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TfP 026. Why Engagement Letters Matter · Transforming: Tales of Business Evolution

0:03
Stephanie Otero: Welcome to Transforming
0:05
Tales of Business Evolution.
0:07
I'm Stephanie Otero,
0:08
Vice President-Small Firm Advocate at the AICPA.
0:12
In this episode, we're
0:13
talking all things engagement letters.
0:16
They're one of the most important tools firms
0:18
have for managing risk,
0:19
setting expectations, avoiding scope creep,
0:23
and protecting both the firm and the client.
0:26
To help us unpack why
0:28
engagement letters matter, what should be included,
0:31
and how firms can make them
0:32
part of their everyday workflow,
0:34
I'm joined by two experts in
0:36
risk management and professional liability.
0:38
I'm pleased to welcome Sarah Ference,
0:41
Risk Control Director for
0:42
the Accountants Program at CNA,
0:44
and Nicole Graham, risk consultant at Aon.
0:47
Sarah and Nicole, thank you both for being here today.
0:50
Sarah Ference: Very happy to be here, Stephanie.
0:52
Nicole Graham: Yes, thanks for having us.
0:53
Stephanie Otero: We have a lot to cover,
0:55
so let's just jump right in.
0:57
Sarah, I'll start with you.
0:58
We hear that engagement letters
1:00
are one of the most important risk
1:02
management tools a CPA firm has. Why is that?
1:06
Sarah Ference: Certainly engagement letters are very
1:08
helpful in claim defense,
1:10
and Nicole will talk about that.
1:11
But I think they are also
1:13
just as helpful in claim prevention.
1:16
You can't really measure the claim that never happened,
1:19
but engagement letters are one
1:21
of those tools that can help
1:22
you manage the services
1:23
that you're delivering to your client.
1:25
The outline of the services you will deliver to
1:28
help make sure you and the client are on the same page.
1:31
They detail the firm's fee,
1:33
and more importantly, the things
1:34
that might affect that fee.
1:36
They lay out timelines and deadlines
1:38
which can help avoid last minute fire drills.
1:41
They put a structure into
1:43
place to help support that engagement letter.
1:46
Stephanie Otero: Nicole, same question.
1:48
Nicole Graham: Like Sarah said, these engagement letters
1:50
memorialize your agreement with the client,
1:52
what you are expected to do for the client,
1:54
what the client needs to do
1:56
to help you reach that result.
1:57
But importantly, engagement letters also
2:00
address what to do
2:02
when things don't go according to plan.
2:05
For example, if things go totally off
2:07
the rails and you need to terminate a client,
2:09
a good engagement letter will spell out how and
2:12
when that can happen and the procedures to terminate.
2:16
In addition, when there is
2:18
a dispute during the course of the engagement,
2:20
a good engagement letter will tell
2:23
you how that dispute can be governed,
2:26
whether it's through a choice
2:28
of mediation or arbitration before you can bring
2:30
a certain claim or other risk allocation provisions
2:34
that govern when a dispute happens,
2:36
the engagement letter helps to direct how
2:39
these disputes can ultimately get
2:41
resolved in a more efficient manner.
2:43
Stephanie Otero: Because although we hope
2:45
things don't go off the rails,
2:46
they sometimes do, so really good point.
2:49
Next question for both of you.
2:51
If you had one minute to convince a firm owner to
2:54
prioritize engagement letters, what would you tell them?
2:57
Nicole, we can start with you.
2:59
Nicole Graham: I will tell you that
3:00
if you find yourself in
3:02
the unfortunate position of being
3:03
a defendant in a professional liability claim,
3:06
the very first thing
3:07
your attorney is going to ask you is,
3:09
can I see the engagement letter?
3:11
That is because that engagement letter
3:14
is going to create the playbook for your defense,
3:16
and without it, you're going to start out less
3:19
protected or less organized in
3:21
your defense of the claim.
3:22
Stephanie Otero: Good point. Sarah, same question.
3:24
Sarah Ference: I would remind people that there's
3:26
a saying that an ounce of
3:28
prevention is worth a pound of cure,
3:29
and there's truth to this saying.
3:31
Not understanding the importance
3:34
of planning and putting things into place
3:37
before a claim arises or a dispute arises
3:40
is going to be a very hard and
3:42
expensive lesson to learn.
3:44
I would go back to the, you want to put
3:48
some time into planning to help
3:49
prevent problems on the back end.
3:51
Stephanie Otero: It reminds me of the Girl Scout motto,
3:52
always be prepared. That's what it makes me think of.
3:55
Sarah, can you share an example of
3:58
a claim where a strong engagement letter
4:00
helped defend the firm?
4:02
Sarah Ference: Sure. There was
4:04
a firm that had a client with two businesses,
4:07
and I will just call them business A and business B,
4:10
both businesses were in the retail
4:12
industry and that shipped
4:13
a portion of the business sales
4:15
to customers in various states.
4:18
The firm was engaged to do a nexus study for business A,
4:22
which they did and provided the results to the client.
