An engagement letter is the best way to protect a firm against legal claims. Alvin Fennell III, vice president at Aon, and Jeffrey Day of CNA told Accounting Today that since there’s no universal agreement on the definition of what an accountant does in an average engagement, having an understanding at the outset of the engagement is vitally important.
As Day explains, “The engagement letter is an extremely important way to minimize client disputes between what is expected and what is actually done, whether it’s for a fee or a service.” In other words, any potential disagreements can be avoided by outlining the scope of work expected to be included in the engagement letter.
Depending on the size of the accounting firm, engagement letters may play a larger role. For example, large firms tend to be more inclined to document the scope of client needs whereas a sole practitioner might rely on client relationships rather than legal documentation. However, if the scope of work changes, the engagement letter should be modified and signed by both parties in order to ensure protection for the accounting firm.
The engagement letter helps to minimize confusion, as well. Fennell stated “The CPA may be talking to a dependent rather than the initial client. The engagement letter should provide a history of the client-CPA relationship.” Similarly, the letter should include the scope of work, list deliverables, and identify responsibility of the firm and client. Last but not least, mediation and arbitration procedures should be included to manage professional negligence claims.
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