An engagement letter protects firms such as accountants, by providing a record of the contract between the accountant and their client i.e. entering in a contractual relationship.
The use of engagement letters help minimise the risk of potential misunderstandings between both parties.
An accountant's drive to go the extra mile for their client, especially in challenging times such as the current pandemic, is understandable. It is a competitive market. Clients expect – and demand – first-class service and support from their accountant.
It has been a time of change for practitioners on many levels: new working practices, new means of communicating with clients and colleagues, new ways of accessing and storing documents. These changes are likely to be lasting, with many firms electing to adopt a hybrid remote working model moving forward.
With change comes increased risk. Practitioners have long recognised the need to take proactive steps to manage risk. A well-drafted letter of engagement is an essential part of every practitioner's risk management toolkit, as it is crucial to manage a client's expectations from the outset. Many complaints and professional negligence claims arise because the accountant has failed to adequately define the scope of their engagement with the client.
In this article, we offer guidance on good practice and practical tips when drafting letters of engagement, with a focus on mitigating risk as we emerge from the pandemic.
Minimum content – a good start
Firms are generally aware of the minimum information required for their letter of engagement, often referred to as their “terms of business”. For example, if the practice will benefit from a share of the interest payable on invested client funds, this must disclosed.
The letter must also explain how the client can cancel their engagement with the firm within 14 days under the Consumer Contract (Information, Cancellation and Additional Charges) Regulations 2013 and the Consumer Rights Act 2015.
While every letter of engagement will vary i.e One size does not fit all. There are a number of key areas that should be considered when drawing up your letter. These include:
- Scope of work
- Responsibility for your work
- Your client's responsibilities
- Limitation of liability
Additional content: good practice
It is simply not practicable to draft a letter of engagement from scratch every time an instruction is received and accepted. For ACCA members, there are free factsheets available on their website containing engagement letters that members can use.
However, the most effective letter of engagement will also need to be tailored to the individual client and the specific piece of work to be undertaken. Careful thought should be given to the key terms of engagement, outlined below.
Scope of engagement
Perhaps the most important section of a letter of engagement – from a risk management perspective – is the definition of the scope of the work that the accountant has agreed to undertake. It is important for practitioners to consider the extent of their remit so that they can clearly define the advice and services that will be provided and, crucially, any advice and services that will not be provided. If an area of advice is specifically excluded – either because it falls out with the practitioner's area of expertise or because the scope of the work to be undertaken has been restricted with reference to an agreed fee – it is important not only to highlight this exclusion but to direct the client to an alternative source of advice for the issue in question.
Where advice and/or services are specifically excluded from the scope of the accountant's remit, care should be taken throughout the instruction not to comment on these excluded areas. Avoiding this protects both the practitioner and the client.
There have been a number of claims brought against accountants for advice that was not provided directly by them, in particular in the area of tax mitigation where accountants have referred clients to specialist scheme providers. Where there has not been an express exclusion of liability for this third-party advice, the accountants have been drawn into claims where a scheme has come under the HMRC spotlight and the client has found themselves facing large tax penalties.
A client, rightly or wrongly, might assume and subsequently assert that the accountant was responsible for a wider range of matters. A well-drafted letter of engagement – which sets out any specific exclusions clearly – will serve to minimise any risk of misunderstanding.
Lines of communication
The letter of engagement should clearly define who the client is. Where the accountant acts for more than one client, the letter should record, following consultation with the clients, whether instructions can be accepted from all parties or whether there is one representative of the group who is authorised to provide instructions on their collective behalf. This is essential for avoiding miscommunication.
The accountant should also say how they intend to communicate with the client. At present, this will likely be by electronic means, but it is important to clarify the point. As a result of the pandemic, practitioners are less likely to meet clients in person or indeed to correspond via post. Virtual meetings via Teams and Zoom can be effective – and convenient – but are not suitable for all clients. Remote working can, inadvertently, lead to less interaction, as clients may be less inclined to contact their accountant with queries or for updates. Providing clearly defined lines of communication – identifying the partner responsible for the instruction and the assisting fee earner along with their direct contact details – is important, more so now than ever.
As with client communication, compliance with the General Data Protection Regulation (GDPR) should be reviewed in light of the pandemic-driven changes to working practices. Accountants, as data controllers, must ensure that they process and store their clients' data lawfully. They must be transparent about how data are used and held. Firms are required to publish this information on their website in the form of a privacy notice. The letter of engagement should include specific reference to the GDPR, the firm's privacy notice, and instructions on how to access it. It is good practice to highlight in the body of the letter how the client's personal data will be stored and used, including what will happen to documents and data held when the instruction is at an end.
Timescales and costs
Where appropriate, the letter of engagement should outline the likely timescales for completion of the work, the various steps involved and the agreed or estimated cost of the work. Doing so can help to manage the client's expectation. Should there be a delay that is out of the accountant's control, this should be communicated to the client, in writing, as soon as possible so that the expected timeframe can be reworked.
It is also important to make the client aware of any steps they will be required to take or timescales they will need to meet.
Limits of Liability
As with various professional bodies, accountants are usually required to carry a minimum limit of liability, also known as 'limit of indemnity' when undertaking their services. Examples are for ACCA members, they need to carry a minimum of 2.5 times their fee income from the last completed financial year end, 25 times their largest single fee from one client and £50,000, whichever is the greatest of the three will be there minimum limit of indemnity required. As for ICAEW members, they need to carry a minimum of 2.5 times their fee income from the last completed year end however, this will also depend on the accountants fees declared.
Depending on the size of the work undertaken, some clients may request an accountant to carry a higher limit of indemnity than their minimum so it is important to specify in the letters of engagement what limit of liability will be carried out.
One exception to the requirement to issue a letter of engagement relates to repeat instructions from regular clients to carry out the same type of work. If there is doubt about whether the work instructed is sufficiently covered by a previous letter of engagement, it would always be safer to err on the side of caution and issue a new one clearly setting out the terms of the new work.
At the end of the letter of engagement, it is advisable to include a section on “Next steps”. Is the client required to sign and return the letter of engagement? Is the client required to confirm in writing that the terms are accepted? Guidance should be provided and diary reminders set to check that the client has returned the signed letter or has otherwise confirmed their acceptance of the terms outlined.
One of the positives of remote working is that it is much more likely that the letter of engagement will have been issued by email. This means that there will be an email chain (hopefully saved to the file) confirming that the letter of engagement was sent to the client. From a risk management perspective, it is important to ensure that a signed copy of the letter is returned or an email has been received in response confirming that the terms of engagement are accepted.
Practitioners are short on time and under increasing pressure to meet client demands and financial targets. Issuing a generic “one size fits all” letter of engagement is often viewed as a quick “tick box” exercise. That is not however an effective means of minimising risk. The importance of issuing an appropriate, tailored letter of engagement cannot be overstated.