4:25
Well, then a couple of years later,
4:27
business B was audited by New York State
4:29
and found to have failed to
4:31
properly collect and remit sales tax.
4:33
The client sued the CPA for the penalties, interest,
4:36
and the tax that the client failed to
4:38
collect for the customers. That was a big amount.
4:41
But thankfully, the CPA had an
4:42
engagement letter in place
4:44
and that stated that the nexus study was for business A.
4:48
The existence of that engagement letter
4:50
that limited the scope of
4:51
services to business A
4:53
only was instrumental in the defense of the case,
4:56
which was ultimately dismissed.
4:57
Stephanie Otero: I don't want to think
4:59
about what would have happened if they
5:00
did not have an engagement letter,
5:02
so I'm glad that they did.
5:03
Nicole, can you share an example where
5:06
the absence of a strong engagement letter
5:08
made a claim more difficult?
5:10
Nicole Graham: I have a very basic example,
5:12
and this is from years ago when I
5:15
was practicing as
5:16
a professional liability defense attorney.
5:19
I had a solo practitioner client.
5:22
He had a long-time client
5:25
and friend who he prepared tax returns for.
5:28
He did the tax work for this client for many years,
5:33
had no engagement letter,
5:35
and at some point, one year,
5:38
the client's mother passed
5:41
away and had a fairly large estate.
5:45
Of course, the client
5:47
was the administrator for the estate,
5:50
mentioned it to his CPA and said,
5:54
look, I'm not sure what to do here.
5:56
I see something about inheritance tax,
5:59
but the estate pays and it's not estate tax.
6:03
I need help with this and the CPA said,
6:06
I don't generally get into those engagements,
6:09
but I can refer you to other people.
6:12
But they did have some discussions around it
6:14
generally and some emails around it generally.
6:18
Then the tax return for the estate does not get filed,
6:22
and the client sues
6:25
the solo practitioner saying,
6:26
I thought you were going to handle it.
6:27
Solo practitioner says, I told you I was
6:29
not going to handle it and I
6:31
don't do those types of returns.
6:32
I cannot help you with that,
6:34
and I told you to look elsewhere.
6:36
Well, unfortunately, it was cloudy
6:39
enough between the email communications and
6:41
the he-said-versus-he-said
6:43
situation that the claim was filed.
6:47
We were not able to get out of
6:49
the claim based on any scope limitation,
6:53
and we had to end up ultimately settling the claim.
6:56
Stephanie Otero: That makes me so sad for
6:57
the solo practitioner.
6:59
You both shared two experiences,
7:00
one where there was an engagement letter
7:02
and one where there wasn't.
7:04
What lessons can firms learn from
7:06
these experiences? Sarah, will start with you.
7:09
Sarah Ference: Sure. I would say
7:11
that the lesson that this firm learned or
7:14
had learned since they
7:15
used the engagement letter was that
7:16
words matter and details matter.
7:20
The fact that the engagement letter
7:22
for this nexus study for
7:24
business A specifically identified Business A as
7:27
the client and stated that
7:29
the Nexus study was to be performed for business A.
7:32
Well, those facts and those words and those details
7:35
mattered at the time and
7:37
definitely in the defense of the case.
7:38
When you use a more generic wording,
7:41
the client might have been able to argue that
7:44
the nexus study applied to
7:45
both of those client businesses,
7:46
which thankfully in this instance,
7:49
that vagueness was not there.
7:50
Stephanie Otero: Nicole, same question.
7:52
Nicole Graham: Memories get fuzzy,
7:54
so having a strong engagement letter and
7:57
documenting any substantive discussions with the client
8:02
throughout the course of the engagement is
8:04
crucial because you don't want to run into
8:06
a situation later where you're being accused of
8:09
having to have provided services you didn't provide.
8:13
Stephanie Otero: We don't want
8:14
engagement letters to be 100 pages long.
8:17
Sarah, what are the core components
8:20
that every engagement letter should include?
8:22
Sarah Ference: I think there's
8:23
a misconception that engagement letters
8:25
have to be long or that
8:27
they're always long. They certainly can be.
8:30
Terms and conditions and other protective provisions
8:33
can definitely increase
8:35
the length of an engagement letter,
8:36
but fundamentally, engagement letters
8:39
should include five basic components.
8:41
The scope, which is what you're going to do.
8:44
The client responsibilities is
8:47
what the client needs to do.
8:48
The deliverable or the work product,
8:50
which is what the client gets.
8:53
The timing, so when you're going to do it,
8:56
and then your fees,
8:57
what the firm is going to charge
8:58
the client for the services.
9:00
Really, those five basic components
9:03
are what every engagement letter needs to have.
9:06
Certainly, there's other things,
9:08
but at its core,
9:10
that's what an engagement letter should include.
9:12
Stephanie Otero: Sarah, a follow-up to that
9:14
from a risk management perspective,
9:16
why is scope of services the most important?
