Mixing business with friendship is fraught with pitfalls. This is true particularly for professionals, because they are prone to disregard formalities and fail to document and define the scope of their services when dealing with friends.
Identifying the common mistakes can help you preserve your professional standing. And, more importantly, it can preserve your friendships in the face of what otherwise might be compromising circumstances. You should heed the tips discussed in this article if you are employed by an accounting firm, law office, financial institution or other business where your clients place their economic interests in your hands.
Take a moment to imagine yourself in the following real-life situation: Your phone line rings. The managing partner of your company needs to see you. A close friend and client (we'll call him Paul) has just filed a lawsuit against your employer and you. Your co-defendants are Paul's lawyer, his sports agent and his investment adviser.
Paul is asserting claims ranging from breach of fiduciary duty to fraud. He alleges millions of dollars of his money cannot be accounted for or are missing from his bank accounts and investment vehicles. Naturally, Paul's lawyer pursues claims against every professional who handled Paul's money, including you.
What went wrong?
You, along with your three chums (the lawyer, sports agent and investment adviser), met Paul in college before realizing any earning capacity. The potential was there, however, especially for Paul. It wasn't long before Paul was earning more money than he knew how to manage, with spending habits to go with it.
You offered to prepare tax returns and help Paul pay his regular monthly bills. Typically you did not provide bill-paying services for regular clients, but this was an exception. Your services and the trust Paul placed in you evolved to the point where most of his mail was sent to your office, including his credit card, mortgage loan and bank statements. Paul wanted you to have access to his bank accounts, including check-writing authority. He also wanted you to make his investment decisions, even though he had an investment adviser who made the trades. You did so for a fee, and you put some of your money with Paul's in the same projects. You spoke often with Paul's attorney and his sports agent on all legal matters, and you helped Paul every time he asked, even when it was outside your professional field. In short, you "had his back" and managed his finances as best you could.
Paul is nearing early retirement and has decided to assert control. You had encouraged Paul to focus on his finances for years. Now, he would like you to return the originals of all of his banking records, tax returns and receipts for years of expenses, and he has asked for an accounting. Essentially, Paul wants you to document where all of his money is, or where it went.
You didn't really control Paul's finances. Paul had joint access to all of his accounts. The two of you met every month for drinks and to go through his bills. He approved all nonroutine checks. There was no engagement letter to define your role, however. This relationship was as much social as professional.
Additionally, you no longer have all of Paul's records, making it extremely difficult to perform an accounting. Your office routinely destroys old records, and Paul's materials had been piling up for years. Many of these documents were sent to the shredder.
Can you spot the material mistakes in this scenario? You'd be surprised how often they actually happen.
First, you went outside your field of expertise. If you are a tax accountant, stick to what you do best. Don't open a bill-paying service, offer investment advice, obtain access to client accounts, act as a mail drop, or get involved with clients in your pet investment projects. Likewise, if you are a corporate attorney, don't do estate planning for friends, or handle that small personal injury case for a member of your church, or review land-use issues for your neighbors. Learn how to say "no" when asked. Better yet, make a referral.
Second, you facilitated sloppy practice by failing to define the scope of your services with a professional services contract. Don't make this mistake. Your friends need to see, in writing, the boundaries of what you have agreed to do for them, and you need to stick to it. If the scope of your services evolves or expands, revise your engagement letter accordingly. Also, in case something goes wrong, you will need a contract defining your respective rights and responsibilities, just as you would for any other client.
Third, don't mix alcohol with business. Just imagine what Paul's lawyer will allege once he hears that your practice was to supply the Patron whenever you and Paul met to review his bills and accounts. That mistake could be painful.
Fourth, your office destroyed many of Paul's documents without written consent. Sure, perhaps Paul trusted you to make such decisions, or maybe your office followed standard protocol in a document retention policy. But the fact of the matter is that those documents may not have been yours to destroy. As Paul's mail drop, you were holding original records that belonged to him. Be careful what you destroy, even if it is taking up space. Better yet, send a letter to the client offering to return the materials or, alternatively, seeking permission to destroy the files.
It's easier than you think to tell friends and family that you cannot avoid formalities. Just make it a habit. If necessary, blame it on firm policy or your cranky managing partner. In every case, make sure you prepare an engagement letter limiting and defining your scope of work and responsibilities. Don't go outside your field of expertise for friends. Don't mix business with alcohol. And don't flippantly destroy client files. Failing to heed these tips will someday give you (or your lawyer) unexpected problems.
This article appeared in the Portland Business Journal on December 14, 2007, and in the March/April 2008 issue of The Oregon Certified Public Accountant.