I speak to many accountants about the use of engagement letters and why it is important to use them. I would say about 30% of the accountant's that I talk to do not use them. Here are the top three reason's that I explain why it is so critical to use them:
1. Engagement letters are forms of written communication memorializing what you have already verbally agreed to. The engagement letter becomes a reference from which you can know what areas of service you agreed to perform, at what price, and the terms you are willing to perform them.
2. Narrowing the scope of the services you will be performing. Accountant's perform many services. To the general public, that can mean ANYTHING financial. If an engagement letter is not used, you could be dragged into any possible claim having to do with the clients financial struggles, even if all you do is a tax return. You are wide open to any actions the client's attorney thinks they can pin on YOU. With an engagement letter narrowing the scope of your agreed services, you close the door on everything else.
3. The engagement letter will become your first line of defense. Talk to any Attorney defending accountants and they will tell you your case is much more defensable with a signed engagement letter. They will plaster it up on a large projection screen in front of the jury until they get the point. Without it, the Attorney's job just got a whole lot more difficult. It becomes he said/she said, and unfortunately most jury's take the side of the innocent public, than the ruthless professional, in their minds.
Take advantage of boilerplates offered by your insurance program. The experienced carriers know the importance of using engagement letters and will often provide templates from which you can tailor them to your needs. You can access engagement letter boilerplates if you are an AICPA/CNA insured by clicking on this link and accessing them with your current policy number: https://forms.cpai.com/members/access.jsp Some carriers will offer credits or deductible offsets when you use them. They do this for a reason, so take the time to help protect yourself, after all, you still have a deductible and hours incurred even with insurance coverage in place.
Many times an Attorney may be called into a situation by your client to review a potential action to bring against you. Their attorney will always ask if the client signed any documents indicating the agreed upon services. If they see the engagement letter, they will often times counsel their client that they may not have a case solely based on having signed the engagement letter. Do not be penny wise and pound foolish when it comes to utilizing engagement letters!
By Paul W. Morris, RPLU, CLU