SAMPLE ONLY—DO NOT USE WITHOUT CONSULTING YOUR ATTORNEY
(Copy and paste onto your firm’s letterhead)
Guidance towards drafting an Engagement Letter for Accounting Professionals
Please keep in mind that the same protocol and guidance outlined below for accounting engagement letters may apply to engagement letters for other professions.
Although engagement letters are not required legally, they are strongly encouraged. A properly drafted engagement letter can serve as a helpful risk-management tool by establishing a legal framework for the relationship with a client. An engagement letter can discourage a client from asserting a merit less claim and can be useful in defending such a claim. The service or type of engagement should determine the terms and provisions to be included in the engagement letter.
A. General Issues to consider when doing an engagement letter:
· Compliance with any applicable standards within your profession;
· Inform your clients of specific responsibilities;
· Limit your risks;
· Draft an engagement letter for every engagement; and
· Consult with your attorney.
B. Common provisions — Engagement letters may vary based on level or type of service; however, the following provisions are common in most engagement letters:
· Disclosure of the client;
· Scope and Limit of Work to Be Performed;
· If your Tax or Attest Engagement is Not Intended to Detect Fraud, it should be Stated in the Engagement letter;
· Expected Timing of Work and Staffing of Engagement;
· Identify Client Responsibilities;
· Identification of the Party to Work with the CPA;
· Disclosure of Intended Users of the CPA’s Work Product;
· When Appropriate Include the Applicable Professional Standards in the Engagement letter;
· Identify any Special Terminology that apply to the Engagement Letter;
· Disclose Fees, Expenses and Payments;
· Confirm the Right to Withdraw from and/or Terminate the Engagement;
· Responding to Discovery Requests, Subpoenas, and Outside Inquiries;
· Limitation of Liability;
· Indemnification;
· Severability Clause;
· Dispute Resolution Options;
· Disclosures Recommended or Required by the AICPA;
· Client Signature/Confirmation Receipt; and
· Non-Engagement Letters.
See below for more information on the above provisions.
1. Disclosure of Client
The engagement letter must identify the specific client who will receive the CPA’s services. If a party related to the client is not included in the engagement, advise that party of its “non-client” status in a separate letter.
SAMPLE LANGUAGE:
This is to confirm our engagement to provide (insert client(s)) the following services: (insert services). We are not engaged to provide services to (insert name).
2. Scope and Limit of Work to Be Performed
The engagement letter should indicate clearly what services are to be provided and what services you are not being retained to perform. In general, the CPA (or applicable professional) should outline the procedures to be performed and any reports to be issued. This would help to avoid unreasonable client expectations about the nature and the scope of the services to be provided. Also, if you haven’t agreed to update your work, you should specifically state so in the engagement letter.
SAMPLE LANGUAGE IN A TAX ENGAGEMENT
We have been engaged to prepare your [Year] tax returns for these jurisdictions: and are not currently engaged to prepare tax returns for any other year or for any other jurisdiction. If you need us to prepare other returns, please let us know, and we can enter into a separate engagement for those returns.
Please note that we have not been engaged to detect fraud, embezzlement, or any other wrongdoing. We will prepare your tax returns based on the information you provide to us and on the assumption that the information is genuine and accurate. Preparing a tax return in accordance with the governing professional standards does not guarantee that the information is accurate or properly recorded according to Generally Accepted Accounting Principles (“GAAP”)
SAMPLE LANGUAGE IN AN AUDIT ENGAGEMENT
When our audit of the financial statement is completed, we will issue a written report of the audit addressed to the board of directors of. We cannot provide assurance that an unmodified opinion will be expressed. Circumstances may arise requiring us to modify our opinion, add an emphasis-of-matter or other-matter paragraph(s), or withdraw from the engagement.
Also, describe the limits of your responsibilities. Explain what services you are not going to be preforming.
