Engagement Letter Essentials Can Help CPA Firms
by Suzanne M. Holl, CPA, CAMICO –
October 5, 2017
Engagement letters help CPA firms improve communication with clients, document engagements more effectively, and protect the firm from litigation. Letters should be as detailed as possible in describing the nature and extent of the services that the firm is being retained to perform, as well as the services that the firm is not being retained to perform.
Similarly, engagement letters should be as detailed as possible regarding the client’s responsibilities and obligations that will facilitate the engagement (e.g., providing necessary documents and accurate information in a timely manner).
The following guidelines of do’s and don’ts are provided to assist you in writing effective engagement letters.
Engagement Letters Should:
- State the purpose of the engagement.
- Define the scope and limits of the engagement (specifically what the firm will and won’t do).
- Specify known negative conditions or adverse situations.
- Note client instructions, responsibilities, deliverables and dates.
- Note reliance on facts provided by the client.
- Outline terms of fee collections and the consequences of late payment.
- Include a stop-work clause.
- Indicate the firm’s record retention policy.
- Include third-party service provider language, if applicable.
- Confirm client’s acknowledgement to the terms of the agreement and request client’s signature.
- Include warnings regarding inadequate internal controls.
- Explain limitations regarding financial statement distribution.
- Include alternative dispute resolution language (i.e., mediation for all disputes, and an arbitration clause for fee disputes only).
- Efficacy of limitation of liability clauses.
Engagement Letters Should Not Include:
Additional Areas to Consider:
- Limit the use of unilateral language to lower-risk engagements (signed engagement letters are always the strongest “first line of defense.”)
- Avoid evergreen letters – update letters annually to reflect changes in the scope of the engagement.
- Avoid usurious interest charges. Instead, assess a “late fee” for unpaid balances.
General Engagement Letter Tips:
- Every engagement letter should include the full or exact name of the client, entity type, specific state names and tax years for tax engagements, and purpose of engagement.
- Review the letter with the client and get agreement regarding the terms and conditions before beginning the work.
- Update engagement letters at least once per year.
- Update engagement letters whenever engagements change.
The best way to improve client communications and manage risk is to use a detailed engagement letter that the client understands and signs. A well-documented engagement, and a strong defense, begin with an effective engagement letter.
Suzanne M. Holl
Suzanne M. Holl, CPA, is senior vice president of loss prevention services with CAMICO (www.camico.com). With more than 28 years of experience in accounting, she draws on her Big Four public accounting and private industry background to provide CAMICO’s policyholders with information on a wide variety of loss prevention and accounting issues.
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Reprinted with permission from CAMICO. Copyright © 2018. All rights reserved.