Buckle Up: The Importance of Engagement Letters
Imagine that you're leaving home to head to the office or a client site, or maybe you're just running out quickly to get a gallon of milk. You get in the car. What's the first thing you do before shifting into reverse and backing out of the driveway? You likely put on a seat belt. If you get into an accident, regardless of who is at fault, that seat belt could help prevent serious injury. Just as a seat belt helps mitigate the risk of bodily injury, using a well-crafted engagement letter may help mitigate the risk of a professional liability claim. The value and importance of engagement letters have been espoused by many. Some professional liability insurers even provide incentives such as premium credits to customers who use engagement letters. Nevertheless, in more than one-third of all professional liability claims asserted in 2013 against CPA firms in the AICPA Professional Liability Insurance Program, there was no related engagement letter. In claims arising from tax engagements, this percentage increased to nearly 50%. These claims are more difficult to defend against if the practitioner did not use an engagement letter. If your firm has never used engagement letters or perhaps has not implemented them consistently, where do you start? Here are some tips to help increase the efficiency and effectiveness of this critical tool. VIEW ENGAGEMENT LETTERS AS A TOOL, NOT A BURDEN At the beginning of the client relationship, you probably discussed the client's needs, the services to be provided, and what the client expected to receive from the firm. Rather than viewing an engagement letter as an administrative hassle or a non-value-added activity, consider it a tool that helps memorialize client discussions and manage expectations. This leaves more time for delivering billable services and means less time will be spent resolving misunderstandings related to scope of services or fees. The result is a win-win for the client and the CPA. CREATE TEMPLATES AND LEVERAGE EXAMPLES TO GAIN EFFICIENCIES While there is no one-size-fits-all engagement letter, it's likely that 90% of engagement letter content will apply to all clients. Create engagement letter templates for each service the firm provides. These templates can then be tailored to specific client needs and circumstances to address the remaining 10%. Common engagement letter components for all services include: * Scope of services. Clearly delineate the services included in the engagement. The description should be clear and include sufficient details to avoid misunderstanding or misinterpretation. * Professional standards by which the engagement will be governed. Referring to the appropriate professional standards helps define the CPA's professional responsibilities. * Deliverable or work product. Even if the work product appears obvious (such as a completed income tax return in a tax compliance engagement), it is important to clearly define the work product to help avoid disagreements. Any restrictions on the use or distribution of the deliverable should also be articulated in the engagement letter. * Limitations of services. Describe applicable limitations to the service. For example, most engagement letters should include a statement regarding the CPA's responsibility, or lack thereof, to detect and report on evidence of possible theft or fraud. * CPA firm and management responsibilities. A CPA's responsibilities are typically limited to the performance of services described in the engagement letter. A client has business operation and oversight responsibilities, including responsibility for making management decisions and performing other management functions. Update the templates at least annually, or as necessary, to address changes in applicable statutes and regulations. The firm's attorney should review the engagement letters to ensure their provisions are enforceable in the applicable jurisdiction. …