No rush to sign: client agreements from government entities not always a fit for CPA firms.

Some CPA firms are being pressured by governmental clients to execute agreements or contracts in lieu of traditional CPA engagement letters. Typically, such boilerplate agreements and contracts are used by governmental entities for all independent contractors. As such, they contain many conditions and caveats that are not necessarily appropriate with respect to the professional services the accounting firm provides.

It's important, therefore, that before you contractually bind your firm to such an arrangement, you understand all the implications. Make sure you are comfortable with the agreement and expectations that will fall on your firm.

For example, many of the agreements attempt to shift liability from the governmental entity to the CPA firm and have indemnification clauses that extend the CPA firm's responsibilities to more than just the quality of the professional services performed. Some of the indemnification language includes, for example, death or injury claims that would be appropriate for an agreement or contract with a construction firm, but not an accounting firm.

In addition, some of the agreements attempt to broaden the professional responsibilities of the CPA firm, primarily in the area of fraud detection (see "Scope of Audit" in Example 1). Some agreements also may contain language and/or responsibilities that may impair independence. To avoid the "client expectation gap" that may pose significant risk to your firm, it is important that the agreement be modified to reflect a clear understanding regarding the scope and responsibilities of the engagement.

As such, before signing these types of agreements or contracts, ensure that your firm has considered the following risk management steps and has provided for the potential additional liability risks:

* Consult with CAMICO to review the agreement. It's best to use individuals knowledgeable with assessing accountants' professional liability risks and coverage implications, as well as contract terms.

* Push back. You don't have to accept the terms as written in an agreement, preprinted or not (Examples 1 and 2 show how an agreement can be revised to be more appropriate for an accounting firm.)

* Develop quality control measures and loss prevention strategies to manage the added liability exposures.

This information is provided by CAMICO Mutual Insurance Company. Find more information at www.camico.com/website/index.asp.

EXAMPLE 1

Excerpt from a School District Annual Audit Agreement

THIS AGREEMENT, is entered into as of ______, between the ______ DISTRICT, referred to as DISTRICT, and ______, referred to as ACCOUNTANT, with reference to the following:

SERVICES: ACCOUNTANT shall perform the necessary professional services, including but not limited to, those hereinafter set forth in connection with an audit of all funds and of the books and accounts of the DISTRICT.

a. SCOPE OF AUDIT: The audit shall include all funds of the DISTRICT including the student body and cafeteria funds and accounts and any other funds under the control or jurisdiction of the DISTRICT including those pursuant to a joint powers agreement. Each audit shall also include an audit of pupil attendance procedures. ACCOUNTANT is responsible for the detection of fraud, and for compliance with all requirements of Education Code section 41020(g).

INDEMNIFICATION: ACCOUNTANT shall hold harmless, defend and indemnify DISTRICT, its agents, officers and employees from and against any liability, claims, actions, costs, damages or losses of any kind, including death or injury to any person and/or damage to property, including DISTRICT property, arising from, or in connection with, the performance by ACCOUNTANT or its agents, officers and employees under this Agreement. This indemnification specifically includes any claims that may be made against DISTRICT by any taxing authority asserting that an employer-employee relationship exists by reason of this Agreement, and any claims made against DISTRICT alleging civil rights violations by ACCOUNTANT under Government Code section 12920 et seq. (California Fair Employment and Housing Act) and any fines or penalties imposed on DISTRICT for ACCOUNTANT'S failure to provide form DE-542, when applicable. This indemnification obligation shall continue beyond the term of this Agreement as to any acts or omissions occurring under this Agreement or any extension of this Agreement.

EXAMPLE 2

Recommended Revisions to Annual Audit Agreement

CAMICO recommends the following revisions to the excerpt from the School District Annual Audit Agreement. New language is underlined:

SERVICES: ACCOUNTANT shall perform the necessary professional services, including but not limited to, those hereinafter set forth in connection with an audit of all funds and of the books and accounts of the DISTRICT.

a. SCOPE OF AUDIT: The audit shall include all funds of the DISTRICT including the student body and cafeteria funds and accounts and any other funds under the control or jurisdiction of the DISTRICT including those pursuant to a joint powers agreement. Each audit shall also include an audit of pupil attendance procedures. ACCOUNTANT is responsible for designing the engagement to provide reasonable assurance of detecting fraud, illegal acts, or violations of provisions of contracts or grant agreements that could have a material effect on the subject matter or audit opinion, and should be alert to situations or transactions that could be indicative of abuse. ACCOUNTANT is also responsible for meeting the requirements of Education Code section 41020(g). The DISTRICT is responsible for informing the ACCOUNTANT about the existence of all funds.

INDEMNIFICATION: ACCOUNTANT shall hold harmless DISTRICT, its agents, officers and employees from and against any liability, claims, actions, costs, damages or losses of any kind, arising from, or in connection with, the performance by ACCOUNTANT or its agents, officers and employees under this Agreement insofar as such performance results from ACCOUNTANT'S negligent, reckless, or willful act or omission. This indemnity does not include claims that arise from any negligent, reckless or willful act or omission of DISTRICT. This indemnification specifically includes any claims that may be made against DISTRICT by any taxing authority asserting that an employer-employee relationship exists between ACCOUNTANT and DISTRICT by reason of this Agreement, and any claims made against DISTRICT alleging civil rights violations by ACCOUNTANT under Government Code section 12920 et seq. (California Fair Employment and Housing Act) and any fines or penalties imposed on DISTRICT for ACCOUNTANT'S failure to provide form DE-542, when applicable. This indemnification obligation shall continue beyond the term of this Agreement as to any acts or omissions occurring under this Agreement or any extension of this Agreement.