Some engagements, like attestation and SSARS 21 financial statements, require the CPA to have a written agreement with the client. However, there are many benefits to using engagement letters even when they aren’t required.
Why should CPAs use engagement letters? Clearly communicating your services strengthens the accountant-client relationship and improves annual client retention. Engagement letters are also key to resolving disputes, especially if a dispute escalates. The right letter is your best chance to defend your practice from claims or litigation.
Nevertheless, many CPAs don’t use engagement letters. In this month’s Journal of Accountancy, Deborah Rood, CPA, explains the most common obstacles and has suggestions about how to overcome these obstacles to start using engagement letters in your practice.
Why don’t CPAs use engagement letters?
Rood discusses five common excuses from CPAs about why they don’t use engagement letters. For example: As a sole practitioner, I do not have time to deal with engagement letters.
Engagement letters take time and can be tedious. Many small and solo practices don’t want to burn through unbillable time, especially if the CPA thinks that an engagement letter is only to protect them if they get sued.
In this case, the CPA does a sort of risk gut-check about the engagement. Even using templates, however, many CPAs will skip the engagement letter for a good client.
As a lawyer, I am required to use written fee agreements with my clients but not always when I am practicing as a CPA. I have worked on both sides of accountant’s malpractice cases, however, and I have seen firsthand how an engagement letter – or a missing engagement letter – can be the deciding factor in a case. As a result, I always made sure to get a signed engagement letter before I started work.
Tax season was especially tedious. My assistant would update one of my engagement letter templates; edit the client’s information into each document; print the letters to pdf files; and finally email the letters to the clients.
The whole process to publish and send all the letters would usually take about a day, sometimes several days. When my clients got the letters, some would sign digitally and return it straight away; others would print the letter and sign it with a pen, and then email a scanned copy.
Unfortunately, most of my clients needed several reminders before they sent the letter back to my office. We might chase down engagement letters for weeks. In some cases, we got the letters only after the tax deadline when I was locking down the client’s file for the year.
This hassle, and the unbillable administrative time, were a big part of why I started Engage for CPAs.
The first time I used Engage in my practice was amazing. I sent my client engagement letters – all of them – at 11:00 in the morning. For the rest of the day, I watched advance fee deposits hit my account each time I got an alert telling me that I had another signed engagement.
Engage entirely automated the process for engagement letters. What used to take my assistant several days literally took only minutes, and I had already been paid.
My clients are not going to understand a 6-page engagement letter. CPAs may not want to send their clients a formal legal document, especially for long term or close client relationships. According to Rood, many CPAs try to make the letter friendlier by removing some of the ‘legalese’. The problem is that some of engagement letter benefits are buried in these details. Rood suggests consulting with a liability insurer or an attorney to understand each legal term before you take it out of your letter.
Engage for CPAs has done this for you. Engage’s letters are written by tax lawyers and reviewed by accountant’s malpractice experts. The letters are immediately updated for changes in the law or professional standards, or for emerging issues like cryptocurrencies or Sec. 199A, so that users know they have a state-of-the-art agreement.
Engage also uses a short, one-page client letter to summarize the engagement. The usual dense legal language has been rewritten into plain English and is sent to the client as a policies, procedures and practices addendum. This addendum covers the ‘boiler plate’ terms of an engagement like privacy policies, confidentiality and consent to use of third-party software service providers.
In some cases, the accountant has the option to use additional terms like requiring arbitration. Trust is the hallmark of any CPA practice and good communication is important to any relationship. Engage therefore highlights these terms and asks the client to add their initials to make sure the client understands the agreement.
In closing, I’ve seen how important engagement letters are to protecting a CPA’s practice. I’ve also struggled with the same questions of risk/burden trade-off when thinking about engagement letters in my own practice.
Engage was designed for exactly these problems. Accountants can use Engage to get signed engagement letters back from their clients within minutes and with advance fees on deposit, all while enjoying the benefits of using engagement letters in their practices.
Deborah Rood, CPA. “Overcoming Obstacles to Engagement Letter Use.” Journal of Accountancy. November 2018: page 14.