Accounts receivable for CPA firms covers the firm's own fees: the time recorded as work in progress (WIP), the invoices that follow, and the cash that eventually arrives. Most of the improvement comes from billing sooner, setting payment terms in the engagement letter, taking retainers on predictable work, and knowing what the AICPA Code lets a firm do when a client stops paying.
This guide covers accounts receivable for CPA firms from the inside: how WIP turns into cash, which billing terms belong in the engagement letter, how retainers work, what the Code of Professional Conduct says about records requests and unpaid fees, and how to measure lockup with a worked example. If you are looking for AR help for a small business client, our guide to accounts receivable services for small businesses covers that side.
A CPA firm's receivable starts long before an invoice exists. Staff record time against an engagement, the time sits as WIP until a partner reviews it, and only then does a bill go out. A tax return finished in March can sit in WIP until the partner clears the review queue in May, and the 30-day payment clock starts after that.
Three features make firm AR harder to manage than a typical trade receivable:
Measuring the whole cycle, from hours worked to cash in the bank, is the first fix.
The cash cycle for a professional firm has two stages. WIP days measure how long recorded work waits before it is billed. AR days (debtor days) measure how long billed work waits before it is paid. Lockup is the sum of the two.
Each stage has its own causes:
WIP stage delays. Time entered late, engagements billed only at completion, partner review backlogs, and write-down debates that stall an invoice for weeks. Progress billing on long engagements and a fixed weekly billing day shorten this stage.
AR stage delays. Vague payment terms, invoices sent to the wrong contact, no automated reminders, and clients who pay only when the next return is due. Online payment links, card and ACH options inside the client portal, and a written reminder cadence shorten this stage.
Most practice management software can report WIP and AR aging by client and partner. If your system cannot, a monthly export of unbilled time and open invoices is enough to start measuring.
The engagement letter is where collection starts. A client who signed clear payment terms is easier to follow up with than one who never saw them. Our accounting engagement letter guide covers the full letter. For AR purposes, these clauses do most of the work:
| Clause | What it says | Why it matters for AR |
|---|---|---|
| Fee basis | Fixed fee, hourly rates, or a mix, with the scope each covers | Removes the most common reason clients dispute an invoice |
| Billing schedule | Monthly, at milestones, or on delivery | Moves work out of WIP on a set timetable |
| Payment terms | Due date (for example, on receipt or within 30 days) and accepted payment methods | Gives follow-up a fixed date to work from |
| Retainer or deposit | Amount due before work starts and how it is applied | Reduces exposure on new or higher-risk clients |
| Late payment | Any late charge the firm applies, subject to state law | Sets expectations in writing before a balance ages |
| Suspension of work | The firm may pause work while fees are overdue | Lets the firm stop adding to an unpaid balance |
| Records and work product | How records are returned and when deliverables may be held | Matches the AICPA records request rules covered below |
| Dispute resolution | Mediation or arbitration for fee disputes | Gives both sides a route other than court |
Late charges and interest are governed by state law, so have counsel confirm the wording for each state where the firm bills clients. The firm's fee model also shapes the schedule: firms moving to fixed fees can bill monthly in advance, which our CPA firm pricing strategy guide discusses in more detail.
A retainer is a payment collected before the work starts. It removes part of the receivable before it exists and shows early whether a new client pays on time.
Common patterns include:
Write down how the retainer is applied and when any unused amount is refunded. Retainers also fit naturally into a CPA firm client onboarding process, since the first payment can be collected with the signed letter.
On the tax side, the timing of income depends on the firm's accounting method. A cash-method firm reports a retainer when it is received. An accrual-method firm should confirm the treatment of advance payments with its own tax adviser.
A firm chasing its own fees is still bound by the AICPA Code of Professional Conduct and, for tax work, by Treasury Circular 230.
The "Records Requests" interpretation (ET 1.400.200) sorts records into categories and sets different rules for each. The AICPA Code of Professional Conduct states that, for client-provided records, the member "may charge a reasonable fee for the time and expense incurred to retrieve, copy, and ship such records; however, the client-provided records may not be withheld for nonpayment of such fees."
Each category has its own rule:
The Code sets a deadline: absent extenuating circumstances, records must be made available "no later than 45 days after the request is made." It also states that a state statute granting the member a lien on records "does not relieve the member" of the obligation, and that a state board rule which is more restrictive overrides the Code's permission to withhold. Failing to comply is a violation of the Acts Discreditable Rule.
In practice, a firm can hold a finished return for the unpaid fee on that return, but never a client's own documents.
Tax practitioners also follow 31 CFR 10.28, which requires a practitioner to "promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations." The regulation adds: "The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section." Where state law allows a firm to keep records during a fee dispute, the practitioner need only return records that must be attached to the return, but must still give the client reasonable access to review and copy the rest.
