Page 495 - JoFA_2022

PROFESSIONAL LIABILITY SPOTLIGHT

Do I really need a new

engagement letter for that?

By Deborah K. Rood, CPA

onsider this: Many professional liability claims arise because
Dismal C A CPA firm prepared tax returns for an of the three “M’s” — mistakes, misunderstand-
engagement individual and his two businesses (Business A and ings, and misrepresentations. CPAs are human
letter usage Business B), all of which had separate, signed en- and make mistakes sometimes — an engagement
gagement letters for the return preparation work.
letter cannot prevent that. Misunderstandings
53% The client asked the firm to research how a state and misrepresentations, however, may be avoided
if there is clear documentation that describes the
income tax credit applied to Business A but did
not ask about Business B. The CPA performed the scope of services and each party’s responsibilities.
The percentage of requested research and responded to the client but Sometimes, it may seem that preparing an
tax claims asserted did not have anything that documented the scope engagement letter is not valuable because it takes
in 2021 against of services or fee arrangement for this additional more time to prepare the letter than it takes to
CPA firms in the research, such as an engagement letter. When the deliver the service. Is there a different approach?
AICPA Professional client balked at the bill for the additional services,
Liability Insurance the CPA discounted the work as an accommoda- ALTERNATIVES TO AN ENGAGEMENT LETTER
Program in which tion, took the loss, and begrudgingly put the An engagement letter is highly recommended for
there was no matter behind him … or so he thought. a new client or additional services to an existing
engagement Several years later, the client left the CPA client if the service falls under different profes-
letter for the for another firm. The new firm asked the client sional standards than the initial engagement.
corresponding
service. why their previous firm didn’t apply for the state Also, if an additional service would take signifi-
income tax credit for Business B, indicating it cant time or could have a material impact on the
Source: CNA Accountants would have qualified. Unfortunately, the statute of client or other stakeholder, such as year-end tax
Professional Liability limitation had expired, and the client was unable planning, a separate engagement letter should
Claim Database,
underwritten by to apply for the credit. The client sued the former be obtained.
Continental Casualty CPA firm asserting that since the former CPA In certain situations, however, other forms of
Company, Copyright © firm performed research related to Business A, documentation, such as an engagement letter ad-
2022. All rights reserved.
the client assumed the firm had also performed dendum or email, while not ideal, may be sufficient.
similar research on Business B and had concluded These circumstances may include minor changes
Business B did not qualify for the credit. to an existing engagement, such as preparing a
While the former CPA firm argued that the tax return for an additional state or modifying the
client had only asked about Business A, the lack of analysis period in a due diligence engagement.
an engagement letter or any other sort of docu- Alternative documentation might also be used to
mentation related to the requested research made memorialize less time-consuming services related
it difficult to defend the claim that the CPA firm to a client’s quick question or request, such as
was engaged to perform the same work for Busi- assisting a tax client with their response to a tax
ness B. Unfortunately, in a war of words, clients notice or calculating withholding required on a
often prevail over the professionals. bonus to avoid underpayment penalties.
Defense of the CPA firm proved challenging,
and the claim was settled. Requirements of alternative documentation
Most CPAs know that a dually signed A primary benefit of an engagement letter is
engagement letter, including applicable terms alignment of the CPA’s and the client’s expecta-
and conditions, is the best way to document the tions regarding the scope and limitations of the
agreed-upon services, especially if a disagreement service to be performed. To derive the same
arises. Despite this knowledge, claim experience benefit from alternative documentation, it is
demonstrates that many CPAs provide services imperative that the alternative documentation
without an engagement letter. include the following:

4 | Journal of Accountancy December 2022