate the accountant/client relationship, agreeing to complete certain services for the client or to help them "wrap up" outstanding tax and accounting matters represents a potential risk exposure and is not recommended.
However, if the client is facing an imminent tax or regulatory deadline, and a delay in providing information to taxing authorities or regulators may result in the imposition of penalties, interest, or sanctions, consult with your attorney and your professional liability insurer before proceeding.
The first paragraph of the letter should clearly indicate that the client relationship is being terminated, the timing of same, and the status of services agreed upon in previously issued engagement letters. This introductory paragraph may state, as follows:
As of May 1, 20XX, Smith CPA LLC is terminating our professional relationship with you and will no longer render services to either John Doe or Doe Distribution Corporation.
Our services to John Doe were comprised of the preparation of personal New York State and U.S. federal income tax returns and were concluded upon delivery to you of the completed 20XX tax returns on April1, 20XX.
Our services to Doe Distribution Corporation consisted of the preparation of compiled quarterly financial statements and were concluded upon delivery to you in October 20XX of the compiled financial statements of Doe Distribution Corporation for the quarter ended September 30, 20XX, and our compilation report thereon.
Unless the firm resigns from the accountant/client relationship while work is in process, the letter should expressly state that there is no work-in-process as of the date the relationship is being terminated. If there is work-in-process, the termination letter should address the work product, if any, that the firm will deliver to the client. Under the AICPA Code of Professional Conduct, ET §501.02, client records prepared by the firm may be withheld if the preparation of such records is not complete. Some state boards of accountancy consider the withholding of client records a discreditable act, even if there are outstanding fees. Perform research on applicable state board of accountancy regulations in the jurisdictions of both the firm and the client prior to withholding records.
From a risk management perspective, firms should avoid providing a partially completed work product to terminated clients or the successor CPA firm. The firm should be prepared to write off the fees for time incurred related to this work.
The letter may state that:
As of the date of this letter, our firm has no work-in-process for either John Doe or Doe Distribution Corporation.
The letter should briefly state the status of outstanding fees, even if fee collection is unlikely.
Seven-hundred and fifty dollars remains due and payable to our firm for the preparation of the 20XX New York State and U.S. federal income tax returns for John Doe. Additionally, $3,250 remains due and payable to our firm for the preparation of quarterly compiled financial statements for Doe Distribution Corporation for the calendar quarters ended March 31, June 30, and September 30, 20XX.
In accordance with our understanding with you regarding professional services as documented in the attached engagement letters signed by you, interest is charged on unpaid fees at the rate of 1.5% per month, and remains due and payable to our firm.
Items for client follow-up
The letter should address outstanding accounting and tax matters that require follow-up or completion by the client or the successor CPA firm, clearly identifying deadline-sensitive items.
You should consult with the successor CPA firm you select as soon as possible regarding estimated taxes and year-end tax planning. Quarterly estimated tax returns and payments for John Doe and Doe Distribution Corporation must be submitted to taxing authorities in a timely manner in accordance with the schedule we previously provided you, a copy of which is attached. We will cooperate with any successor you designate to us in writing, in accordance with the provisions of the AICPA Code of Professional Conduct.
Applications for an extension of time to file the 20XX New York and U.S. federal income tax returns for John Doe and Doe Distribution Corporation have been filed with the taxing authorities. These extensions expire on October 15, 20XX and September 15, 20XX, respectively. You should meet with the successor CPA firm you select as soon as possible regarding the preparation of these returns. In the event any portion of your 20XX income taxes remains unpaid, underpayment penalties and interest continue to accrue on these amounts. Further, in the event your 20XX tax returns are not filed by the due dates, additional penalties and interest may be assessed.
Client records and records retention
Clearly indicate the status of any client records supplied to you in connection with prior engagements and also note your firm record retention policy. For example:
We previously returned to you all original records you provided to us in connection with previous engagements. Our working paper files are the property of our firm, and will be maintained by us in accordance with our firm record retention policy.
We have enclosed all of the original records provided to us for John Doe and Doe Distribution Corporation. These include the following:
- All receipts and other supporting documentation pertaining to the 20XX expenses of John Doe
- All 20XX monthly general ledgers for Doe Distribution Corporation (provided via enclosed CD-ROM) (etc.)
If records are transmitted and stored through a client portal, consider including the following:
Your access to the XXX client portal will expire on May 31, 20XX. You may access copies of records in the portal up to this date. Our working paper files are the property of our firm, and will be maintained by us in accordance with our firm record retention policy.
All client termination letters should include the following:
We will consider any requests for copies of documents in our working paper files from you or the successor firm. However, providing such copies is at our discretion. We may require payment in full of all outstanding fees owed our firm before providing these copies. Copying costs will be charged at our regular rates, and are due and payable on a COD basis.
If questions arise regarding records that should be made available to the client, review ET section 501.02 of the AICPA Code of Professional Conduct. Consultation with the AICPA or a state CPA society through available professional ethics hotlines is also recommended. Consult with the state boards of accountancy in the jurisdictions of both the firm and the client or refer to their regulations on client records.
The above basic elements should be included in a client termination letter. While additional factual information may be included depending on the particular circumstances, resist the temptation to include a discussion of the reasons the firm decided to terminate the relationship. Such statements may be viewed as defamatory.
Finally, consider designating in the letter a principal of the firm as the sole contact for any future communications by the client. This minimizes the risk of miscommunication and places control over responses to requests for documents.
The letter always should be sent using a certified delivery method which provides documented evidence of receipt at the client location on a specified date. Overnight and second-day delivery services are good methods as parcel tracking numbers are assigned to track document delivery. Courier services also serve the same purpose. The use of registered mail is not recommended because office staff frequently refuses to accept registered mail unless instructed in advance to expect such a letter. If email is used, verify in advance the email address of the client, and ensure that the email platform used can provide receipts for both received and read emails. To establish proof of delivery, receipts acknowledging that the email was both received and read should be maintained, in addition to maintaining a copy of the sent email. If a receipt acknowledging that the email was read is not received promptly, conventional overnight and courier delivery services should be used.
Termination letters are important tools in managing risk when terminating a client relationship. Devoting extra time to drafting these letters and retaining proof that the client received the letter can help accounting firms avoid future problems with former clients.
CNA, Accountants Professional Liability Risk Control, 333 South Wabash Avenue, 36th Floor, Chicago, IL 60604.
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