Engagement Agreements for Accounting Services

What Is an Engagement Agreement for Accounting Services?

An accounting services engagement (or agreement) is, as the name suggests, a contract between a professional services firm and its clients that lays out the scope and terms of the accounting services to be provided. It formalizes the working relationship and minimizes any possible misunderstandings or unexpected circumstances about the nature of the role of the parties to the agreement, including expectations for work performed .
A signed accounting services engagement formally marks the beginning of the relationship between an accounting firm and its client. In general, there are three key areas of information that should be included in any accounting services engagement: the services being provided, the compensation, and relevant disclaimers with respect to the services provided. With these in place, a client knows what to expect and an accountant’s work is protected against undo liability.

Components of an Accounting Services Engagement Agreement

Understanding the needs of each client will help you to better prepare an engagement agreement. At a minimum, the following components should be included in the agreements:

A description of the scope of work to be performed. The scope generally includes both the services that will be performed and the responsibilities of both parties. In some cases, it may be appropriate to designate one party as the "client" – for example, a private equity fund with respect to its portfolio companies – even though it is communicating with your firm through different portfolio company employees.
Payment terms. Firm policies on payment terms, including progress billing, retainers, and collection issues (such as the imposition of late fees and/or the retention of collection agencies) should be addressed.
Duration. There are three common types of duration provisions in accounting services engagement agreements: (i) indefinite: a provision whereby either party can terminate the agreement at any time upon notice of a specified number of days (with or without cause); (ii) fixed term: a provision which makes the agreement effective for a specific period of time, with or without renewal options; and (iii) project-based: an arrangement which terminates automatically upon completion of a specific service, for example, delivery of a final report or a final audit opinion.
A confidentiality clause. The starting point for this clause is often the AICPA’s confidentiality rule, although for many states there are additional criteria that must be met. In any event, there is almost always a need for a confidentiality clause, as your firm may well have access to information that is owned by the client, but is not intended for general distribution or sharing. In addition, if there may be a need for the client to share some of this information with others, we may want to make specific reference to such arrangements and the client’s rights to disclose confidential information.
Termination conditions. As a minimum, the parties should agree that either party may terminate an engagement, with or without cause, on reasonable written notice. Some clients attempt to limit the ability of the firm to terminate the engagement unless the client is in breach of the agreement, and in most cases, this is unacceptable.

How Engagement Agreements Affect Your Client Relationship

Engagement agreements are the first foundation for a successful relationship between CPAs, public accountants and clients. The terms of service engagement agreements (sometimes referred to as an "engagement letter") establish the scope of the services that the CPA public accountant will be providing to the client and the fees associated with those services. There’s no limit as to what kind of relationship can be established and documented in an engagement agreement, but some minimum terms are usually included. Most typically, the description of the services is predominant, and other terms are secondary.
Engagement agreements help build trust and clarity between accountants and their clients. This is because engagement agreements help to prevent misunderstandings and disputes. An engagement agreement can help prevent problems with too broad of a scope agreement and result in the client’s dissatisfaction with the accountants services. Agreements in writing can also help with misunderstandings between accountants and clients. A written agreement can clarify the accountant’s or auditor’s responsibilities and the responsibilities of the client or any other party relative to the audit or services being performed. Verbal representations made by a client or accountant may not carry much weight if a written agreement contradicts them, as to the different understanding of the parties.

Pitfalls to Avoid

It is imperative that the professional’s engagement agreement includes clear and unambiguous terms. One common mistake is to use legalese or to overuse "Definitions" when it is not necessary. Someone reading the agreement should be able to readily understand what is meant without having their compass constantly fine-tuned to the professional’s subjective marks.
Another common mistake is not reviewing (and updating, if necessary) the engagement agreement after a significant change in the governing profession’s or industry’s professional standards or applicable laws and regulations. When there is a critical change in the legal landscape, practitioners in that field usually assume that everyone is aware of the change. But if that practitioner’s understanding is wrong, then the client and the practitioner may find themselves at odds with each other during a subsequent dispute. Not all legislative changes are apparent—think about revenue recognition and its many false starts in the last couple of years. Failures to update agreements promptly can be expensive.
Finally, professionals should not neglect dispute resolution considerations, especially in the accounting service arena. Usually, the professional will have a much stronger bargaining position and can consider mandatory binding arbitration—especially for smaller disputes.

Drafting a Thorough Engagement Agreement

An engagement agreement is essential to avoid misunderstandings, and there are several elements that should be included. A comprehensive engagement agreement will not only ensure that all parties understand the terms of engagement, but will also provide legal protections to your accounting firm:

