Client Engagement
I am not a lawyer nor do I play one on TV or on the internet. I am writing this article as a means of encouraging our audience to ensure that you have taken the necessary steps to protect yourself and your business from potential problems with your clients. If you don't have an engagement letter and/or a "What We Do" Publication for your clients, hopefully you will make it a point to get them after you read this article.
As I mentioned, I am not a lawyer, so I relied very heavily on an industry friend, Bill Thompson of CPA Mutual (CPA Mutual was established in 1987 to provide CPA firms a reliable market with stable and competitive insurance rates), who provided some key insight and the core documents I used to write this article.
What is an engagement letter? The best definition I could find came from Wikipedia
An engagement letter defines the legal relationship (or engagement) between a professional firm (e.g., law, investment banking, consulting, advisory or accountancy firm) and its client(s). This letter states the terms and conditions of the engagement, principally addressing the scope of the engagement and the terms of compensation for the firm.
Based on the definition above, do you have an engagement letter? Do your clients know the terms and conditions of the work you do for them?
What is a "What We Do" Publication? I had not heard of this until I started writing this article. The “What We Do” publication provides, in layman’s language, an explanation of:
(1) what accounting professionals do in connection with financial statements, the preparation of income tax returns, and consulting services; and
(2) what is expected of individual clients and/or management in connection with these accounting services.
The “What We Do” publication is intended to not only inform clients, but also judges and jurors who may later be called upon to adjudicate a client’s or user’s professional liability claim. It may serve to protect the accountant from undue liability exposure, as well as to educate the client as to the limits of accountants’ services, so that the client can make an informed decision as to the level of service to be performed.
So now that you understand what an engagement letter is and why you need one, you need to understand what the key features are of an engagement letter. The key features are going to vary based on the type of work you do, so the list below are CPA Mutual's recommendations for Consulting Service engagements as a point of reference. Consulting engagements may vary widely in the type of services provided, as well as the client’s objectives. Consulting service engagement letters, therefore, need flexibility in content and format. The following are some provisions which an accountant should consider when drafting a consulting engagement letter: (you can download the complete copy of CPA Mutual's "A Guided Tour of Engagement Letters and "What We Do") here)
Background: This first paragraph briefly restates the client’s history, any previous conversations with the client, and the client’s perception of the problem in the client’s own words.
Objectives: The accountant’s role in a consulting service engagement is to serve the client’s interest by seeking to accomplish certain defined objectives, while maintaining integrity and objectivity. The engagement letter should define the client’s objectives and ensure that the client and accountant have a clear understanding of those objectives from the outset.
Nature and Scope of Engagement : This paragraph defines what the accountant intends to do in furtherance of the client’s objectives, and the order he or she intends to undertake those tasks. The substance of this paragraph will depend on the nature of the engagement. For example, the accountant may be retained to prepare documents for the purpose of obtaining financing for the client’s business operations. This may require the accountant to determine the amount of financing needed, the purpose for the financing, and the sources and methods for obtaining the necessary financing. A business plan and other documents may also need to be prepared for the client to make an effective presentation of the need for financing to a financial institution.
Roles: In a consulting engagement, the accountant must establish an understanding with the client about the responsibilities of the respective parties. Therefore, it may be appropriate in certain consulting engagements for the engagement letter to more definitely define the accountant’s and client’s role in the engagement.
Results And Benefits : The accountant should set forth any tangible end product that is contemplated by the parties, along with any intangible benefits the client may recognize from the engagement. This again will depend on the nature of the engagement. In many cases, the tangible work product will be some written report of findings, conclusions and/or recommendations. However, it may be in some other form, such as the preparation of identified financing documents or a business plan.
Limitations Of Engagement: Limitations on an accountant’s role as a consultant may vary depending on the nature of the services the accountant is retained to provide. In identifying the limitations to the engagement, an accountant should consider what things his work will not encompass. For example, it may be necessary to document the parties’ understanding that the accountant will not participate in the implementation of recommendations. It may also be necessary to document that the accountant’s work is not designed to identify or detect any errors or irregularities in the client’s financial statements. Whatever the limitations of the engagement are, they should be clearly documented and understood by the parties.
Project Staffing And Scheduling: Consulting engagements may require the involvement of the client’s staff, in addition to the accountant (or accountant’s firm). This paragraph should indicate the accountant or members of the accountant’s firm who may work on the particular project, as well as any involvement of the client’s staff that may be necessary. This paragraph should also set forth any time limitations on the project or phases of the project. To the extent the completion of the accountant’s work may depend on a third party’s timely performance, contingencies should be made in this paragraph for any third party delay that may result.
Engagement Completion And Termination: The completion of consulting work is not always easily defined. Therefore, it may be appropriate to identify with particularity in the engagement letter the anticipated event that will mark the completion of the accountant’s work. Additionally, this paragraph should define the circumstances under which the client and accountant may terminate or withdraw from the engagement.
Third Party Use and Reliance: Where a third party may use or rely on an accountant’s work, the accountant should consider addressing such use at the outset. The accountant should consider identifying any third parties who may use or rely on the accountant’s work product, and document the client and accountant’s understanding of the limitations on any third party use. The accountant should also consider requiring the client to obtain written consent from the accountant before any additional third party may use the accountant’s work product, as well as distribute the “What We Do” publication to all third parties who intend to use or rely on their work.
Limited Liability and Indemnification: As discussed above, the permissible scope of limited liability and indemnification clauses in non-attest service engagements is generally much broader than in attest service engagements where the accountant must maintain independence. The consulting service engagement letter should, therefore, include broader limited liability and indemnification provisions than will typically be used in an audit or review engagement.
Dispute Resolution: This paragraph can generally follow the format discussed in the Audit Engagement Letter section above. However, we recommend consulting with legal counsel to determine which, if any, ADR mechanisms are appropriate for the particular consulting engagement involved.
Billing, Confidentiality, Third Party Requests for Information and Integration/Modification: It may also be appropriate to address issues relating to billing, confidentiality, third-party requests for information and integration/modification (discussed above) when entering an engagement for consulting services.
So the bottom line for an accounting and technology professional is that you need an engagement letter to protect yourself, your business and your client. The engagement letter can protect you against project "creep", against clients who want more without paying for it and it can help you stay on task. The more clearly you can define what you are doing for the client and the better the client understands it, the higher your chances are of having a very satisfied client. While this article talks more about accounting services, if you are providing technology consulting services, it is equally important to obtain an engagement letter and a "What We Do" publication to provide to your clients.
As I mentioned earlier, this article is not legal advice and is intended solely to get you to think about your business and whether you have this very basic documentation with your clients. If you need legal advice, get it from your lawyer. If you are looking for insurance coverage there are certainly many options out there for you to choose from. The companies that I am most familiar with are: CPA Mutual Insurance (CPA's Only), Landy Insurance and Camico. You should do a little research and find the company that best suits your particular needs and situation.
You can download the complete copy of CPA Mutual's "A Guided Tour of Engagement Letters and "What We Do") here