The increasing number of malpractices in industries over the years has made it important for owners to set up a wide range of defensive procedures as a usual practice for their company. One of these practices is a client screening process. This process is aimed at identifying those types of clients who cause a risk to the company by engaging in malpractices. An effective process of client screening can massively reduce the chances of a malpractice claim, which results in a liability to the company. This forces the company to be more acquainted with the risks that are connected with their past and current clientele.
Client screening is a process that assists you to be confident that you are not hiring an unethical or corrupt client for your company. This ensures that no conflicts are there to represent the client, and that there will not be a delay in your company providing services. Additionally, client screening helps make the first meeting efficient and allows you to be sure that you are offering your services or products to the right person or company. So, before meeting a client or offering them with any services, it is advised that you do a proper background check on them and understand if they are genuine or not.
Why is client screening and assessment important?
It is important to conduct a background check for many reasons, some of which involve exposure to lawsuits, unpaid clients, and even stress due to the type of client. If you have an effective client screening process, these risks can be avoided. Setting and implementing a formal screening process is the most effective way. Through research and gathering information from various sources, you can get to know the client starting from a meeting, and figure out what they expect from you. Various sources of gathering information can be by reviewing the past reports of the client, conducting formal background checks, interviewing their key staff, and so on. All this contributes to the evaluation of the client.
This helps assure you that the client in question came to you for the right reasons and that they require your professional skill set to assist in improving their business. If you don’t conduct screening, you will end up inheriting risks that might lead to losses in your company. Some of the red flag issues may be:
- High risk industry and regulatory environment
- Lack of staff competence & internal controls
- The management team quality
- The reliance on third party work product (such as outside lenders or investors)
- Transactions with related organisations on reliance or a single large client for income
- Long term profitability and unrealistic performance goals
The early assessment of a client helps you understand the risks of engagement with the potential client better. Also you can determine if your expertise will help add value to the client. To determine this, you can also use an evaluation checklist as it is a useful tool. To assist you in avoiding lawsuits, adding a provision for the limitation of liability to the engagement letter might help, also to cut the expense and time of a lawsuit a meditation clause can be included. Furthermore, if you assign your most skilled staff to deal with an engagement by carefully documenting everything, it will reduce the risk of loss drastically.
When to Screen Potential and Existing Clients?
To create an effective client screening process, it is essential to decide how to screen for risks that associate with malpractices for a current or potential client. Nevertheless, every industry and company needs to adopt screening to make things better for their company and avoid any risks. They should take detailed acceptance policies and client background to check all their potential clients concerning the malpractices risks before they decide to accept the deal.
A company’s financial position and strength can change rapidly in regard to an existing client. This is why screening of existing clients should be taken on a half-year or annual basis. The company should set up a procedure through which all existing clients should be regularly screened for any risk that might come up. Additionally, evaluating the risks that are associated with malpractices requires a regular procedure for screening. This will also help the accountant to better serve the client as he will have a deeper knowledge of the client’s needs and will be able to provide better services.
Background Check on New Clients
Background checks on potential clients can be time consuming, which is why it is essential that you are strategic at this point with your approach. Every situation is unique to the client, but one general rule to follow is that with time, you should research the client more in depth as you plan to invest more resources into the client.
However once the deal is signed, to make sure the contract is going accordingly, and regular comprehensive checks are essential. The goal of screening is to make sure that the client is who they say they are, to confirm the sign that is authorised by the company, and to confirm that the client is doing real and legal business. With this information in hand, you can comfortably start the project as there is legal protection within the contract.
How to do a background check on clients?
To help you understand the process of doing a background check on clients, we have shared the steps involved below:
#1 Confirm the client’s identity
- The official name of the company needs to exist in the corporate records of the region or state.
- On behalf of a real company, a signatory signs the papers and is listed as the principal of the business.
Always remember that an incorporated business entity is an individual entity, it is separate from any group of people or person. In the Secretary of State within which they are conducting business activities, the company needs to be registered and in the company’s corporate filings the principals must be listed. However exceptions do apply in certain situations, but corporate law is complex. The main thing to remember is that the company’s records should always be in the Secretary of State website.
Generally these corporate records are available online for free, all you need to do is search for it on the Secretary of State’s website. This will lead you to the records section. After confirming that the name of the entity exists and the signatory has the power to sign contracts, you need to gather more information about the company. Learn about the client before investing.
#2 Check the client’s background
Large companies have a large number of clients. And handling such a large client base might be difficult. Without checking the background of the client, things can get bad for the company. This is why you need to assess the risk and decide if the client is worth your products/services or not. You also need to be sure that the client has the money to pay you (mostly if the product or service that you are offering is expensive). Here are some places that can help you get the credit report of a client:
- Consolidated information sources
- Credit reporting companies
- Specialized consultants in screening company backgrounds
- Information bureaus & corporate credit
After you reach a level at which you are comfortable with the client’s information knowing that you are going to get paid, you can go ahead and move with higher confidence. Until you reach this place of satisfaction, you will have to keep searching and digging information about the client’s company. Also, do not just check their credit report, but everything else that is important to know that the client is the right one.
With the information you got from the Secretary of State website, you can get creative and search about press meets, releases, court records, media mentions, etc related to the client on Google by using the principals names listed.
#3 Leverage the information you found
Regarding your potential client, you might have gathered a fair amount of information at this stage. This is the time to make decisions based on the information you pulled together. If you found little to no information about the entity, it could be a new company, but it may also be a fake company lying about their identity. Here you will have to make a judgement call on how you will go ahead. Finally, while gathering any information, look out for the slightest suspicion you might have on the company and inquire about it till you are satisfied otherwise. With the high level of information you gathered, use your judgement and make a final decision.
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