When it becomes necessary to terminate a client relationship, it is important to confirm this action in a letter to the client to avoid future ambiguity regarding the status of the relationship. Even if you decide to inform the client of your resignation verbally, a follow-up letter evidences the discussion.
When drafting the client termination letter, keep the following in mind:
- It’s not necessary, or suggested, to include a reason for the termination. The letter should simply and directly inform the client that you will no longer provide services to them. While general information may be included depending on the circumstance (exiting an area of practice or loss of a key engagement team member, for example), resist the temptation include a discussion of the reasons the firm decided to terminate the relationship, especially if the relationship has grown acrimonious. Such statements are of little benefit to either party and may provide the client with a justification to “correct” its negative behavior in order to continue to receive services.
- Tell the client what they need to do to move forward without you and what could happen if they don’t. You don’t want a client to later assert that they weren’t aware of and, therefore, missed a deadline and were assessed penalties, fines or some other sort of damages as a result. Making the client aware of their responsibilities, in writing, helps defend against such an assertion.
- Termination means it’s the end. Upon deciding to terminate the CPA/client relationship, do not feel compelled to agree to complete certain services for the client or to help them "wrap up" outstanding tax and accounting matters. This presents a potential risk exposure and is not recommended.
- Send the letter via a traceable delivery method. Advances in technology have made most interpersonal communications nearly instantaneous. Yet, the professionalism and permanence of a mailed termination letter cannot be ignored. Unless there is a looming deadline or other rare situation, a hard copy of the termination letter should always be sent by a delivery method that evidences delivery and receipt by the client. 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. If email is used, verify the email address of the client in advance, and ensure that the email platform used can provide notification that the email was received and read. Be sure to retain the notifications as well as a copy of the sent email. However, remember that the email recipient can choose to not provide a read receipt to the email sender. Therefore, if email is used, consider sending a follow-up hard-copy letter as well.
- Be wary of terminating a client right before a deadline. If the client is facing an imminent tax or regulatory deadline, proceed with caution. Termination may still be a viable option, but consult with your attorney and your professional liability insurer before proceeding.
When drafting your client termination letter, consider including the following components. An example letter is included in Appendix A.
The first paragraph of the letter should clearly indicate that the client relationship is being terminated, note the effective date of termination and provide the status of services agreed upon in previously issued engagement letters. If applicable, include a list all of the entities or individuals with whom the relationship will be terminated.
Unless the firm resigns from the CPA/client relationship while an engagement is in process, the letter should expressly state that there is no work-in-process as of the relationship termination date.
If there is work-in-process, the termination letter should address the status of the firm’s work product and what, if anything, the firm will deliver to the client. Under paragraph .07 of §1.400.200 of the AICPA Code of Professional Conduct, Records Requests, a firm’s work product may be withheld if the work product is incomplete. Be sure to research applicable state board of accountancy regulations regarding this topic as well.
From a risk management perspective, CPA firms should avoid providing a partially completed work product to terminated clients or the successor CPA firm.
- Outstanding fees
The letter should briefly state the status of outstanding fees, even if fee collection is unlikely. At times, clients assert that CPAs knew they did not provide proper service because they did not bill for their time or follow-up on outstanding fees. As a result, regardless of your expectations regarding collection, a termination letter should state the amount of fees due or state that a balance is not due. A final billing statement may resolve any confusion and could be included as an enclosure with the termination letter.
- Items for client follow-up
The letter should clearly map out the client's responsibilities going forward and issues that should be raised with a successor CPA. Matters of particular importance to include are deadlines (statutory, regulatory, or operational), internal control weaknesses or breakdowns and indicators of potential fraud or violations of laws and regulations. Be sure to tell the client what could happen if they do not follow up on items noted and that they will be responsible for the consequences of their inaction. If deadlines are missed or a theft occurs and the CPA had not informed the client of those in writing, the client may blame the CPA firm.
If the CPA has power of attorney to represent or act on behalf of the client before the IRS, include your intention to withdraw from such authority in your termination letter to limit your professional responsibility to the client and the IRS.
