Letters of Engagement for Accountancy Firms
08 September 2022
An engagement letter can be a key document when defending professional negligence claims against accountants. Regrettably, we often find it is absent, poorly drafted or there has been no follow up letter when instructions have changed.
In the following article, we discuss why engagement letters are so important for accountancy firms and why they can be crucial in defending claims made against you.
Why do accountants need an engagement letter?
An engagement letter sets out the way you work with your clients. It defines the business terms agreed and helps to set expectations on your working relationship.
An engagement letter is a good way to help avoid any disputes, as long as it is used correctly. It clearly sets out what is expected from both parties. When these expectations are not met, an engagement letter provides a clear referral point to come back to without having to enter into a lengthy dispute process.
It is worth noting here, that if your firm is registered with a professional body their code of ethics will set out recommendations for your engagement letters. Whilst the use of engagement letters may be mandatory, there is no generic content for these from governing bodies and every engagement letter will be different. These must be based on your unique working practices and relationships with clients. We recommend consulting the Code of Ethics from your governing body to ensure that your engagement letters meet their criteria.
What should an engagement letter include?
An engagement letter sets out the way that you work with your clients. It should include information on:
- The services that you are expected to provide
- How they will be provided
- Who is responsible for various actions – what you will do for your client, and what your client will do
- When these actions will be undertaken - We see many claims around missed deadlines. It is important that your engagement letter clearly sets out responsibilities in relation to missing deadlines, and the consequences if either party fails to do so.
- Terms of business – including the way you calculate fees
- Your payment policies
- Your data protection provisions
- A limitation of liability clause. This is designed to manage risk by limiting your potential liability for damages. Care should be taken to ensure that the limitation of liability is appropriate for the work undertaken. (Liability caps are often set at multiples of the fees charged). A liability cap should also be highlighted clearly to the client.
The engagement letter should clearly set out any work that is being undertaken. With every accountancy business, we understand that client relationships develop over time, and the service provided will differ depending on factors internally and externally.
If your scope of work changes, this must be confirmed in writing. This is to ensure all parties understand the scope of work at all times, and it can be clearly identified when and what was changed to avoid misunderstandings and any following legal challenges.
If your work does not cover something, this should also be set out in writing. One of the most common sources of claims against accountants arise from providing tax advice, in particular an increasing amount of claims in relation to advice on the VAT status of a business. If you do not advise on a particular area due to limitations on the scope of your expertise, this should clearly be documented in the letter of engagement. You should identify the additional advice that might be needed and direct clients to the appropriate source. This helps to ensure clients are informed and helps to minimise the risk of successful claims.
How often should an engagement letter be reviewed?
Engagement letters should be drafted at the outset of your relationship with clients. Following this, best practice dictates that this should be reviewed at least annually. Not only does this provide an opportunity to evaluate the relationship between your accountancy practice and clients, allowing you to bring up any challenges or issues, it allows for future planning. During the review, you can identify opportunities to bring further benefits to the relationship – for example, perhaps you have bought new expertise into your practice that has allows you to expand your scope that could benefit your client.
For insurance purposes, we recommend that an engagement letter should be updated every time instructions change. If a claim is made against you, an engagement letter can be relied on heavily in a defence. If this is not kept up to date if the scope of work is changed, it is harder to depend this action.