An economic triple threat - the collapse of equity markets, declining top-line revenue, and stingy banks - makes it a risky time to be in business or investing, and equally risky to be a CPA.All businesses are being squeezed hard. This creates pressure to cut corners or ignore the facts. Human nature being what it is, you must be extra-vigilant. CPAs are also expected by clients - and juries - to "advise and warn" clients who are teetering on the brink of losing their credit and their footing in business. If CPAs don't, a possible lawsuit could easily follow.

So, examine your client base and apply the professional standards of integrity, independence and objectivity. Determine which clients are affected by the recession and disengage from the worst in writing, with good notes, or at least point out the clients' problems and make sure that they understand what's needed to solve them.

Ask yourself: Which clients are losing customers? Which are making less money? Which are in breach of loan covenants? Which are in danger of losing their credit or their investors? This can be difficult, sometimes causing a dilemma between whether to remain loyal to a long-term client, or to avoid going down with the ship.

Here's some advice to follow when you conduct client due diligence:

* Identify risky clients sooner, not later. Don't do this by yourself. Enlist the help of one or more senior partners to evaluate your clients. Know your clients' situations and make sure that they are getting good advice. Triage your client base to address the riskiest clients first.

* Take an active role in problem-solving. It's much easier to deal with trouble ahead of time than after the fact, and if you're able to help a client through a difficult period, it can cement your relationship.

* Advise and warn. Don't allow yourself or your firm to be placed in the position of having failed to communicate or offer services that would have prevented a problem. And make sure you document that communication. A passive, hopeful approach doesn't work and leaves you exposed to litigation.

* Increase communications. Arrange face-to-face or on-site meetings with clients you've identified as being at risk. Take the opportunity for personal observation whenever possible. Consider publishing client alerts and other communications. Let them know that you are there to help.

* Don't go along with requests that skirt the truth. A common and serious error that CPAs make is to go along with clients on actions designed to satisfy creditors. An example is overvaluation of inventory or assets: It may look good to the bank but could result in a material misstatement.

* Take extra care with new engagements. New clients need to be thoroughly checked out before you accept the engagement. Why are they coming to you? What happened in their previous engagement? Is the corporate or entity structure transparent? If these questions can't be answered or are answered vaguely, resist the desire to engage them. Also, as a defensive measure, consider sharpening your engagement agreement language to more clearly reflect your duties and your client's.

Now is the time to examine your clientele to determine which are being affected by the recession. Otherwise, you may risk losing your reputation and your own financial security from a disastrous engagement.

Ric Rosario, CPA, CFE, is chief executive of Camico Mutual Insurance Co.

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