Signed engagement letters help CPA firms improve communication with clients and protect the firm from litigation as “the first line of defense.” Use the following tips to help you write more effective engagement letters.
Engagement letters should…
• State the purpose of the engagement.
• Define the scope and limits of the engagement.
• Specify known negative conditions or adverse situations.
• Include 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.
• Include alternative dispute resolution language (i.e., mediation for all disputes and an arbitration clause for fee disputes only).
• Confirm client’s acknowledgment to the terms of the agreement and request client’s signature.
Additional considerations
• Include protective language on traditional tax and financial statement engagement letters that specifically disclaim the firm’s involvement with assisting client with compliance under the Corporate Transparency Act. CAMICO recommends that any such CTA related services be covered under a separate standalone CTA engagement letter.
• Specify the client’s responsibility for the adequacy of a system of internal control.
• If applicable, explain limitations regarding financial statement distribution.
• Evaluate the appropriateness and efficacy of including limitation of liability clauses.
Engagement letters should not include…
• Marketing information. The engagement letter should be viewed and composed as a contract.
• All-encompassing language. Limit the scope of your firm’s work by avoiding superlatives and absolutes such as all, every, any, complete, confirm, totally, validate and verify.
• Legal jargon or ambiguity. Don’t use abbreviations or words only a CPA would understand. Any ambiguity will most likely be decided in the client’s favor in a court of law.
Additional tips
• Avoid evergreen letters — update letters annually to reflect changes in the scope of the engagement.
• Update engagement letters whenever engagements change.
• Avoid usurious interest charges. Instead, assess a “late fee” for unpaid balances.
• For tax engagements, include the full or exact name of the client, entity type, specific state name(s) and tax year(s), and purpose of the engagement.
Save yourself time and energy by using the letters specially crafted for CPA firms by CAMICO experts.
As seen above, a clear, comprehensive engagement letter is one of your best safeguards against future disputes. CAMICO offers policyholders with Professional Liability Insurance access to engagement letter review services. CAMICO’s internal Loss Prevention Specialists are happy to review and comment on your drafted engagement letters – at no cost. Furthermore, CAMICO has 150+ sample engagement and disengagement letter templates available on its Members-Only Site. CAMICO experts designed these sample letters to be clear and understandable for clients, provide appropriate documentation for you, and effectively outline the scope of your work.
