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New Client Investigation Before accepting a new client, most CPA firms investigate the company to determine its acceptability.Many of these businesses fail financially and expose the CPA firm to significant potential liability.

New Client Investigation Before accepting a new client, most CPA firms investigate the company to determine its acceptability. They do this by examining, to the extent possible, the prospective client's standing in the business community, financial stability, and relations with its previous CPA firm. For example, many CPA firms use considerable caution in accepting new clients in newly formed, rapidly growing busi-nesses. Many of these businesses fail financially and expose the CPA firm to significant potential liability. The CPA firm must also determine that it has the competency, such as industry knowledge, to accept the engagement and that the firm can satisfy all independence requirements.
For prospective clients that have previously been audited by another CPA firm, the new (successor) auditor is required by auditing standards to communicate with the predecessor auditor. The purpose of the requirement is to help the successor auditor evaluate whether to accept the engagement. The communication may, for example, inform the successor auditor that the client lacks integrity or that there have been disputes over accounting principles, audit procedures, or fees.
The burden of initiating the communication rests with the successor auditor, but the predecessor auditor is required to respond to the request for information.
However, the confidentiality requirement in the Code of Professional Conduct requires that the predecessor auditor obtain permission from the client before the communication can be made. In the event of unusual circumstances such as legal problems or disputes between the client and the predecessor, the predecessor's response can be limited to stating that no information will be provided. If a client will not permit the communication or the predecessor will not provide a comprehensive response, the successor should seriously consider the desirability of accepting a prospective engage-ment, without considerable other investigation.
Even when a prospective client has been audited by another CPA firm, a successor may make other investigations by gathering information from local attorneys, other CPAs, banks, and other businesses. In some cases, the auditor may even hire a professional investigator to obtain information about the reputation and background of key members of management. Such extensive investigation is appropriate when there has been no previous auditor, when a predecessor auditor will not provide the desired information, or if any indication of problems arises from the communication.
AICPA auditing standards also require that the auditor determine whether the financial reporting framework to be used by management to prepare the financial statements is appropriate. Without an appropriate financial reporting framework, the auditor does not have suitable criteria for auditing the financial statements.
In making that determination, the auditor considers the nature of the entity, the purpose and nature of the financial statements, and whether laws or regulations prescribe a particular framework. Common financial reporting frameworks include U.S. generally accepted accounting principles and international financial reporting standards (IFRS).