How does a client’s tone at the top affect an organization?
In any business transaction, there is a lot at stake on both the buy and sell side. Reputation, Integrity, Quality of work, Legal, Budgets, and Regulatory variables. Be that as it may, a company’s ability to delve deep into the cultural lapse in client integrity or ethics can almost always have a negative impact on an engagement. Most professional services firms depend on the client’s cooperation in providing accurate information and representations. Thus, questionable ethics or lack of integrity could manifest itself in the information provided to the firm, which, in turn, may lead to an inappropriate firm work product.
Even a flawlessly executed engagement can be placed at risk by a client with poor tone at the top. Unethical clients not only increase the likelihood of a professional liability claim, but they also expose the firm to other risks such as nonpayment of fees and increased exposure to regulatory and criminal complaints.
Consider the following techniques to address issues relating to tone at the top:
- Do your homework on new clients. Client acceptance is the first opportunity to identify a client with questionable ethics or integrity. A robust client-acceptance process helps a CPA firm avoid risky clients by addressing issues before an engagement begins. Potential red flags in evaluating new client relationships include disputes with the predecessor accountant, disputes between owners of the client’s organization, regulatory or business complaints, failure to obtain proper permits or licenses, or even taking aggressive positions on tax returns. The potential upsides of a new client, such as fees or a new relationship, should not overshadow concerns about a client’s ethics.
- Continuously evaluate. The acceptance process is not the only opportunity to evaluate the client’s tone at the top. Situations often arise during an engagement, and management’s responses to these situations often speak volumes about the client’s ethics. If a client does not address difficult situations appropriately, a firm should consider terminating the engagement.
- Consider reputational risk. A CPA firm may suffer harm to its own reputation by rendering services to an unethical client. Third parties likely will not hesitate to include the CPA firm in a lawsuit, regulatory complaint, or criminal investigation, and clients lacking integrity similarly will not mind sharing the blame with the firm. Even if the accusation lacks merit, the CPA firm will waste valuable time responding to and defending the charge, and may incur considerable costs. In addition, consider the reactions of other CPA firm clients. One questionable client may cause other clients to reevaluate the firm’s ethics and question their association with the firm.
- Prepare for the worst. Even a longtime, seemingly ethical client may act inappropriately if faced with an unexpected challenge. If a claim arises, how the CPA firm has documented its work and client communications will be important to the defense of the claim.
Documentation of recommendations, discussions with management, and internal-control-related matters may help demonstrate the firm’s commitment to due professional care.
Communication with the client should always be clear, concise, and professional. Additionally, two engagement team members should be involved in any difficult client discussions to ensure proper communication of the message. If the discussion becomes a subject of dispute, the presence of other team members can help provide accurate recall. The discussion should also be documented in a memo to the file.
THE IMPORTANCE OF TONE AT THE TOP AT FIRMS
Firms should consider the following when assessing their ownethical climate.
- Everyone is the “top.” Tone at the top in a business is ultimately communicated from its partners and owners. However, each individual in any firm may demonstrate leadership, whether that person is a partner or brand-new associate. Instilling leadership values and a commitment to ethics and integrity at all levels of the firm helps reinforce appropriate decision-making and the ability of all personnel to “do the right thing.” Raising issues and consulting with other team members when faced with a difficult situation should be encouraged and supported.
- Develop the future. A focus on ethics and integrity through responsible leadership should be included in training and mentoring at all levels. This gives all firm professionals greater awareness of the potential impact of ethical- or integrity-related conflicts and also helps to prepare the firm’s future leaders. In addition, the firm should develop and disseminate to all personnel its policies regarding conflicts of interest and independence. Ethics training also should be provided routinely.
- Monitor your firm. A firm’s personnel is its greatest asset. Just as a multinational firm may recommend to its clients, its own internal controls should be established, implemented, and updated to deter improper actions. Strict adherence to firm policies through proper oversight, review, and approval should reinforce the firm’s tone at the top and help demonstrate its commitment to integrity and ethical values.