Build a Better Engagement Letter: Standard Terms and Conditions

Imagine that a claim has been brought against your firm and you’re sitting on the witness stand defending the firm’s services. Your confidence is bolstered by detailed engagement letters used for each service that was delivered to the client by the firm. Yet, doubt creeps into your mind as you remember your client’s comments:

“Why does the tax engagement letter have different terms than the audit letter? I know we agreed to a change in the limitation of liability provision for one service, but I don’t see the same change reflected in the other engagement letter. Who’s in charge? Don’t you talk to each other?” Have you heard clients make similar statements? Have you or others at your firm made similar statements when trying to update engagement letters? Fortunately, there’s a way to address these all-too-common gripes—a standard terms and conditions (Ts & Cs) document.
 

Why Standard Terms and Conditions Help

It is recommended that every firm have a set of standard T&Cs included with every engagement letter. When applied to all engagements, standard Ts & Cs can help establish a mutual understanding with a client regarding the services to be rendered and contractual elements that apply to the engagement, thus mitigating the risk of an expectations gap.

Additionally, including standard Ts & Cs with each engagement letter can help eliminate conflicting terms. Generally speaking, when a firm has multiple engagements with the same client, and those engagements are performed in accordance with different professional standards, it’s recommended that a separate engagement letter be used for each engagement. However, when a firm has several engagement letters for the same client, but the “boilerplate” terms differ from one engagement letter to another, the client may suggest that there was really no “meeting of the minds” on the terms of service since the terms were inconsistent across multiple letters. Alternatively, the client may cherry-pick terms and assert that the terms that are most advantageous to them apply to all engagements.

When drafting documents, it’s important to consider that inconsistencies and ambiguities may be construed against the drafter, which is, in this situation, the CPA firm. Even if not argued in court, conflicting terms can lead to disagreements and confusion with clients. In the event of a dispute, different engagement letter provisions make reaching a resolution challenging.

However, when a standard Ts & Cs approach is employed, the individual engagement team is no longer responsible for updating and negotiating multiple engagement terms. Instead, that valuable time can be focused on the critical task of determining and agreeing the specifics of an engagement with the client, including the scope of services, deliverables, firm and client responsibilities, timing, and fees. Increasing an engagement team’s focus on the engagement-specific elements of an engagement letter can help align expectations regarding the services to be delivered and help reduce the risk of a future disagreement.
 

A Success Story

Let’s look at an example of a standard Ts & Cs document in action to see how it can protect a CPA firm:

A CPA firm provided bookkeeping and tax compliance services to a client. When the IRS disallowed a deduction resulting in additional tax, penalties, and interest, the client claimed the CPA firm was responsible for the penalties. The firm reviewed its engagement letters and determined that it had implemented the terms and conditions strategy the year before the matter relating to the disallowance and included a limitation of liability clause.

If the claim had occurred just a year prior, when the standard Ts & Cs strategy hadn’t yet been implemented, the client may have argued that it was a bookkeeping mistake, and the limitation of liability clause didn’t apply.
 

What Terms Should Be Included?

The provisions included in a standard Ts & Cs document should address the key contractual elements of the engagement—there are at least five categories or types of provisions to consider.
 

1. Firm Practices

These provisions describe the firm’s administrative protocols that apply to the engagement, including, but not limited to:

• Termination and withdrawal. Ensuring that the CPA firm may withdraw for any reason without completing services is important, especially if the client’s integrity is questionable after the engagement has commenced.

 

• Billing and payment terms. Addressing consequences of late payments or a failure to pay before the engagement begins reduces the likelihood of an expectations gap if bills are unpaid.

 

2. Standards-Related Terms

This category is for terms that may be required by or relate to the CPA firm’s professional standards, including, but not limited to:

• Confidentiality. This provision may prevent a client from requiring a CPA to sign their own confidentiality agreement, which may be overly broad.

 

• Records management. The terms and conditions should explain that client records will be returned to the client and that the CPA firm’s records are its property. These provisions also may include how the CPA firm will respond to subpoenas and other third-party record requests.

 

3. Terms That Help Protect the CPA Firm

These provisions clarify the firm’s role and responsibilities (i.e., what it is and isn’t responsible for), including, but not limited to:

• Reliance on oral and written advice. Specifying that only advice requested and provided in writing may be relied on may assist in the defense against allegations that a client relied on off-the-cuff advice provided by the CPA firm.

 

• Disclaimer of legal and investment advice. Establishing that the CPA firm won’t provide legal or investment advice is important, especially if the firm is providing services related to the Corporate Transparency Act.

 

4. Risk Allocation

These provisions allocate the risk of an engagement between the client and the firm and may include:

• Dispute resolution. Generally, agreeing in advance with a client on how disputes will be resolved (e.g., mediation) and designating the venue and jurisdiction that’ll be used tends to expedite the resolution of disagreements.

 

• Limitation of liability and indemnification of the firm. Where permissible, these clauses may help limit the firm’s exposure if a claim arises. If the engagement is of a type whereby the firm is precluded from including these clauses because they would impair independence, strike these terms from the terms and conditions through a notation in the engagement letter.

 

5. Legalese

These are terms generally found in any contract, for example:

• Severability. If a certain provision of the engagement letter is found to be unenforceable, a severability provision allows just that provision to be struck from the contract rather than the entire contract being considered unenforceable.

 

• Electronic signature and counterparts. Establishes that an electronic signature is intended to authenticate a written signature and shall be valid.

 

Who’s Responsible for Creating and Updating a Standard
Ts & Cs Document?

In general, the individual or team responsible for quality oversight at the firm takes the lead on creating and maintaining the firm’s standard Ts & Cs document. At a small firm, for example, this may be the firm owner. At a mid-size firm, this may be the managing partner. A large firm may have a separate quality control function.

Regardless of firm size, centralized oversight of a firm’s standard Ts & Cs document is critical. Any requests for changes, whether the request is made by a client or engagement team, should flow through the quality oversight function. This helps ensure the firm manages its risk consistently across all engagements and engagement teams and can assess and understand the risk impact of any agreed upon changes to the firm’s standard Ts & Cs for an individual engagement and the firm as a whole.

A firm’s standard Ts & Cs document should be reviewed by an attorney for enforceability in the firm’s jurisdiction. It’s also recommended that a firm periodically revisit the document to address new professional developments, changes in law, and changes to firm policies.

Remember, the rules of war are drawn up and agreed to during peacetime—terms and conditions are those rules. Importantly, a client should acknowledge that the firm’s standard Ts & Cs document has been received, read, and accepted, which can be acknowledged through initialing a box next to the engagement letter signature block.

To help protect yourself and your firm from any risk of inconsistency and confusion from clients, let a standard Ts & Cs document come to your rescue. Professional liability policyholders have access to a sample Ts & Cs document. Log into the Policyholder Resource Center with your firm's policy number to download.

Deborah K. Rood, CPA, MST, is a risk control consulting director at CNA. For more information about this article, contact specialtyriskcontrol@cna.com.

A version of this article originally appeared in the Journal of Accountancy.