By Ronald C. Parisi, CPA, J.D.
When the familiar faces of your client have been replaced with new management or, worse, a bankruptcy trustee, the only documented understanding with your client will be contained in the engagement letter. By setting out the understanding, you minimize your chances of facing litigation, because the engagement letter will leave little or no room for misunderstanding—a common reason for lawsuits.
If you do find yourself in the middle of a lawsuit, the engagement letter will then serve as documented evidence of the duties your firm was to perform. A well-constructed engagement letter also provides an opportunity to explore other potential business with your client. Down the road, your client may seek additional services that are outside the engagement letter parameters. Upon mutual agreement to the additional services, amend the original engagement letter to include additional services and additional fees.
If you want to reduce your risk and your firm’s risk, then utilize engagement letters that clearly define roles and responsibilities. Without clear definitions, there is no such thing as a routine engagement.
Follow these expert tips now and avoid expert testimony later.
- Start with a strong and focused introduction, and avoid marketing language or superfluous information about the firm and its services.
- Clearly define the scope of the engagement (specifically, what you will and won’t do). Avoid all-encompassing language and instead use limiting language.
- For non-attest financial statement work, detail what is not included in the services.
- Define the client’s responsibilities, such as condition of work product, deliverables, and due dates.
- State that the firm will be relying on the information provided by the client.
- Insert your record retention policy in every engagement letter.
- Clearly state your fee structure (e.g., retainer, progressive billing) and consequences of late payment or failure to pay.
- Include a stop-work clause in every engagement letter.
- If you are outsourcing any part of the work, address the issue and inform the client.
- Include limitation of liability language (if appropriate).
- Include a mediation clause (seek assistance from CAMICO or local counsel).
- If required by your policy, and/or if desired, consider including arbitration language for fee disputes only.
- In the closing, emphasize that this is a mutual understanding of the services being provided.
- Require the client to return the signed engagement letter before work begins. Include a due date by which the client is to return the letter, so that work can commence.
- As the engagement expands or contracts from the original agreement, amend the document with an new engagement letter and have the client re-sign. This avoids what is commonly called engagement creep.
- Do not include any marketing information; defer promotional information and other forms of marketing to other documents. Your engagement letter should be viewed as a contract and composed accordingly.
- Do not use all-encompassing language; avoid absolutes, superlatives, and words that expand rather than limit your responsibilities. Because an engagement letter limits the scope of your work, stay away from words that expand, rather than contract, your responsibility.
- Do not use legal jargon or ambiguity. Make your engagement letter easy for your client to understand. Don’t use abbreviations or words only a CPA would understand.
- Do not use “evergreen” engagement letters. These letters are rarely admissible in court because they are outdated and no longer reflect the actual scope of the services being provided. We strongly recommend that engagement letters be updated and signed every year. Ongoing engagements that extend into new fiscal or calendar years require new engagement letters. Suggestion: For individual tax clients, include engagement letters in your annual organizer.
In summary, use detailed engagement letters for all engagements and amend them as necessary.
Ronald C. Parisi, CPA, J.D., is executive vice president of risk management for CAMICO (www.camico.com). In that capacity he is responsible for executive oversight of the company’s underwriting and claims functions.
The tax-related articles and sample engagement letters in this CAMICO Resource Pack are designed to help you gain a better understanding of tax engagement risks. Also included are loss prevention tips and advice to help reduce those risks. Download today.