Ask any lawyer who routinely represents CPAs: “What is the No. 1 mistake CPAs make that gets them into trouble with their clients?” The answer almost invariably will be, “Suing clients for fees.”
Why this is, and whether it ought to be so, is not the point. Know that there are best practices that, if adhered to, will greatly reduce the incidence of fee-related malpractice claims while at the same time improving your collection efforts.
The best way to avoid a collection problem in the first place is to ensure good communication. This includes communicating your billing and collection policies in your engagement letter, including stop-work and disengagement provisions. Good communication helps you set expectations. Letting your clients know that you expect to be paid for services rendered, on time and in full, is an especially important expectation to set.
Having staked your position, you will need to walk the walk. That is, bill on a timely basis. You do not want fees to build up to a level that might form an unpleasant surprise for the client when she or he first sees your bill, triggering passive-aggressive behavior (like delaying payment). In addition, you do not want your work in progress to reach the point where you can no longer walk away from the account receivable once it has been billed.
Even with timely billing and good communication surrounding your billing and payment policies, collection issues are inevitable. A leading insurer of CPAs counsels a three-step approach. This involves a series of letters that politely, yet firmly, notifies the client and, if necessary, escalates the situation.
The first letter simply notes the nonpayment of fees owed, requests payment, and asks whether there is any reason for the delay. Polite. Professional. The second letter is the same as the first (“We write to you again concerning …”). The third letter summarizes the lack of payment and lack of response to the first two lettaers, and it requests a phone call to discuss payment arrangements. It will also include a deadline, noting that, if no call is received by that date, a demand for arbitration will follow.
Let us backtrack on the subject of alternative dispute resolution (ADR). ADR involves mediation and/or arbitration. In the most general terms, mediation is a facilitated discussion, hosted by a neutral mediator, focused on reaching a binding agreement to resolve a dispute. Arbitrators act as judge and jury; their role is not to facilitate a settlement. Arbitration involves a formal hearing, at the end of which is a final and binding decision.
To bring ADR into the equation, have an ADR clause in your engagement letter and signed by the client. ADR is extremely popular because civil litigation is slow, costly, and fraught with variables that can make the process unpredictable both in terms of expense and time. For something like collection of fees, ADR is widely understood to be a suitable forum. A malpractice claim can also be sensibly mediated, but only in rare occasions would binding arbitration be preferred. Despite its inefficiencies and other imperfections, civil litigation has its appeal when it comes to managing and litigating complex disputes, such as tax or audit malpractice. Hence, ADR clauses can be drafted to require mediation for all disputes and binding arbitration for fee disputes only.
Suing for fees carries the high probability of a countersuit by the client, in which allegations of malpractice are cited as to why the fees are not owed. There may also be damages sought above and beyond the unpaid fees. Litigation over unpaid fees, therefore, nearly always results in the practitioner spending more in attorney fees and lost revenue/time than the value of the claim.
The professional liability insurance industry has developed strong incentives for policyholders (including discounts on premiums) to use ADR and to not sue clients for fees – at least not without first taking a time-out and conferring with the insurance carrier about the situation. Check your policy carefully for terms and conditions that may pertain to resolving fee disputes before you take any action.
Note that use of collection agencies does not change the fundamental dynamic. Too much pressure brought to bear can result in a claim asserted in reaction, even if only in the form of a notice letter from an attorney asserting professional negligence. Collection agencies, when used, should work in close and thoughtful coordination with the practitioner.
The topic of client selection is immediately adjacent to the topic of chasing receivables. Most practitioners are already well-versed in this topic, so I will simply note in passing that an ounce of prevention is better than any ADR clause.
Be vigilant with your fee collections, but remain patient. Only act upon a well-thought-out plan that integrates with your engagement letter.