SAMPLE LANGUAGE
We are not engaged to detect fraud, embezzlement, or any other wrongdoing. [For a corporate client:
We are not retained to investigate the propriety of any salaries or acts of corporate governance. To determine whether the company is adhering to norms of corporate governance, you should consult a lawyer.] Nor are we retained to do. We will prepare your tax returns based on the information you provided to us and on the assumption that it is authentic and accurate. Preparing a tax return according to governing professional standards does not assure that the information is accurate or is recorded in accordance with GAAP.
3. If your Tax or Attest Engagement is Not Intended to Detect Fraud, it should be Stated in the Engagement letter
Such a disclaimer may be helpful in defending against claims but may not totally shield you from liability.
SAMPLE LANGUAGE IN A TAX ENGAGEMENT
We are not engaged to detect fraud, embezzlement, or any other wrongdoing. We will prepare your tax returns based on the information you provided to us and on the assumption that the information is authentic and accurate. Preparing a tax return according to governing professional standards does not assure that the information is accurate or properly recorded according to Generally Accepted Accounting Principles (“GAAP”).
SAMPLE LANGUAGE IN AN AUDIT ENGAGEMENT
We will issue a written audit report addressed to the Board of Directors of upon completion of our audit of financial statements. We cannot provide assurance that an unmodified opinion will be expressed. Circumstances may arise requiring us to modify our opinion, add an emphasis-of-matter or other-matter paragraph(s), or withdraw from the engagement.
4. Expected Timing of Work and Staffing of Engagement
This section of the engagement letter varies by the type of engagement and indicates when the engagement will begin and end.
For example, an audit engagement may contain a provision indicating the date fieldwork will begin and end and possibly an expected date of delivery of the audit report.
A tax engagement may contain a provision indicating any known filing deadlines and the parties’ understanding concerning the use of extensions should the CPA not receive the information needed to timely prepare the return. Some CPA firms may indicate who will be staffing the engagement. This provision is helpful when a client expects to work with certain employees at the CPA firm.
5. Identify Client Responsibilities
In most engagements, the client is required to collect certain information and provide certain records to the CPA. If this information is necessary for the CPA to complete the engagement, any client responsibilities and any applicable deadlines for the completion of work by the client, should be described.
For example, a tax engagement would normally contain a provision indicating it is the client’s responsibility to sign and file tax returns prepared by the CPA, along with the explanation of the consequences of the client’s failure to sign and file such returns.
6. Identification of the Party to Work with the CPA
Some engagement letters request the client to designate the party to work with the CPA. This provision can help the CPA avoid situations in which conflicting requests or instructions are received from more than one of the client’s employees.
Similarly, when there is more than one accounting or other professional firm or firms responsible for portions of the same project, consider adding language to your engagement letter specifying which firms are responsible for certain portions of the project.
7. Disclosure of Intended Users of the CPA’s Work Product
In some jurisdictions, a CPA can limit or avoid liability to third parties by identifying in the engagement letter the intended users of the work product. In addition to identifying these users, this provision often contains language prohibiting the client from distributing the CPA’s work product to any party other than these users.
In deciding whether the engagement letter should contain this provision, competent legal counsel should be consulted. This is especially true for jurisdictions which have privity standards for establishing auditor negligence.
8. When Appropriate Include the Applicable Professional Standards in the Engagement letter
This may prove helpful in showing that you and your client agree on the professional standards that apply to the assignment.
9. Identify any Special Terminology that apply to the Engagement letter
This type of provision should help avoid any disputes regarding the meaning of certain terms and how they apply to the particular engagement.
Any request for a restriction in agreed services that departs from the standard or accepted scope of services in a particular type of engagement or service should be specifically noted in the engagement letter. This provision will be evidence that a departure from normal and accepted practices was part of the original agreement between the parties.
10. Disclose Fees, Expenses and Payments
An engagement letter can help avoid fee disputes before the work begins. This section of the letter details the hourly rate or lump sum you are charging for your services and how and when the client will be billed. It may describe the amount of retainer (if any); how the fee will be computed; when payment will become due; the client’s obligation to pay promptly; and the CPA’s rights should the client fail to give prompt payment.
