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Q&A billing, collecting and suing for fees.

When businesses and individuals are struggling as many are in this economy--they might delay payment on fees they owe. So what do you do when you have provided services and payment is due, yet no fees are forthcoming?

For some guidance, California CPA chatted with Michael Davenport, J.D., a professional liability claims specialist with CAMICO Mutual Insurance Company since 1988. The following provides some strategies regarding CPA fees, billings, collections, suits for fees and arbitration in a good economy or bad--and how to possibly avoid collection issues to begin with.

How can I avoid a collection problem in the first place?

The best way to communicate your billing and collection policies is in your engagement letter, including stop-work and/or disengagement provisions that can be enforced if a client doesn't pay you in accordance with the engagement letter. Also, bill on a timely basis and do not allow fees to build up to a point where you can no longer walk away from them. When unpaid fees become too large, they provide an incentive for the client to sue for malpractice, especially when the CPA has sued to collect fees.

Is there a better option than suing to collect fees?

CAMICO's claims experience shows that simple fee disputes are better resolved through mediation and arbitration than through litigation. That's why CAMICO recommends mediation for all disputes as a first step and binding arbitration for fee disputes only as a second step.

How do I get the client to agree to this?

The best way is to have a mediation clause for all disputes, plus a binding arbitration clause for fee disputes only, in your engagement letter, which is signed by the client. CAMICO members can find suggested engagement letter language on our website in the Reference Library under Risk Management/ Engagement Letters/Suggested Wording/ Mediation or Arbitration. Note that some states do not permit arbitration clauses.


What are the first steps to take when a client is not paying?

Good communication with a non-paying client will either spur payment or set up circumstances that will make a potential demand for arbitration more effective. This involves sending a series of three letters requesting payment and communication from the client:

1. The first letter politely notes the fees owed, requests payment and asks if there is any reason for the delay in payment.

2. The second letter repeats the first letter.

3. The third letter notes the continued nonpayment and requests a call to discuss payment arrangements by a specified deadline, stipulating that if no call is received by that date, the result will be a demand for arbitration concerning the fee dispute, effective as of that date.

The purpose of this is to show that, by not responding to the letters, the client did not have any valid basis to claim that the fees were not owed. Had there been any dissatisfaction with the work, the client would have communicated it when given the opportunity.

Why is mediation and arbitration better than suing to collect fees?

Suing for fees creates a high probability of a countersuit by the CPA's client, usually alleging malpractice during the engagement.

Does CAMICO cover claims arising subsequent to suits for fees?

Policyholders have the; option of suing to collect fees, but must consult with CAMICO before suing for fees. CAMICO will cover claims arising subsequent to suits for fees if the policyholder has that option, but the premium credit is not available with that option.

Why do I have to first consult with CAMICO?

The consultation enables a CAMICO specialist to assist the policyholder in weighing the risks and consequences of suing for fees. Lawsuits and countersuits almost always result in CPAs spending far more in attorney fees and in lost billable time than is warranted for the fees owed to them.

Has CAMICO seen an increase in CPAs trying to recoup fees in this economy?

All claims activity--including difficulties in recouping fees--has increased as a result of the recession. There is an economy-wide trend of clients having business problems, such as cash flow and difficulty in paying bills, and this includes CPAs.

Does CAMICO recommend binding arbitration for other disputes?

CAMICO does not recommend binding arbitration for disputes other than simple fee disputes. The only exception might be simple individual income tax return preparation engagements (1040 forms), but not complex returns.

Can I just use a general arbitration clause in my engagement letters?

We advise CPAs to not use a general arbitration clause in an engagement letter. Most engagements, when in dispute, tend to produce complex, high-risk, high-dollar disputes that are better managed through litigation than arbitration. An effective legal defense can be restricted and impaired by arbitration.

Can I still use a collection agency?

Yes, but the same guidelines apply to the agency. If you are using CAMICO's basic policy form without the alternative endorsement, you must consult with CAMICO before the agency sues to collect your fees. Even if you have the alternative endorsement that excludes coverage for countersuits after suing for fees, countersuits will not be covered if the collection agency sues for your fees.

What if a client goes belly-up?

CPAs do well to use common sense in determining whether it is worth trying to pursue payment from a bankrupt client. If there's no money left, it's futile. Otherwise, the firm gets in line with the other creditors. If the CPA firm has allowed fees to build up to the point where the firm can no longer walk away from them, that's as much the firm's fault as the client's fault.

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Title Annotation:practicemanagement; Michael Davenport of Camico Mutual Insurance Co. speaks about professional fees
Publication:California CPA
Article Type:Interview
Date:Jul 1, 2009
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