Firms are increasingly using formal processes and criteria to find and keep good clients, and even weed out undesirable ones. Criteria can include maturity of the client’s business, growth potential, leadership, industry type, breadth of services offered, and a client’s possibility of being acquired. A management analysis is also applied as part of the due diligence.

Lacking “at least a de minimums approach to qualifying new clients and having a client acceptance process would be akin to bowling with a blindfold on,” says Carl Alper, business development director at Windham Brannon in Atlanta. “Ultimately, not every potential client would be the right fit for Windham Brannon and vice versa. We focus on capturing those clients whose industry focus aligns well with our industry segments where we have market competitive preference, having the right team that can deliver the requisite skill sets that client needs, and determining whether they want to truly build a long-term relationship.”

A Strategic Approach

“Several years ago, we formed a retention committee whose purpose is to both review existing client relationships for continuation and to approve new relationships as they are being explored for the initial acceptance,” says managing partner Wayne Pinnell, of Irvine, Calif.-based Haskell & White. “Since the formation of the committee, we’ve also developed a list of ‘ideal prospect criteria’ which helps us focus our evaluation efforts on existing and potential clients. We may continue to work with or accept a client that is less than ‘ideal,’ but we do so with the knowledge of where we rank the client against the ideal situation. We also give consideration to availability of personnel, time of year, and other factors when taking on ‘less-than-ideal’ projects.”

“We’ve made a conscious effort to improve the quality of both new clients and existing clients,” says Jeffrey Weiner, managing partner, New York-based Marcum & Kliegman. “The primary goals of our client acceptance process are: ascertain that new clients of our firm are reputable and have integrity; identify business risk and determine whether such risk is acceptable; assure that our firm has the appropriate expertise in each new client’s industry; determine that we have sufficient resources available to service the client and meet client expectations; and that the fee has been established at an appropriate level.”

Says Bob Biehl, assurance partner with GBQ Partners in Columbus, Ohio, “A credit check is run on all new clients when they are first thought to be a prospect. We hold a weekly meeting to discuss all potential new clients. The engagement team pursuing the prospect is required to meet with the Acceptance & Retention Committee (ARC), which is made up of four of the firm’s members, our controller, and accounting/credit manager. At that meeting, the engagement team will go over the mandatory completed client acceptance form and discuss the type of service we’ll be providing, timing of the work, staff availability, competition for the work, client management’s integrity and reputation, potential risks, independence issues, results of the credit report, the client’s current accounting firm, and the budget and expected realization for the engagement,” he says. “After the discussion, a vote by the committee is taken whether we should accept or reject the client.”

Advantages and Obstacles

Weiner says formalizing this program brings several advantages. “The partners are generally all on the same page with respect to the type of new-client engagement that our firm is willing to accept, and the individual partners typically weed out the problems before it gets too far into the process,” he says. “We’ve improved the quality of our clients, been able to direct the resources to work on better quality clients, and better quality clients have improved staff morale.”

“Disciplined growth translates into a more sustainable growth model that supports more profitable and high gain engagements and a longer, lifetime value from our client base,” Alper says. “The persistent challenge is maintaining this level of discipline internally, especially when a good portion of our business comes to us via referral or other networking opportunities. Another challenge can be getting firm leadership to agree on the key criteria for making client selections consistent and in line with this way of thinking.”

“When we formalized the process four or five years ago, the biggest obstacle was getting individual partners to come to grips with their no longer controlling the process and their needing to get approval from our client acceptance committee,” Weiner recalls. “Our client acceptance process has worked extremely well. Within a few months, as the benefits became apparent, we quickly obtained buy-in from all of our partners.”

“The biggest advantage is to get people to communicate and think about the types of clients we bring to the firm and how they fit with our strategic plan,” says Biehl. “The biggest obstacle to implementing the program was the front-end time involved with getting everyone on board and acclimated with filling out the required paperwork.”

Another plus is to retain clients with whom you want to work, “which includes those with challenging issues for our personnel’s growth and those who value our services,” Pinnell says. “It also helps keep our collections in line, as we can minimize the risks by accepting clients whose risk profiles are not off the charts. The challenge is culling of relationships that no longer meet the firm’s standards. Partners generally don’t like to dismiss clients, yet, sometimes, it’s better for both parties to better match the client with another accounting firm through a referral.”

