Letters of Engagement

13 March 2017.jpg

 

Under the code of ethics of the professional accountancy bodies, it is mandatory for accountancy practices, when signing up a new or existing client, to obtain a signed letter of engagement setting out the terms of the business agreement and contracted services. This blog provides tips and advice on writing effective engagement letters to avoid unnecessary client disputes.

The letter of engagement is a formal letter and is in fact a contract between the accounting or audit firm and the client. Among the many purposes of the letter is to ensure that all parties are aware of their respective responsibilities, resulting in greater clarity and hopefully fewer disputes and/or misunderstandings.

Regulated work

Formal engagement letters are mandatory for audit work and investment business advice. Certain clauses are mandatory for inclusion in engagement letters, e.g. clients’ right to complain to the firm (usually a contact name in the firm for complaints, is stated in the letter) and to the professional body of the advising firm, in the event of a complaint being unresolved. Another clause will refer to the latest anti-money laundering legislation, the Criminal Justice (Money Laundering and Terrorist Financing) Act, 2010.

A commission retention clause, is mandatory, where the firm has recommended goods or services (e.g. advising the client to seek advice from an external financial adviser) to the client, for which it will earn a commission, about which the client might otherwise be unaware.

Dispute resolution

Once a dispute arises, the letter of engagement can play an important role in helping find common ground and resolve disputes quickly, including fee disputes. The letter of engagement is often the first document requested by professional indemnity insurers in the event of a dispute, which has developed into a claim.

The lack of a well worded engagement letter will often result in an unfavourable outcome for the accounting firm. Hence, it is essential that the letter is both complete and up to date.

In a 2009 case, involving outstanding fees, discounted to around £70,000, heard in the High Court of Justice in Belfast, Northern Ireland, the judge held against the accountancy firm on various grounds, including the fact they had no engagement letter after 20 years of service to the client that owed the money. ‘Based on the evidence, I find that during a period of some twenty years there was no retainer note, no written contract and no breakdown of hourly rates of remuneration’.

Regulated work

Engagement letters are mandatory for regulated work including charities and investment/insurance intermediaries. Engagement letters are extremely important where there is an increased likelihood of dispute, such as in business valuations, profit projections, cashflow forecasts and business plans.

For some reason, these are the areas where engagement letters are most often ignored, perhaps due to the lack of formal guidance and the degree to which reliance is necessarily placed on senior management, making formal documentation of respective responsibilities all the more important.

Matters outside the scope of the service

It is recommended best practice that engagement letters include negative clauses, clearly stating what the practice will not do for the client, (e.g. management accounts, VAT returns) besides covering the work that has already been agreed to be done.

A copy of the letter should be signed by the client and returned as positive evidence of their acceptance of the terms. Best practice is to obtain positive evidence of acceptance of the terms. i.e. get the client to sign and return a copy of the letter to indicate their agreement. Adobe Sign is a useful tool that facilitates engagement letters to be sent electronically by mail and allows the client to sign off quickly, all the while tracking and electronically storing the signed documents for both parties.

What needs to be included?

The engagement letter should include the following:

1.       Cover letter/key facts;

2.       Standard terms of business/limitation of liability;

3.       Reference to the appropriate accounting framework such as FRS 102 or IFRS;

4.       Audit;

5.       Accountant’s report (i.e. audit exemption and unincorporated entities);

6.       ‘Agreed upon Procedures’ such as under the International Federation of Accountants ISRS 4400, where an auditor simply provides a report of the factual findings of agreed-upon procedures and where no assurance is expressed. Users of such reports assess for themselves, the procedures and findings which are reported by the auditor and draw their own conclusions from the auditor’s work

7.       Accounting services e.g. accounts production, management accounting, bookkeeping;

8.       Taxation services;

9.       Other services e.g., payroll, VAT returns, company secretarial services;

10.   Specialist reporting requirements, e.g. Central Bank requirements for insurance brokers and the Accountants’ Report to the Law Society under the Solicitors Accounts Regulations, 2014.

It is not permitted to include a limitation of liability clauses in respect of audit work. However, for non-audit work it is possible to include a limitation of liability clause in an audit engagement letter. Users should seek legal advice regarding the wording of such clauses. 

Example of a liability cap for the professional accountants’ reporting engagement

The aggregate liability, whether to [insert name of client] or [insert name of third party] or any other party, of whatever nature, whether in contract, tort or otherwise, of [insert name of professional accountants] for any losses whatsoever and howsoever caused arising from or in any way connected with this engagement [and this transaction] shall not exceed [insert amount].

 

To access some ready-made and up to date templates of engagement letters, please visit our website at https://jmcc.ie/d7/content/publications