Why should CPAs use engagement letters? The reasons are many and varied. Professional standards require an engagement letter for attest services. Standards for other services require the CPA to establish an understanding with the client of the services to be performed. In addition, the use of an engagement letter generally provides for a more efficient resolution of client disagreements. Finally, the AICPA Professional Liability Insurance Programs experience demonstrates that the use of engagement letters has a positive impact on reducing claim severity.
Despite all of the benefits supporting the use of engagement letters, many CPAs fail to do so. If you are one of the CPAs who does not use an engagement letter, perhaps one (or more) of these is the reason you've been using.
I'm not convinced engagement letters really work.
In short, yes, engagement letters work. While they are not a "get out of jail free" card if a claim occurs, engagement letters support a defense if a claim arises. Consider this story where a solid engagement letter may help to avoid a future claim:
A CPA firm's corporate tax client becomes subject to sales tax collection and remittance obligations in various states following the Supreme Court's decision in South Dakota v. Wayfair, Inc., No. 17-494 (U.S. 6/21/18). The client sold goods over the internet and did not collect sales tax in South Dakota and other states that impose sales tax collection obligations on out-of-state retailers that meet certain "economic nexus" standards. Dissatisfied with the new tax obligations, the client blamed the CPA firm for failing to advise it to review its sales tax filing obligations in other states. The CPA firm responds by referring to its trusty engagement letter, which contains two important, applicable provisions, namely: * "CPA Firm is not responsible for advising Client Name on nexus in other states unless specifically engaged to do so"; and * "Tax planning services are not included as part of the engagement but can be provided pursuant to a new engagement letter." To further shield the CPA firm from the client's displeasure, the firm sent a newsletter to all clients explaining the impact of the Wayfair decision and advising clients to contact the firm for assistance in applying the decision to their specific facts and circumstances.
I have long and close relationships with my clients. They would never sue me.
Some attorneys who defend CPAs refer to these types of clients as...