Engagement letters should be used for all engagements including tax returns and non-attest financial statement engagements. The primary objective of a well-crafted engagement letter is to make the engagement easy for your client to understand. By documenting the understanding with each client in the engagement letter you minimize a common reason for litigation. If litigation is initiated the engagement letter will serve as documented evidence of the duties your firm agreed to perform.
If you want to reduce your firm’s risk, utilize engagement letters that clearly define roles and responsibilities. An effective engagement letter limits the scope of work to be performed. By stating what is not being performed the agreement will provide an opportunity to explore other potential business with your client. If your client needs these additional services that are outside the engagement letter parameters, amend the original engagement letter to include additional services and additional fees.
“Apart from a legal perspective, the firm should keep the business perspective in mind and ask the question ‘does this make it easier to contract and do business with my client?’” advised Scott Remington, the tax practice leader of Grant Thornton's Denver office. “We suggest a ‘Statement of Work’ format for engagement letters as an alternative to issuing new letters/terms annually that have to be renegotiated, etc. Using the ‘Statement of Work’ format can also be more efficient than amending prior engagement letters when there is a change in scope.”
While the following list is not all-inclusive and does not represent legal advice, it does represent ideas from professional liability insurance companies who are in the business of limiting your risk from litigation.
Compose the engagement letter as a contract of mutual understanding of the services being provided.
State that the firm will be relying on the information provided by the client.
Clearly define specifically what your firm will and will not do.
Use limiting language that reduces your firm’s responsibility.
Detail what is not included in the services.
Define the client’s responsibilities.
Define deliverables, and due dates.
Inform the client if your firm will be outsourcing any part of the work.
Include limitation of liability language.
Include a mediation clause.
Insert the firms record retention policy.
Include a stop-work clause.
Clearly state the firm’s fee structure.
State your retainer and progressive billing policy.
Detail the consequences of late payment or failure to pay.
Include arbitration language for fee disputes.
Update and sign every year.
Require new engagement letters for ongoing engagements that extend into new fiscal or calendar years.
Include engagement letters in your annual organizer for individual tax clients.
Require the client to return the signed engagement letter before work begins.
Amend the document with a new engagement letter and have the client re-sign if the engagement expands or contracts from the original agreement.
Include a due date the client is to return the letter.
Include any marketing information.
Use marketing language or superfluous information about the firm and its services.
Use all-encompassing language;
Use words that expand rather than limit your firm’s responsibilities.
Use legal jargon or ambiguity.
Use abbreviations or words only an accountant would understand.
Use “evergreen” engagement letters, which may no longer reflect the actual scope of the services being provided.