For audit, review and other attest clients, old receivables are an independence issue as well as a cash issue. The Code's "Unpaid Fees" interpretation (ET 1.230.010) says unpaid fees "include fees that are unbilled or a note receivable arising from such fees," so WIP counts. Threats are not at an acceptable level if, when the current-year attest report is issued, unpaid fees are "both significant to the covered member and relate to professional services provided more than one year prior to the issue date." Other combinations require judgment and possibly safeguards. Attest clients therefore need tighter monitoring than the rest of the aging report.
The Code allows an engagement letter to include alternative dispute resolution for disputes over past services (ET 1.228.030), though binding arbitration with an attest client may create an adverse interest threat. If a fee dispute reaches litigation or arbitration, the Confidential Client Information Rule "is not intended to prohibit a member from disclosing information necessary to initiate, pursue, or defend the member" in that proceeding (ET 1.700.070). Outside a proceeding, normal confidentiality applies, so collection messages should reveal no more than the invoice details.
Much of the AR cycle is production work: preparing invoices from approved time or fixed-fee schedules, sending reminders, applying payments, and building the weekly aging report. That work suits an outsourced team working inside the firm's own practice management and billing systems, so there is one set of records.
Partners should keep decisions that depend on the relationship or on professional judgment:
A hold list pauses follow-up on any invoice under dispute or pending adjustment until the partner clears it. Reminder templates should be partner-approved and sent in the firm's name.
Before any client data reaches an outside provider, the Code asks the firm to act. Under ET 1.700.040, the firm should either have a contract requiring the provider to keep the information confidential, with reasonable assurance that its procedures prevent unauthorized release, or obtain the client's specific consent. ET 1.150.040 adds that the firm should inform the client, preferably in writing, that it may use a third-party service provider. Our accounting outsourcing contract template lists the confidentiality terms to include.
Tax clients raise a separate question under Section 7216. The regulations allow a preparer to use and disclose, without written consent, tax return information the taxpayer provides to pay for tax preparation services "to the extent necessary to process or collect the payment" (26 CFR 301.7216-2(l)). Sharing other return information with an outside provider needs its own review, which our vendor risk assessment for accounting firms guide covers.
Lockup converts WIP and AR balances into days of fees. The formulas are:
Some firms divide AR by billed revenue instead. Use one method every month so the trend is comparable.
Consider an illustrative firm with $3,000,000 of annual fee revenue, $370,000 of unbilled WIP and $520,000 of open invoices at year end. The firm sets a target of 25 WIP days and 45 AR days.
| Measure | Current | Target | Cash released |
|---|---|---|---|
| Daily fees ($3,000,000 / 365) | $8,219 | $8,219 | |
| WIP balance | $370,000 | $205,479 | $164,521 |
| WIP days | 45.0 | 25.0 | |
| AR balance | $520,000 | $369,863 | $150,137 |
| AR days | 63.3 | 45.0 | |
| Lockup days | 108.3 | 70.0 | $314,658 |
Reaching the target frees $314,658, about 38.3 days of fees, without adding a single new client. Each day of lockup removed is worth about $8,219 to this firm. The split also shows where to work first: WIP accounts for more of the gap than AR, so faster partner review and progress billing would release more cash here than tighter reminders. The figures are illustrative and the targets are the firm's own choice, since no official benchmark for lockup exists.
Lockup belongs on the managing partner's monthly dashboard alongside realization and utilization. Our list of accounting firm KPIs shows how it fits with other practice metrics, and the fractional CFO for professional services firms guide explains how WIP and lockup connect to partner pay and cash planning.
When a balance is finally written off, the tax effect depends on the firm's accounting method. The IRS bad debt guidance states: "If you're a cash method taxpayer (most individuals are), you generally can't take a bad debt deduction for unpaid salaries, wages, rents, fees, interests, dividends, and similar items of taxable income." A cash-method firm never reported the unpaid fee as income, so there is nothing to deduct. An accrual-method firm that included the fee in income may be able to deduct it as a business bad debt once it becomes worthless.
Can a CPA firm hold a tax return until the client pays? Under ET 1.400.200, a firm may withhold a member's work product, such as a tax return, if fees are due for that specific work product. It may not withhold client-provided records for unpaid fees, and state board rules can be stricter than the Code, so check your state before relying on this.
How long does a CPA firm have to respond to a records request? The AICPA Code says the firm should comply as soon as practicable but, absent extenuating circumstances, no later than 45 days after the request. Tax practitioners must also return records "promptly" under Circular 230 section 10.28.
Do unbilled fees count for independence purposes? Yes. The Code's unpaid fees interpretation includes fees that are unbilled, so WIP on an attest client counts. Significant fees for services provided more than one year before the current-year report date put independence at risk.
Can an outsourced team send collection reminders in the firm's name? Yes, if partners approve the templates and the firm meets the Code's third-party provider rules on client notice and confidentiality. Disputes, payment plans and attest client balances should go to a partner.
Madras Accountancy supports US CPA firms with outsourced accounting work, including billing preparation, payment follow-up and AR reporting inside the firm's own systems, with partners keeping approval of invoices and client decisions. To discuss how this could work for your firm, contact our team.
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