In some cases, the CPA may charge interest for late payments. In more extreme cases, it may be necessary for the CPA to suspend work or cancel the engagement due to fees not being paid.
11. Confirm the Right to Withdraw From and/or Terminate the Engagement
It may be necessary for the CPA to withdraw from the engagement. The engagement letter should outline the conditions that might lead to the CPA’s withdrawal, any compensation that may be due and the procedures the CPA will follow in case of withdrawal.
Examples of situations in which the CPA’s withdrawal from the engagement may be required include issues of conflict of interest; failure of the client to make information available for you to perform your services; management ethics or integrity; or the CPA’s real or apparent lack of independence. If you decide to withdraw, you should send a disengagement letter.
This section should also discuss policies and procedures related to the termination of the engagement including return of client files; preparation of the final bill; work-paper retention; and date of termination of services.
12. Responding to Discovery Requests, Subpoenas, and Outside Inquiries
Occasionally, a CPA may receive a discovery request, subpoena, or outside inquiry. While several states have established a CPA/client privilege with respect to communications, most states do not have such a privilege.
Moreover, there is no federal CPA/client privilege with the specific exception relating to tax planning. This section of the engagement letter can help avoid future misunderstandings between the client and the CPA regarding whether, and to what extent, the CPA may be required to respond to such requests.
13. Limitation of Liability
You may wish to limit your liability in engagement letters. These limitations could be critical if a lawsuit is filed. Since the enforceability of these clauses can vary from state to state, you should consult with a local attorney.
14. Indemnification
The engagement letter should contain a provision that would obligate your client to indemnify you if third parties bring claims. Since enforceability of an indemnification clause depends on local law; you should consult with an attorney to draft the proper indemnification clause.
15. Severability Clause
Also, your engagement letter needs to include a severability clause that reads, “If any part or provision of this agreement should be held void or invalid, the remaining provisions shall remain in full force and effect.” This language ensures that the rest of the agreement remains enforceable even if a court refuses to enforce a particular provision or clause. If no severability clause exists in the engagement letter, a court may determine that the entire agreement (including your contractual right to fees) is void.
16. Dispute Resolution Options
Alternative dispute resolution (ADR) refers to methods of resolving disputes outside of the courtroom. One of these methods is known as arbitration.
In arbitration, the opposing parties select one or more arbitrators who decide the outcome of the dispute. In most cases, the decision of the arbitrator cannot be appealed. Typically, the pre-arbitration discovery process is limited, and third parties are not bound by the arbitrator’s decision.
Another method of resolving disputes outside of a court of law is mediation. During mediation, a mediator attempts to find the “common ground” that exists between the opposing parties that may lead to a mutually agreed-upon settlement. In the event the mediation is not successful, the parties, if they so desire, may litigate their dispute.
Before inserting a provision in the engagement letter regarding alternative dispute resolution, a CPA should consult with legal counsel regarding the provision’s enforceability.
In addition, inserting a provision concerning alternative dispute resolution in an engagement letter may have insurance coverage implications. For example, while some insurers encourage the use of mediation, under some policies the use of an arbitration clause may limit or void the CPA’s professional liability insurance coverage for any claims that are arbitrated.
17. Disclosures Recommended or Required by the AICPA
The AICPA recommends the inclusion in an engagement letter of certain disclosures for certain types of engagements. These disclosures may be incorporated into, or have an effect upon, other provisions of the engagement letter.
18. Client Signature/Confirmation Receipt
This section should request the client sign and return an executed copy of the engagement letter to the CPA. It should provide that if the client does not agree that the engagement letter accurately reflects the agreement of the parties to the engagement, the client will promptly notify the CPA.
If the client does not return a signed engagement letter, the CPA may send a certified letter indicating that, unless otherwise notified, the CPA will assume the client agrees to the terms of the engagement letter or the CPA many recuse himself or herself from the engagement. The most effective engagement letter is one signed by the client before the CPA begins the engagement. When this is not feasible, then a letter should be sent by email and/or certified mail so that receipt can be confirmed, with the terms of the representation specifically outlined.