Use of Standard Terms and Conditions Can Help Build Engagement Letter Consistency

By Deborah K. Rood, CPA, MST 

Imagine that a claim has been brought against your firm and you are sitting on the witness stand defending the firm's services. Your confidence is bolstered by detailed engagement letters used for each service that was delivered to the client by the firm. Yet doubt creeps into your mind as you remember your client's comments.

“Why does the tax engagement letter have different terms than the audit letter? I know we agreed to a change in the limitation of liability provision for one service, but I don’t see that the same change was reflected in the other engagement letter. Who's in charge? Don’t you talk to each other?"

Have you heard clients make similar statements? Have you or others at your firm made similar statements when trying to update engagement letters? And what’s the real risk of differences in terms anyway? How can you address these all-too-common gripes? Let a standard terms and conditions (Ts & Cs) document come to your rescue!

What are the problems?

The expectation gap

An engagement letter, including its Ts & Cs, between a CPA firm and their client establishes an understanding about what the CPA will do for the client, each party’s responsibilities, and includes general terms that address how the firm does business, such as billing and dispute resolution. If the client does not understand the engagement letter's provisions, the effectiveness of one of a CPA’s most important professional liability defense tools may be weakened. Using standard Ts & Cs helps establish a mutual understanding with the client regarding the services to be rendered and contractual elements which will apply to the engagement, thus helping to reduce the expectations gap.

Conflicting terms

Generally speaking, when a firm has multiple engagements for the same client and those engagements are performed in accordance with different professional standards, it is recommended that a separate engagement letter be used for each engagement.

However, when a firm has several engagement letters for the same client, but the "boilerplate" terms differ from one engagement letter to another, the client may suggest that there was really no meeting of the minds on the terms of service since the terms were inconsistent across the multiple letters. Alternatively, the client may cherry-pick terms and assert that the terms that are most advantageous for them apply to all engagements.

When drafting documents, it is important to consider that inconsistencies and ambiguities may be construed against the drafter, which is, in this situation, the CPA firm.

Even if not argued in court, conflicting terms can lead to disagreements and confusion with clients. In the event of a dispute, different engagement letter provisions make reaching a resolution challenging.

A potential solution? Standard Ts & Cs 

There is a remedy for this problem—a set of standard Ts & Cs used firmwide, updated periodically, and included with every engagement letter issued by the firm, typically as an addendum that is attached to and incorporate by reference. Standard Ts & Cs which apply to all engagements give the firm and the client the benefit of a single understanding addressing the key contractual elements of the relationship.

When a standard Ts & Cs approach is employed, the individual engagement team is no longer responsible for updating and negotiating multiple engagement terms. Instead, that valuable time can be focused on the critical task of determining and agreeing the specifics of an engagement with the client, including the scope of services, deliverables, firm and client responsibilities, timing, and fees. Increasing an engagement team’s focus on the engagement-specific elements of an engagement letter can help align expectations regarding the services to be delivered and help reduce the risk of a future disagreement.

Before sending the engagement letter to the client for signature, the engagement team can attach the firm’s Ts & Cs document to it. The engagement letter plus the Ts & Cs represents the full agreement between the firm and the client.

Terms that may be included in a standard Ts & Cs document

The provisions included in a standard Ts & Cs document generally address the key contractual elements of the engagement and can be categorized as follows:

• Firm practices. These provisions describe the firm’s administrative protocols which will apply to the engagement, such as:
  • Termination and withdrawal. Ensuring that the CPA firm may withdraw for any reason without completing services is important, especially if the client’s integrity is questionable after the engagement has commenced.
  • Billing and payment terms. Addressing consequences of late payments or a failure to pay before the engagement begins reduces the likelihood of an expectations gap if bills are unpaid.

• Standards-related terms. This category is for terms that may be required by or relate to the CPA firm’s professional standards, such as:
  • Confidentiality. Including this provision may prevent a client from requiring the CPA to sign its own confidentiality agreement, which may be overly broad.
  • Records management. The terms and conditions should explain that client records will be returned to the client and that the CPA firm's records are its property. These provisions also may include how the CPA firm will respond to subpoenas and other third-party records requests.

• Terms which help protect the CPA firm. These provisions clarify the firm’s role and responsibilities, what it is and is not responsible for, such as:
  • Reliance on oral and written advice. Specifying that only advice requested and provided in writing may be relied on may assist in the defense against allegations that a client relied on off-the-cuff advice provided by the CPA firm.
  • Disclaimer of legal and investment advice.Establishing that the CPA firm will not provide legal or investment advice is important, especially if the firm is providing services related to the Corporate Transparency Act.

• Risk allocation provisions. These provisions serve to allocate the risk of an engagement between the client and the firm and may include:
  • Dispute resolution. CNA claim experience has found that agreeing in advance with a client on how disputes will be resolved, such as use of mediation, and designating the venue and jurisdiction that will be used generally expedites the resolution of disagreements.
  • Limitation of liability and indemnification of the firm. Where permissible, these clauses help limit the firm's exposure if a claim arises. If the engagement is of a type whereby the firm is precluded from including these clauses because they would impair independence, strike these terms from the terms and conditions through a notation in the engagement letter.

• Legalese. These are terms generally found in any contract, for example:
  • Severability.If a certain provision of the engagement letter is found to be unenforceable, a severability provision allows just that provision to be struck from the contract rather than the entire contract being considered unenforceable.
  • Electronic signature and counterparts. Establishes that an electronic signature is intended to authenticate a written signature and shall be valid.

 Who is responsible for creating and updating a standard T&C document?

 In general, the individual or team responsible for quality oversight at the firm takes the lead on creating and maintaining the firm’s standard Ts & Cs document. At a small firm, this may be the firm owner. At a mid-size firm, this may be the managing partner. A large firm may have a separate quality control function. Don’t know where to begin? Consult your professional liability insurance carrier who may have an example available for use.

Regardless of firm size, centralized oversight of a firm’s standard Ts & Cs document is critical. Any requests for changes, whether the request is made by a client or engagement team, should flow through the quality oversight function. This helps ensure the firm manages its risk consistently across all engagements and engagement teams and can assess and understand the risk impact of any agreed-to changes to the firm’s standard Ts & Cs for an individual engagement and for the firm as a whole.

A firm’s standard Ts & Cs document should be reviewed by an attorney for enforceability in the firm’s jurisdiction. It is also recommended that a firm periodically revisit the document to address new professional developments, changes in law, and changes to firm policies.

Acknowledgement

The client should acknowledge that the firm’s standard Ts & Cs document have been received, read, and accepted, which can be acknowledged through initialing a box next to the engagement letter signature block.

A Success Story

A CPA firm provided bookkeeping and tax compliance services to the client. When the IRS disallowed a deduction resulting in additional tax, penalties, and interest for the client, the client claimed that the CPA firm was responsible for the penalties. The firm reviewed its engagement letters and determined that it had implemented the terms and conditions strategy the year before the matter relating to the disallowance and included a limitation of liability clause.

This technique was beneficial to the firm because the prior year, the corporate tax engagement letter limited liability to three times fees for the service, but the bookkeeping engagement letter was silent. If the claim had occurred in the prior year, the client may have argued that it was a bookkeeping mistake, and that the limitation of liability clause did not apply. Instead, one set of terms and conditions that limited liability applied.

The rules of war are drawn up during peacetime. Terms and conditions are those rules.

Deborah K. Rood, CPA, MST, is a Risk Control Consulting Director at CNA. For more information about this article, contact specialtyriskcontrol@cna.com.

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