Applying the Criteria

Introduction of an audit prospect begins at the office level at Red Bank, N.J.-based WithumSmith+Brown, according to Dave Dacey, senior manager of the firm’s technical resources department. “The prospect is evaluated between the individual obtaining the contact and the partner in charge of the office. The evaluation includes discussion of a host of issues, including potential independence issues, client complexity, any prior or current accounting and audit issues, possible integrity issues, new events for the prospect, and reasons why the audit is required,” says Dacey.

Criteria at Pinnell’s firm includes a prospect’s integrity and ethics; the firm’s access to the decision-maker at the client; “challenging” work; a good match to the firm’s industry/technical abilities; consideration of the time of year for the requested services; and turnover of the client’s key personnel, among others.

“A partner or employee fills out a client lead sheet with generic information on the source of the lead, its location, and its industry,” says managing partner Bruce Madnick of New York-based Friedman LLP. “I review the lead. Assuming it’s in keeping with our business plans and capabilities, it’s then forwarded to the larger management group to elicit more information. We see if anyone can help by providing additional background. We request financial information and collect background materials on the company, find out who their bankers and lawyers are, and perform outside research to ensure it’s a good fit.” Adds Jeff Zudeck, Friedman’s New Jersey managing partner, “We consider whether we have the proper industry expertise. We also explore whether someone in the process, among our staff or contact base, knows the prospect and can give us a fuller picture. The integrity of the potential client, the reputation of its people, the profile and nature of the work are all factors. It’s also worth considering if the prior accounting firm resigned.”

Biehl’s firm poses the following questions about prospects: Does the prospective client fit our strategic plan? Does the management have integrity and value the accounting function? Is the business viable with good long-term prospects? Is the prospective client in an industry that we serve, and have a good reputation? Is the size of the potential engagement a fit with the firm’s standards, and does the firm have the staff to complete the work to meet the deadline?

Alper’s firm looks at whether his firm can provide long-term value to a client, and whether the client is a “touchstone” client, “one that we can work with for many years to come and create a lasting relationship that will continue to grow as they grow,” he says. Other criteria questions: Does the client understand that the low-cost option may not always be the best, and are they more focused on getting long-term value from their service provider? Do they fit within one of the firm’s industry and/or service line segments?

“We don’t have specific client criteria, but we don’t stray from our stated goals,” Weiner says. “Critical to our process is the establishment of a client-acceptance committee that must sign-off on the prospective client before any work can commence on a new engagement. The decision of our committee is final. Our committee includes the managing partner of the firm, as well as the partner in charge of assurance services.”

Miscalculations Being Made

Firms’ most common mistake in this area, says Alper, “is for them to not have a complete understanding and definition of their ideal client profile. Do they know what top five attributes are identifiable across the very best clients they have, from a longevity and profitability standpoint? Are these demographic characteristics based on fact or fiction? Have they determined an ideal client profile for each industry or service line segment of their business? Have they refreshed it from last year’s determination? Without taking this key step before instituting a filtering process, they jeopardize their chances of reaping the benefits of having the higher quality client opportunities emerge and identifying those clients that don’t warrant as much, or any, investment.”

“Firms sometimes accept at face value the assertions of the potential client and others who know them without looking behind what they’re saying,” Madnick cautions. “Even the most streamlined client selection criteria won’t work under those circumstances.”

“Firms rationalize their way around their own criteria for acceptance,” Pinnell notes. “Some folks will argue that you can take a poor situation and improve it over time. Then two things could happen. First, the situation truly cannot be changed due to circumstances beyond control, and, second and worse, the effort is not made to proactively work on the relationship. The other place where firms go wrong is allowing old events and relationships to skew the culling decision that’s often needed.”

“Most firms make a mistake accepting a job when they know the job is not going to be profitable. It’s a recipe for disaster,” says Tony Salerno, managing director, business development for the Newport Beach, Calif.-based Lyndon Group. “A lot of firms chase trophy clients, and ‘buy’ the work by bidding the job at a price that’s less than what it costs them to staff. They feel that if they have this client, others will want to engage them as well. This is a flawed strategy, because firms will quickly realize that the client is not profitable and, as a result, less-experienced staff will service the client to shore up the losses. The client also loses because it has a bad experience that creates a sour reputation for the firm in the marketplace.”

Zudeck agrees. “They hope that everyone else has made the wrong decision and they’ve made the right decision, or they underestimate the amount of work,” he says. “A new accounting firm generally only can examine the prior accountant’s finished product, and can arrive at a fee that underestimates the amount of work actually involved. Not asking the right questions to size up an engagement is a big pitfall.”

“I would expect the biggest challenge is not getting the right people, with the proper level of authority, within the firm involved in the process,” says Weiner. “Most accounting firms are driven by the revenue that a new client can bring in and are apt to overlook other criteria if the potential revenue is high enough,” Biehl also cautions.