- Client records and data retention
Clearly indicate the status of any client records supplied to you in connection with prior engagements, and also note your firm’s record retention policy.
If questions about or requests for records subsequently arise, review §1.400.200, Records Requests, of the AICPA Code of Professional Conduct and applicable state board of accountancy rules and regulations. Consultation with the AICPA or a state CPA society through available professional ethics hotlines is also recommended.
- Other considerations
Finally, consider designating in the letter an owner or firm administrator of the firm as the sole point of contact for any future communications by the client. This minimizes the risk of miscommunication and places control over responses to requests for records.
Termination letters are important tools in managing risk when terminating a client relationship. Devoting some time to drafting these letters and retaining proof that the client received the letter can help CPA firms avoid future problems with former clients.
Appendix A – Termination Letter Example
[Name of Authorized Client Representative Name]
Dear [Client Name or Authorized Client Representative Name]:
As of [Date], [CPA Firm Name] (“firm,” “we,” “us,” or “our”) is terminating our professional relationship with [Client Name] or [Additional Client Names] (collectively, “you” or “your”) and will no longer render services to you.
Our services to you were comprised of the [Name of service provided] and were concluded upon delivery to you of the completed [Deliverable] on [Date].
Work in process
As of the date of this letter, our firm has the following work-in-process for [Client Name]:
[Describe outstanding work-in-process for the client].
As of the date of this letter, our firm has no work-in-process for [Client Name]:
$[XXX] remains due and payable to our firm for the [Name of service provided] for [Client Name].
In accordance with our understanding with you regarding professional services as documented in the attached engagement letter 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. [update as necessary to mirror the firm’s billing practices as outlined in the client engagement letter]
Items for [Client Name] follow-up
You should consult with the successor CPA firm you select as soon as possible regarding [List items that need to be addressed, any applicable due dates and the consequences of not addressing the item(s).]
Applications for an extension of time to file the 20XX U.S. federal and [State] income tax returns for [Client Name] have been filed with the taxing authorities. These extensions expire on [date]. 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, and you will be responsible for them.
We recommend having your successor CPA obtain a Power of Attorney so that they may communicate with the IRS and state taxing authorities. We are withdrawing our Power of Attorney from the Internal Revenue Service (IRS) and [State]. [Optional – If the CPA firm has an outstanding Power of Attorney for the client.]
Client record and data retention
We previously returned all original records you provided to us in connection with previous engagements to you. 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 [Client Name]. These include the following:
[Describe original client records being returned to the client]
Your access to the [Client Name] and [Additional Client Names] client portals will expire on [Date]. 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. [Optional – If client had access to firm’s electronic systems or portals.]
We will consider any requests for copies of documents in our working paper files from you or the successor firm. We will cooperate with any successor you designate to us in writing, in accordance with the provisions of the AICPA Code of Professional Conduct. 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.
Please direct all questions to [Contact name at CPA Firm] at [phone number] or [email].
Very truly yours,
 For instructions on how to withdraw the Power of Attorney, refer to the instructions to IRS Form 2848, Power of Attorney and Declaration of Representative.
 If multiple services were delivered or if multiple clients are being included in the termination letter, separately list each client and each service that was delivered to that client. Use of bullets or a table is recommended for clarity.
This information is produced and presented by CNA, which is solely responsible for its content. Continental Casualty Company, a member of the CNA group of insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program.
The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of the authors’ knowledge as of the date of the article. Accordingly, this article should not be viewed as a substitute for the guidance and recommendations of a retained professional. In addition, CNA does not endorse any coverages, systems, processes or protocols addressed herein unless they are produced or created by CNA.
Any references to non-CNA websites are provided solely for convenience, and CNA disclaims any responsibility with respect to such websites.
Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice.
“CNA” is a registered trademark of CNA Financial Corporation. Certain CNA Financial Corporation subsidiaries use the “CNA” trademark in connection with insurance underwriting and claims activities. Copyright © 2020 CNA. All rights reserved.