How to ensure engagement letter compliance in the US

Engagement letters are essential in most professional practices, but they’re particularly important for accountants and tax practitioners. Engagement letters (at least when implemented correctly) not only set the terms and expectations of your client relationships, they can also help protect you against claims, disputes, and lawsuits.

As The Journal of Accountancy points out, “Engagement letters are one of the best defensive tools a CPA can possess. In fact, in the event of a dispute, one of the first documents requested is the engagement letter.”

That being said, crafting engagement letters isn’t just about writing out your own terms and sending them to your clients. You must ensure the content of the letter complies with certain industry laws and requirements.

“Not having the right terms or putting together a letter that hasn't been reviewed by an attorney, insurance company, or your professional organization, may cause that engagement letter to then be moot or you may miss required information that goes into an engagement letter,” says Joshua Lance, Head of Accounting at Ignition.

That’s why he recommends consulting with experts and professionals who can determine if your engagement letter is enforceable.

Doing so, “ensures that you're not saying things you shouldn't be saying, or saying things that are going against your CPA license,” he adds.

So, your accounting engagement letter must be crafted and reviewed with compliance in mind.

Here are some pointers on how to do just that.

Strive to be as unambiguous as possible with your engagement letter provisions. Eliminating any gray areas keeps all parties on the same page, ultimately reducing the chances of disputes (and if they do arise, a well executed engagement letter will help protect your business).

When you’re outlining your terms, pay careful attention to the following sections:

The client. The National Association of State Boards of Accountancy (NASBA) recommends that accountants limit the number of parties listed in the letter. This reduces complexities within the agreement and makes communication easier.

As NASBA suggests, “Narrowly identifying the client not only reduces the lawsuits from potentially aggrieved parties but also makes your life easier if a dispute arises later and multiple business owners begin giving you conflicting instructions.”

If you’re working with a couple or a group of people, for instance, it may be appropriate to identify one individual and list them on the engagement letter.

The scope of work. The services that you’ll be providing must be clearly outlined in your accounting or tax preparer engagement letter. This doesn’t just mean listing your services; in many cases, you must also define what you’re actually doing.

According to Joshua, “Depending on what type of service you are doing, you may have different things you need to include in there. So an audit would be different than tax preparation, which is different from general accounting. You have to consider those different things from a general compliance standpoint.”

Strive to be as specific as possible. If you’re doing tax preparation, clarify the type of return you’ll be doing.

In addition to compliance, having a clearly defined scope also benefits you from an operational standpoint.

“It's important to have an engagement letter that has detailed terms and scope of what you're doing,” says Joshua. “This helps to avoid confusion so no one can make assumptions such as, ‘Okay, what did you mean when you said accounting services?’”

Dates. Your letter needs to contain any key dates relevant to the engagement. It’s essential to outline when the engagement starts and ends. It’s also advisable to list key dates for your deliverables. If you’re preparing a tax return for instance, make sure to specify when you’ll complete the return.

Payment terms. Your engagement letter should also have a section detailing your payment terms. When is payment due? How will the client be billed? Ensure there is no ambiguity; and if possible, enable the client to easily make payments once the engagement letter has been signed.

Ignition makes this step easy through the app's client billing features. With Ignition, you can request upfront deposits right from your engagement letter or proposal, thus reducing late or non-payments.

Termination. It also helps to detail the cancellation process in the event the engagement needs to be terminated.

“If for whatever reason you need to terminate the engagement letter, clarify the ways you can do that, so you’re not running afoul of anything and you’re giving proper notice to the client,” says Joshua.

As mentioned above, your accounting engagement letter may be unenforceable if it doesn’t comply with industry standards and regulations. To that end, consider using credible and professional resources to ensure your documents make the grade.

Work with a lawyer. One of the best ways to have a fully compliant engagement letter is to have a lawyer either review your letter or draft it all together. Work with someone who’s well-versed in accounting and professional services laws, so you can ensure that you have your legal ducks in a row.

Consult with a professional trade organization. Another option is to tap into any professional services organizations that you’re part of. According to Joshua, groups like the American Institute of Certified Public Accountants (AICPA), “routinely provide updated details and information, plus terms you need to include as laws change”.

Consult with your insurance company or professional vendors. You could use resources provided by your professional insurance provider. In particular, your liability insurance company can often serve as a resource for information on engagement letter compliance.

Also consider tapping into your service providers or technology vendors. Ignition, for instance, has industry vetted engagement letter templates you can use in your practice.

An engagement letter isn’t something you can just set and forget. Remember that laws change, so your practice needs to evolve along with your industry.

That’s why Joshua recommends reviewing – and if necessary revising – your engagement letter on an annual basis.

“I usually recommend people do it in the November or December timeframe after the prior tax season has finished. That's a good time to do it.”

He continues, “The AICPA usually releases their letters in around October or November. So then you're working with the freshest material out there, which is helpful.”

Staying on top of compliance requires you to maintain proper documentation and records. In many cases, you’ll need to go back and forth with different parties, and ensure that everything is signed.

Engagement letter compliance can be extremely cumbersome and time consuming when you don’t have the right tools. That’s why it’s helpful to digitize your processes and automate tedious tasks.

For example, rather than using scanned documents (or worse, paper print-outs) use a platform that enables parties to quickly sign the letter without having to download or print out a copy.

In addition to streamlining the process and reducing back and forth, most documentation platforms have automatic timestamps that capture when and where the letter was signed.

Ignition, for example, has an engagement letter feature with e-signature capabilities so clients can easily review and sign your letter. Everything is logged digitally, making record-keeping a breeze.

Aside from improving efficiency, technology can also provide peace of mind, says Joshua.

“You can ensure that if there was ever a question later on, you can refer to the letter and say, ‘Yes, this person signed it on this date. Here's their IP address.’ Ignition has that record in there that it’s been done, and that's super helpful from that standpoint.”

We hope this article encourages you to review your existing engagement letters to ensure they’re compliant with all the necessary laws and regulations. And if you need help doing that, Ignition’s industry body approved engagement letter templates can help you get started.

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