When it becomes necessary to terminate a client relationship, it is important to memorialize this action in a confirming letter to the client. While you may decide to inform the client of your resignation in a conversation, a letter provides written evidence of when the resignation occurred and instructions to the client regarding needed follow-up on tax, accounting, and other matters about which your firm previously advised the client.
The letter should be 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. Once you have decided to terminate the relationship, it is generally not a good idea to agree to complete certain services for the client to help them "wrap up" outstanding tax and accounting matters.
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.
Introductory paragraphs
The first paragraph of the letter should clearly indicate 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 could read as follows:
As of May 1, 2008, 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 consisted of the preparation of personal
Our services to Doe Distribution Corporation consisted of the preparation of compiled quarterly financial statements and were concluded upon delivery to you in October 2007 of the compiled financial statements of Doe Distribution Corporation for the quarter ended September 30, 2007, and our compilation report thereon.
Work-in-process
Unless the firm resigns while work is in process, the letter should specifically 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 what work product, if any, the firm will deliver to the client. Under the AICPA Code of Professional Conduct, ET §501.02, clients records prepared by the firm may be withheld if the preparation of such records is not complete. From a risk management perspective, firms should avoid providing partially completed work product to terminated clients or the successor CPA firm and should be prepared to write off the fees for the time incurred on this work.
The letter could say:
As of the date of this letter, our firm has no work-in-process for either John Doe or Doe Distribution Corporation.
Outstanding fees
The letter should briefly state the status of outstanding fees.
For example:
Seven-hundred and fifty dollars remains due and payable to our firm for the preparation of the 2006
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, identifying deadline sensitive items specifically, as in the following examples:
You should consult with the successor CPA firm you select as soon as possible about 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 2007 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, 2008. 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 2007 income taxes remains unpaid, underpayment penalties and interest continue to accrue on these amounts. Additionally, in the event your 2007 tax returns are not filed by October 15th, 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 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 2004 expenses of John Doe
· All 2004 monthly general ledgers for Doe Distribution Corporation (provided via enclosed CD-ROM) (etc.)
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, and copying costs will be charged at our regular rates and are due and payable on a COD basis.
If questions arise regarding what records should be made available to the client, review ET section 501.02 of the AICPA Code of Professional Conduct. Additionally, consult with the AICPA or a state CPA society through available professional ethics hotlines. Some state boards of accountancy consider the withholding of client records a discreditable act, even if there are outstanding fees. Please consult with your state board of accountancy or refer to its regulations on client records.
These basic elements should be included in a client termination letter. While additional 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.
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 should always be sent using a delivery method that can provide documented evidence that it was received at the client location on a specific date. Overnight and second-day delivery services are good methods because parcel tracking numbers are assigned to track document delivery. Courier services also serve this 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.
Termination letters are important tools in managing risk when terminating a client relationship. Devoting a little extra time to drafting these letters and retaining proof that the client received the letter can help accounting firms avoid future problems with ex-clients.
May 2008
By Joseph Wolfe, Assistant Vice President, Management and Professional Liability Risk Control, CNA,
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