Why CPAs should always prepare engagement letters for clients



Video transcript:

Engagement letters are so important for CPAs, there’s really three main reasons. Number one, for a lot, for attest services it’s required in the standards that you have to have an engagement letter, but even if it’s not required by the standards, it’s required that you establish an understanding of the scope of services with the client. And so all you’re doing is writing down that understanding that you already have. So number one, it’s required or just a darn good recommendation. Number two, a good engagement letter will establish what the CPA firm will do and what the client will do: “CPA firm, here’s what we’re doing; here’s what we’re not. Here’s our scope of services. Client, here’s what you’re responsible for. You’re responsible for getting us information on a timely basis. You’re responsible for cooperating. You’re responsible for reviewing returns, for making management decisions, establishing CPA and client responsibilities.” Number three, it assists in the event of a professional liability claim. So often a professional liability claim occurs because there’s a misunderstanding about the scope of services. So if you’ve done a good job of establishing scope, man, you might not even have, you might be able to prevent a professional liability claim. But even if you don’t do that, you’ve strengthened your defense because at least you have an argument there as for why it’s why you did what you did or didn’t do what you did or didn’t do. But third, it can also — our claims people have done a study and claims with an engagement letter can be up to 71% less severe or expensive to settle because you’ve done all of that and maybe you’ve got a limitation-of-liabilities clause in there, or maybe you’ve got something else in there that makes the professional liability claim less. So why are engagement letters important? Number one, it’s required or just a darn good reason to do it in the professional standards. Number two, it establishes the responsibility of the firm and of the client. And number three, it assists in the defense of a professional liability claim. I mean nobody wants a claim, but if you think about a claim like a seatbelt, you never want to be in an accident, but if you are, you definitely want that seatbelt there to protect you, and that’s what an engagement letter’s purpose is, too.

SPONSORED REPORT

2018 financial reporting survey: Challenges and trends

Learn the top reporting challenges that emerged in a survey of more than 800 finance, accounting, and compliance professionals across the world, and compare them with your organization's obstacles.

PODCAST

How the skill set for today’s CFO is changing

Scott Simmons, a search expert for large-company CFOs, gives advice for the next generation of finance leaders and more, including which universities are regularly producing future CEOs and CFOs.