Watertight accountant engagement terms needed

This article was current at the time of publication.

Documentation is key when it comes to onboarding new clients or updating accountants’ engagement terms of service for an existing client.  

“We have certainly had circumstances where a client rightly or wrongly assumes an accountant will undertake work outside their scope,” says Fenton Green & Co Executive Director Drew Fenton CPA. The firm handles insurance placements for more than 2800 CPA firms.

“Accountants need to be very clear about which areas of the client’s business or finances they are going to assist with to avoid potentially costly repercussions,” Fenton says. 

An engagement letter that outlines the scope of work in detail, as well as how fees are calculated and agreed to billing schedules, is ideal, says Jodie Smith FCPA, Senior Assessor – Professional Standards for CPA Australia.

A written Terms of Engagement can help reduce professional indemnity insurance premiums and many insurers require it.

In disputes between clients and accountants, the engagement letter can also be heavily relied on by legal representation.

“Accountants’ engagement documentation is there to protect both the accountants and their clients from any misunderstanding and assist with risk management for the firm.  

“The professional standards, in particular APES 305 Terms of Engagement, require a firm to document and issue the terms of engagement to their clients.  Failure to do so is a breach of the professional standard and leaves the firm vulnerable if there is any dispute,” Smith notes.

When things go wrong with engagement terms

Fenton recently handled the case of an accountant who ran into trouble with research and development (R&D) costs included in a tax return for a business client.

“The letter of engagement was quite broad and, when the business stopped using an R&D specialist, they passed some of the work onto the accountant.

“The accountant completed a tax return that relied 100 per cent on the client’s statements about what was spent, the client was audited and sued, and the insurance claim ended up more than $1 million.”

A current engagement letter that restricted services to the accountant’s areas of expertise would have reduced the firm’s exposure, Fenton emphasises. 

“Engagement terms should be limited to your areas of expertise, not all-encompassing.”

Outdated engagement terms – or outdated letters for files sent during assessments – were among the issues with client engagement documentation identified by the CPA Australia Best Practice Program (formerly the Quality Review Program).  

According to Smith, these were more common among established firms with long-term clients.

“Best practice is to update the engagement letter annually although this not the requirement,” she says. 

“But [should] anything significant change in between the issuing of the engagement and performing the engagement in subsequent years, then the engagement documentation should also be updated.”

If in doubt, consider whether, in the event of a dispute, what’s in place would provide the necessary evidence to effectively demonstrate your professional and legal obligations.

Be transparent about services 

Failure to adequately disclose outsourced services and cloud computing was another area of concern identified by CPA Australia’s assessments of engagement documentation.

“Software providers are moving more and more to cloud storage solutions or firms are looking for software to gain efficiencies and often this software is stored on the cloud,” says Smith.

“If the server where information is stored is not located in their office and they don’t have direct control over the data, accountants need to identify to the client in an engagement letter where the data is sent in geographical terms and how it is stored.

“This allows the client to make an informed decision.” 

CPA Australia’s template tool, which has recently been updated and is customisable, can help with documentation, including third-party engagement, confidentiality issues, professional fees and billing, ownership of materials and an accountant’s scope of work in all engagement responsibilities.

Fenton suggests it can also be helpful to include a summary description within an engagement letter of the accounting services that will be provided and those that will not.

“For example, you may be a tax agent, but not an auditor, or assist with budgets but not acquisitions,” he says. 

“Putting a tick by services you do perform, and a cross by ones you do not, makes it very clear to the client what you will and will not do for them.”

Stay in your lane

Scope creep is common when accountants and clients build a more familiar relationship over time. 

However, agreeing to perform services that do not come under your scope of expertise can be a costly mistake, even if you include them in an updated client engagement letter. 

Fenton tells of an insurance case involving an accountant who had agreed to collect and open a client’s mail. 

“He forgot to open a letter and, as a result, the client missed a deadline to object to a building project that [arguably] diminished the value of the client’s property. 

The accountant was sued for more than $600,000.

“That’s a case of where the engagement letter went too far,” Fenton believes.

Smith says good engagement documentation that details accountants’ areas of expertise helps lay a solid foundation for a working relationship, ensures transparency, educates both parties on their obligations, and from the outset demonstrates professionalism.

It also protects your legal rights and can help to reduce indemnity insurance premiums and, if insurers require it, can reduce liability and the risk of doing business.

Smith adds that recent assessments also found a small number of CPA Australia members were overlooking the Professional Standards Scheme disclosure within their engagement terms. 

This disclosure assists to support your limited liability cap for your insurance and sets the maximum of your liability in the event of a dispute.