You and your staff are relied upon as “experts,” however working without written engagement agreements can put your business on the wrong end of a client dispute.
Since the IRS has put more responsibilities on tax preparers and accountants, most are now using engagement letters, even with long-term clients.
It’s easy to store those forms away and forget what agreed-to services they contained, but you may need to review them each year and consider revisions if you’re providing a new or special service that wasn’t addressed in the initial engagement agreement.
A well-crafted engagement letter can be a primary tool for managing risk, in order to avoid and defend malpractice claims. A proper engagement letter will precisely define your professional obligations to a client. In so doing, it will also discourage a client from asserting a meritless claim, and it will form the basis for a dismissal of a meritless lawsuit against you. Conversely, the lack of an engagement letter may result in a confused or unhappy client, and may set the stage for meritless and possible protracted litigation.
NSA Encourages You to Use an Engagement Agreement
Especially nowadays with so many IRS changes and you and your staff being relied upon as “experts,” working without written engagement agreements can put your business on the wrong end of a dispute with a client over their expectations. Clients may assume that you are automatically making applicable adjustments resulting from new IRS rules, but they don’t always disclose circumstances in their lives or businesses that might warrant revisions.
Even though you’re likely discussing needed changes, not documenting the services you agreed to perform could leave you defending a “he said, she said” scenario in a lawsuit. NSA members can download sample engagement letters to find several verbiage suggestions.
Consider a Written Confirmation Supplement
If you perform a one-time service or revision for a client, such as making an accounting or tax status method modification, it usually isn’t efficient to create a revised engagement agreement. Still, it’s prudent to have those agreed-to changes acknowledged in writing by the client in order to protect yourself in the future. If your client becomes mentally ill, dies, or sells the business, you may end up dealing with the client’s guardian, heirs or new owners.
A common type of errors & omissions claim against tax preparers and accountants involves future parties challenging whether the client was “in his right mind” or alleging that the client was misdirected or unaware about making a change to a method.
Without having to call a formal sit-down meeting to sign a new agreement, consider as a “supplement” to your engagement an email exchange with your client that acts as a way of you both acknowledging a change. It can be informal and chatty, while stating what you discussed and why (and comments, if your recommendation differed from their wishes). But it should also ask for a confirmation of agreement. You might add something like this: “Please reply and confirm that you agree with this change, or let me know if you have further questions.”
At the very least, document each conversation about changes with a date and time, and retain it in the file. Such documentation is valuable protection in the event of a claim, even if you choose not to use written agreements or confirmations.
Prepare a tailored engagement letter for every engagement
To help you prepare the proper engagement letter, we have gathered relevant information and model engagement letter provisions for you review. Tailor them for your specific requirements. Download your guide to help you create effective engagement letters .
Quick links to engagement letters and resources:
If you have the NSA Accountants Professional Liability Plan, it includes network and information security offense protection covering: (1) claims for the transmission of computer viruses; (2) claims for failure to control access to the insured’s computer or network; and (3) failure to prevent unauthorized access to, or use of, data containing confidential information of others. For details on the NSA-endorsed Accountants Professional Liability Plan visit www.ftj.com/nsa or contact plan administrator Forrest T. Jones & Company at 800-821-7303. Flexible limits, premium installment options, and deductibles let you customize coverage to fit your practice.
- Sample Engagement Letter for Audit
- Sample Engagement Letter for Compilation
- Sample Engagement Letter for Tax Preparation
- Sample Engagement Letter for Bookkeeping
- Sample Engagement Letter for Estate Planning
- Sample Engagement Letter for Litigation Support
- Sample Engagement Letter for the Attest Service Known as a Review
- Engagement Letter Matrix: General Topics to Address and include in Engagement Letters
Download from NSA MemberConnect.
An engagement agreement is your opportunity to come to a formal understanding with your client regarding the scope of the engagement, as well as your opportunity to have the client agree, in writing, that he or she is explicitly aware of the limitations of the engagement.
In litigation, cases often come down to believability of witnesses based upon alleged oral conversations that occurred between the parties. An engagement agreement executed by the client is an important piece of evidence that may contradict what the client could later claim was stated in oral conversations with the accountant.
Always prepare an engagement letter that spells out what services are to be performed and what your fees and expenses are likely to be. It is also beneficial to describe what services you will not perform, as doing so will help protect you from a lawsuit based on services outside the scope of your engagement. Some engagements, such as audits, require that your client sign an engagement letter before you begin providing services while other engagements, such as tax engagements, do not require that your client sign an engagement letter. However, it is still the best practice to have one for every engagement.
Different types of engagements require different engagement letter provisions. For example, the content of a tax return engagement letter will be different from that of an attest services (an audit, review, or compilation) engagement letter. Likewise, consulting services engagement letters will again require language specifically tailored to the services you’re being retained to perform.
Some important provisions to place in an engagement agreement include:
- A specific and detailed outline of the scope of services agreed to between the parties. You should also include a provision that the scope of services to be provided under the engagement may only be amended under a separate written agreement.
- A list of the limitations under the engagement. For example, a client may assume in a business tax engagement that the engagement is supposed to identify employee theft. Your business tax engagement letter should inform the client that the engagement cannot be relied upon to disclose errors, fraud or illegal acts including employee embezzlement or other fraudulent activities.
- A statement informing the client that the accountant in a tax engagement is relying upon the accuracy of the information reported by third parties. The engagement agreement should include a provision that acknowledges that the accountant has not been retained to, and will not, conduct analysis or an investigation into the truthfulness or accuracy of the information reported by third parties.
- A dispute resolution provision. You may want to have the client agree that any dispute under the engagement be resolved through arbitration, or litigated in a specific jurisdiction that is favorable to the accountant.
It is important that you do not act contrary to the terms of the engagement agreement, since you could later be deemed to have assumed duties and obligations to the client that were not owed under the agreement. Finally, it is important that the client signs the engagement agreement and that you maintain a copy of the fully executed agreement.
When considering engagement letters, remember to:
- Comply with the applicable standards
- Inform your clients
- Limit your risk
- Draft an engagement letter for every engagement
- Consult with your attorney
About the Authors:
Ronda Jones is a Property & Casualty Business Coordinator for Forrest T. Jones & Company (FTJ). She has 30 years’ experience working in professional/E&O coverage lines as an underwriter, broker and in claims administration for a law firm. She has worked with products geared specifically for accountants for 15 years while at FTJ.
Randy Heaster writes about insurance and financial services for Forrest T. Jones & Company, which administers NSA’s member insurance program. Randy has written about business and consumer issues for more than 20 years.