Three Essential Elements of a Protective Engagement Letter

Three Essential Elements of a Protective Engagement Letter for AccountantsCPAs devote their services to helping clients with complicated accounting and tax needs. It is a revered profession and expertise must extend beyond numbers—the subjective and intimate elements behind this type of advice increase the potential for problems.

Even with a public accountant’s best efforts, clients’ future actions can prove to be unpredictable. That’s why the best lawyers and insurance experts stress the importance of protective engagement letters for CPAs. According to the Pennsylvania Institute of CPAs, a lack of a quality engagement letter is a common thread among liability claims. While plenty of CPAs write these letters, each document must include the right elements in order to be effective.

While you are familiar with an engagement letter, there are specific points to include in this document that can shore up any weaknesses, protect against liabilities and clearly outline the services that will be exchanged between a CPA and client.

Here are three critical points to remember the next time you are reviewing an engagement letter:

1. Customize the content

An engagement letter is a valuable tool in the accounting field, but it isn’t always a versatile one. This type of document is on the front line in the battle against malpractice, but it must be customized for each client in order to be effective. According to The CPA Journal, an engagement letter loses its benefits if it isn’t tailored for specific circumstances. Each client brings his or her own set of needs, and using a boilerplate letter can miss these nuances. That will leave the accounting firm vulnerable should things not go as planned.

2. Be clear and comprehensive

An engagement letter must protect the interests of the accounting firm. It cannot do that if it doesn’t include every detail about their professional relationship with the client. According to the Journal of Accountancy, the letter’s author must be clear and comprehensive. For example, outline every return individually, including the year it will be prepared and the number of years that service will be completed. Include clauses and disclaimers to further protect against malpractice, wherever possible.

3. Highlight the dates

Dates matter. In many cases, the CPA will work with the client for an extended period of time. For example, helping a business owner file their professional and personal returns will take place over many months. An engagement letter must highlight the dates these services will be exchanged. Typically, it will only cover the current year, but it is crucial to make this distinction. When other public accountants executed previous years’ returns, make sure the document clearly states that those previous year’s returns are not the responsibility of the current CPA.

Unfortunately, not every professional relationship goes smoothly. While CPAs never approach clients with this thought in mind, it is always smart to use effective communication skills to implement quality risk management procedures.


© 2014 Merit Career Development. All rights reserved. For more information, please contact Jim Wynne at jwynne@MeritCD.com.

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