Identify the Parties. Clearly identify your firm and the other party. Include the other party’s full name, address and employment identification number (if applicable).
Specify the Scope of Services. The more detail the better. Ideally, a scope of services will start with a brief explanation of the services that your firm offers. Then a detailed list of the specific services you are offering for this particular client. For example: Tax Compliance Services ("Tax Compliance Services") means the services to be performed by the firm as set forth in the tax organizers, questionnaires and/or coverage documents provided to the client at the beginning of each tax year, as supplemented by additional information submitted to the firm by the client including but not limited to the following services: Medicare reimbursement analytics, third party reimbursement reviews, Medicare TEFRA 435G and final cost reports, Medicare TEFRA 990TD cost certifications, state Medicare cost and reimbursable health care system indirect medical services cost reports, allocated costs to subacute facilities, financial package and federal cost reimbursement reporting, allocation of general administrative overhead and operating indirect costs to long term care areas, spread of outpatient revenue and expenses, preparation of questionnaires, tax work papers, federal and state tax returns, and federal, state and local tax correspondence and various other specialized tax related services.
Identify the Engagement Period. An engagement period can be described as the time frame for which the engagement is intended to last. However, this time frame can be both specific and flexible. The engagement period can begin and end on a specific date. Alternatively, it can end based on certain conditions. For example: "This engagement shall terminate upon the occurrence of any of the following events: (a) termination by either party upon thirty (30) days written notice to the other party; (b) in the event of failure by the Client to abide by the terms and provisions of this Agreement; or (c) in the event of default by the Client in any payment obligations under any terms hereunder or as dictated by the Account Balance Certification unless such accounting has been made by an Accountant agreeably to the Client; provided that, however, this Agreement shall not be terminated for any of the foregoing causes until an authorized representative of the firm of Accountants shall have delivered to the Client a certificate signed by a duly authorized partner of the firm of Accountants charging against the Client a participating capital contribution or an interest charge, which shall be due and payable on a specified date."
Include Disclaimers of Liability. Your firm should disclaim any liability associated with its work. For example: The Firm shall be entitled to rely upon the accuracy and truthfulness of all information provided to the Firm by the Client. The Client shall not take any position before any court , agency or other authority in conflict with the opinion or advice expressed by the Firm to the Client.
Add a Change in Terms Clause. You never know what will come up, so a change in terms clause will allow you to renegotiate the scope of services in the event of unexpected occurrences. For example: In the event the Client requests additional services or the scope of services is modified in such a manner to require the Firm to perform any additional services, then the Client will pay a fee commensurate with fees appropriate for the services requested and the time expended by the Firm’s personnel, plus reasonable reimbursable expenses such as travel, lodging, per diem allowances and incidental expenses.
Add an Indemnification Clause. An indemnification allows you to disclaim any liability associated with your work. For example: To the maximum extent allowed by applicable law, the Client agrees to release, indemnify, hold harmless and defend the Firm and any person (i.e., partner, principal, employee, agent, parent, affiliate, etc.) employed or engaged by the Firm, from and against any and all claims, damages or costs (including but not limited to attorney fees and costs) that may arise directly or indirectly from (i) any third parties’ enforcement of confidentiality requirements; (ii) the Client’s breach of the confidentiality requirements; or (iii) any negligence, bad faith or other wrongful conduct of the Client.
Expand Fees and Payment Terms Section. In general, your current fee arrangement can marry its readability to its completeness just by moving the fees and payment terms to its own section. A section like: Fees and Payment Terms. Fee for services identified in the engagement letter will be charged at the Firm’s standard hourly rates for services rendered by the Firm’s employees and partners, plus reasonable reimbursable expenses such as: travel, lodging, per diem allowances and incidental expenses. Fees and expenses are due upon receipt of the Firm’s invoice and shall be considered delinquent thirty (30) days following the Firm’s invoice date. Delinquent accounts shall bear interest at the rate of one and one-half percent (1.50%) per month…
Include a detailed Arbitration Clause. If you want to resolve disputes through arbitration, include a detailed arbitration clause. Final determination of any matter hereunder shall be submitted to arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. At the time of the submission to arbitration, each party shall appoint one arbitrator. If the two appointed arbitrators cannot reach a consensus, they shall jointly appoint a third arbitrator. If either party refuses to appoint an arbitrator within thirty (30) days after receiving a written request to do so, the other party may then appoint a second arbitrator. The Federal Arbitration Act, 9 U.S.C. §§ 1-15, applies to this Agreement. This arbitration provision survives the termination of this Agreement.
Make Sure Both Parties Sign the Agreement.

To Customize or Not: Engagement Agreements

Accounting is not a one-size-fits-all business. The specific services each of your clients require, and how you provide them, are unique to their situation and needs. With that in mind, it’s important to use an engagement letter that is customized for the particular services you’re offering and connects with the individual needs of each of your clients.
Using the same engagement letter for each of your clients is not only unprofessional; they may contain boilerplate language that is not relevant and can leave you exposed by limiting your potential liability (counter intuitively). It can also lead to misunderstandings … if you’re providing data analysis to a client and their engagement letter explicitly states you will not analyze the data, you may find yourself dealing with an unhappy client.
Failing to customize your engagement letters may also expose you from a risk standpoint. If your client is an attorney, for example, you may want to include specific language in your engagement agreement that explains the role you play in their practice and the limitations of your responsibility – to help protect against the "silent CPA" problem raised when clients believe your advice provided services should be solely relied on for tax advice, when instead they should be consulting their attorney.

Addressing Changes and Updates in Engagement Agreements

A common question in the accounting services industry is how to deal with changes that arise during an engagement. Typically, an accounting services engagement agreement covers both specific tasks and a general "continuous" clause that commits to the relationship for a number of months or years, but is usually made subject to annual review. That review process may or may not lead to negotiated modifications to the engagement agreement. Agreements should include general procedures for revising the agreement if something significantly changes in the scope of the work that will be performed, such as: An agreement should require that any changes or modifications be approved in writing. Such as an email or amended contract . Renegotiation of fees is sometimes needed when unanticipated issues arise that require more/less time or effort than originally planned, but the law firm and the service provider should work together to resolve this issue amicably. Amendments to agreements may also be required if legislative or regulatory changes affect the operation of the businesses, such as changes in pricing or government entity regulations. The parties will likely need to renegotiate certain modified provisions based on what occurred. Changes to location, business name, ownership or affiliations should also be approved by both parties and documented in writing, since any such event could be significant to the viability of the relationship.