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Spell it out: clearly defined expectations key to strong engagement letter.

Clients in tough financial shape, lower firm realizations, increasing professional liability claims against CPAs ... when will it end? No one really knows. Yet, CPAs can reduce their risk by being disciplined, persistent and utilize engagement letters that clearly define roles and responsibilities.

When the familiar faces of your client have been replaced with beneficiaries, new management or (worse-case scenario) a bankruptcy trustee, the engagement letter serves as a documented understanding between you and your client. This understanding minimizes your chances of faring litigation because the engagement letter leaves little--or no--room for misunderstanding, which is a common reason for lawsuits.

If you do find yourself in the middle of a lawsuit, the engagement letter will serve as documented evidence of the delineated duties your firm was to perform.

Follow these expert tips now and avoid expert testimony later.

Do

* Clearly define the scope of the engagement--what you will and won't do.

* For non-attest financial statement work, detail what is not included in the services.

* Define the client's responsibilities, such as condition of work product, deliverables and due dates.

* State that the firm will be relying on the information provided by the client.

* Insert your record-retention policy. This is especially important for CPAs who anticipate retiring in the upcoming years.

* State your fee structure (e.g., retainer, progressive billing) and consequences of late payment or failure to pay.

* Include a stop-work clause.

* If you are outsourcing any part of the work, address the issue.

* Include limitation of liability language (if appropriate). Before automatically using the suggested limitation of liability language in your engagement letters, CAMIGO encourages you to review this language with your risk adviser or legal counsel for possible modifications. Also, it's important to note that the SEC forbids the use of indemnity clauses in engagement letters with public companies.

* Include a mediation clause. Seek assistance from GAMICO or local counsel. Mediation clauses generally are only effective when the right to litigation is waived before mediation is used. The right to litigate should not be waived without legal counsel.

* Consider including arbitration language for fee disputes only, if required by your policy or desired.

* Emphasize in the closing that this is a mutual understanding of the services being provided.

* Require the client to return the signed engagement letter before work begins. Include a deadline for the client to return the letter so that work can commence.

* As the engagement expands or contracts from the original agreement, amend the document to reflect, the changes and have the client resign. This avoids what is commonly called "engagement creep."

Don't

* Avoid any firm marketing or promotional information. Your engagement letter should be viewed as a contract and composed accordingly.

* Stay away from all-encompassing language, such as "authenticate," "validate'' and "exhaustive," that expands rather than limits your responsibilities. An engagement letter limits the scope of your work.

* Do not use legal jargon or ambiguity. Use plain English, and make your engagement letter easy for your client to understand. Don't, use abbreviations or words only a CPA would understand.

* Do not use "evergreen" engagement letters, which are rarely admissible in court because they no longer reflect the actual scope of the services being provided.

CAMICO recommends that engagement letters be updated and signed every year. Ongoing engagements that extend into new fiscal or calendar years require new engagement letters. For individual tax clients, CAMIGO suggests you include engagement letters in your annual organizer.

If you want to reduce your--and your firm's--risk, then utilize engagement letters that, clearly define roles and responsibilities and amend them as necessary.

VerbiageGuidance

Avoid these words and terms:

"absolute," "all," "any," "audit" (never use the word "audit" on "non-audit engagements" unless it is used in the phrase, 'This engagement is not an audit), authenticate," "certain," "complete," "comprehensive," "conclude," "conclusive," "confirm," "decide," "define," "definite," "determine," "discover," "each, "entire," "every," "everything," "exhaustive," "judge," "rule," "scrutinize," "settle," 'thorough." "totally," "unlimited," "validate," "verify," "whenever."

Try to use these words: "comment on," "examine," "follow," "investigate," "look at," "notice," "observe," "study," "test," "watch."

Ronald C. Parisi, CPA, J.D. is CAMICO's national program director and services CPA firms with complex professional liability risk exposures. You can reach him at rparisi@camico.com.
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Title Annotation:bestpractices
Author:Parisi, Ronald C.
Publication:California CPA
Geographic Code:1USA
Date:Jun 1, 2010
Words:694
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