The Existing-Client Review

Existing clients are also included. “We’re just now putting some formality to this process,” says Alper. “We gather the client team and objectively evaluate our top clients based on profitability and long-term potential. We look at what we have learned from this client relationship to determine how those lessons can be successfully applied to others. We also look for other opportunities to add value to this client,” he adds. “Are they about to merge with another company? Would they benefit from a risk assessment? Are they financially on solid footing and also engage in business activities that are acceptable on ethical and other grounds to our firm?”

“Our due diligence generally includes discussions with our referral sources, predecessor accountants, attorneys, bankers, or other known business contacts,” adds Weiner. “We also utilize a third party to perform extensive background checks on key company officers and directors, as well as the company itself. The background checks include criminal records, tax liens and judgments, bankruptcies, regulatory agencies, civil actions, and various media sources.”

Biehl says his firm has an annual client-retention process wherein the firm controller provides to the head of the committee a client list by the billing member that lists billings and realization percentages. “The committee will then review the list to determine if there are any low realization clients that should be selected for further discussion,” he says. “The credit manager will provide to the committee a list of all clients she believes should be discussed as to whether to continue to do their work or not, based on the client’s payment history in general and to the accounting firm. The head of the committee then compiles a total list, broken out by member, of clients that each member will have to give written reasons as to why we should retain. This list is forwarded to each member, and meetings are held where each member will discuss their clients. Written explanations should be completed and forwarded to the committee a week prior to the scheduled meeting.

“The committee would also like each member to take a hard look at their entire client list and determine if there are any clients that the committee hasn’t selected that we should no longer retain,” Biehl adds. “These criteria for clients are subjective, but should be based upon factors such as client integrity, risk to the firm, difficulty of the client to work with, and strategic fit with the firm. The committee challenges each member as to whether we should retain the client.”

Madnick’s firm performs an annual review of all existing clients that assesses realization, timeliness of payments, treatment of the firm’s staff, financial conditions, “and whether they are an asset to our reputation in the professional community,” he says. Adds Zudeck, “Our partners sign yearly engagement continuance forms that note any change in management, risk tolerances, financial obligations, or banking activities. But beyond that, due diligence also involves meeting with clients and really knowing them.”

“We review our audit clients annually for continuance as part of our planning process,” says Pinnell. “While the process may not be as extensive as the initial acceptance due diligence, we do look for changes at the client or in the client’s industry that could change their risk profile, and we evaluate our continued ability to serve that client with an appropriate fee return on our efforts. Our retention committee reviews client relationships with an initial focus on the financial metrics of that client relationship. We also encourage our personnel, generally, to engage in open service team dialogues about the client in light of our ‘ideal-prospect criteria’ with the intent to fix pieces of the relationship if and where possible, or make that sometimes-difficult decision to terminate the client relationship.”

“We talk to a lot of people. Bad reputations tend to spread quickly and easily,” says Salerno.

The Risk-Management Question

Risk management can be extremely important, Alper says, “in that conflict of interest and independence issues are crucial to determining whether a firm can accept a particular client. This is really the first hurdle in determining whether a client passes muster from a compliance standpoint before evaluating whether they make sense from a business consideration.”

Pinnell says the primary factors of risk management that come into play include making sure you’re working with the right kind of clients, including those your firm can properly serve with the correct match of industry and technical knowledge, as well as not serving those clients where the risk of association is extremely high. “Client relationships need to be evaluated in light of economic and legal conditions to make sure you’re cognizant of a potential client’s ongoing risks, propensity to litigation, and other factors, and how those risks change over time. Associating with clients with a proper view of the value of the services requested/provided and the willingness and ability to pay timely for those services is also key.”

“Risk management is threaded throughout the process,” Weiner says. “By putting the client-acceptance decision in the hands of a separate committee, risk decisions can be viewed completely objectively.”

The policies and criteria set and how they are followed is a key element in mitigating business risk and litigation, says Biehl, adding, “The prospective client’s reputation and accounting records could have an impact on the accounting firm’s reputation.”

“Risk management means assessing a client or potential client to see if they have the financial wherewithal to fund their own operations in addition to paying fees. There are other issues at play as well,” says Madnick. “Do they appreciate and respect the service you render? What is their overall reputation?”

Above all, learn from what your peers went through. “If another trusted service provider has a bad experience with a prospect, we do some diligence to determine if it’s a one-time situation or a reoccurring theme,” Salerno notes.