9:20
Sarah Ference: I think I alluded to
9:22
it a bit in my example.
9:23
When that scope is not
9:25
detailed enough or specific enough,
9:28
it just allows different interpretations
9:31
of your scope of services to exist.
9:34
It allows a client
9:36
to think one thing and you to think another,
9:39
and there'd be a disagreement in that.
9:41
If there is a claim,
9:42
it allows a plaintiff attorney to insert
9:45
their own interpretation of the scope of your service.
9:48
Stephanie Otero: I never realized
9:49
the importance of scope,
9:50
and now I do, so thank you for sharing that.
9:52
Nicole, why is client responsibility so important?
9:55
Why do firms sometimes overlook it?
9:57
Nicole Graham: It is very important because
10:00
it lets the client know what is expected from them,
10:03
what is needed from the client, when it is needed,
10:05
what their responsibilities are
10:07
throughout the life of the engagement.
10:09
Importantly, this is where you can
10:12
also include the ramifications if
10:14
they don't comply with their responsibilities.
10:19
For example, if you have clients who are
10:22
always late or slow to provide you with information,
10:28
you can build into your engagement letter what happens
10:31
when you have to keep following up for documents.
10:36
The documents don't arrive on a timely basis.
10:38
You can charge more
10:40
for having to complete the services in
10:42
a compressed amount of time
10:44
if they're not providing things timely.
10:46
It gives you the opportunity to client
10:49
manage that risk of being slow with information.
10:53
I think that sometimes it gets
10:55
overlooked because you think,
10:58
well, the client's asking me for help,
10:59
they're willing to give me what I need.
11:01
While generally that's true,
11:04
they may not always understand what you need.
11:07
It's really helpful to spell it out in
11:09
the engagement letter so that there's no confusion.
11:11
Stephanie Otero: As a follow-up to that,
11:13
what role do terms and
11:14
conditions play in helping firms manage risk?
11:18
Nicole Graham: Terms and conditions is
11:20
the section of the engagement letter where
11:22
you're going to put in all of
11:23
your risk allocation provisions.
11:26
For example, you can put in
11:28
a provision in the engagement letter that says,
11:31
if a dispute arises or if you are
11:33
going to assert a claim against
11:36
me and say I negligently undertook or
11:38
failed to perform any duties under this contract,
11:41
you must do it from one year of the date that you
11:45
received the deliverables or
11:47
one year from the end date of
11:48
this contract, whatever happens first.
11:50
If you limit it to a year,
11:53
some states it could be 2, 3,
11:55
4 years to bring a claim,
11:57
and you're limiting it to one year.
11:59
You can also limit the damages
12:01
that the client can seek from you.
12:03
By limiting it, I mean in not only the dollar amount,
12:07
but the types of damages,
12:08
that they can only recover
12:10
the actual damages and that they're not going to
12:12
get any consequential or
12:14
exemplary damages and things of that nature.
12:16
You can limit that.
12:18
If you're a firm and you
12:20
have practices and clients everywhere,
12:22
you might want to have all
12:24
of your disputes in your home court.
12:27
You can put that into your engagement letter.
12:29
You can also put in a choice of
12:30
law provision where you can find
12:32
law that's most favorable to you
12:34
and have that law govern any disputes.
12:37
You also want to include
12:38
any mediation or arbitration clause saying,
12:41
before you can sue me,
12:43
we must go before
12:44
a mediator and try to resolve our dispute.
12:47
If we are unable to resolve it before the mediator,
12:49
then we can continue on in the litigation path.
12:52
Or you can have an arbitration clause.
12:54
Some firms prefer those
12:57
where instead of a lawsuit being filed,
13:02
it's a private arbitration.
13:03
It is not a public dispute,
13:06
so it keeps it out of the public eyes.
13:09
That is one of the reasons that firms
13:11
prefer arbitration to litigation.
13:13
I will say, I do not believe that
13:16
arbitration is necessarily more
13:18
cost effective than litigation.
13:19
Feel that you're still hiring
13:21
the experts and doing a lot of the discovery,
13:23
but it does keep it from being a public fight.
13:27
Stephanie Otero: It's like putting your
13:28
own terms so you're not
13:29
having all these uncertainties, is what it sounds like?
13:32
Nicole Graham: Exactly.
13:33
Sarah Ference: A colleague that Nicole
13:35
and I both used to work with always
13:36
said that the rules of war are
13:38
drawn up during peacetime,
13:40
and that was what he equated engagement letters to,
13:43
and it's very true.
13:44
When you set the terms of how you might
13:47
settle a dispute before you have the dispute,
13:50
when minds are cool and emotions are not quite so high,
13:54
it usually results in a better resolution.
13:58
Stephanie Otero: I know we touched on this a little bit,
14:00
but how do claims stem from
14:03
misunderstandings about scope
14:05
rather than technical mistakes?
14:07
How often are you both seeing that?
14:08
Sarah Ference: One of the primary root causes of
14:11
a claim is a misunderstanding.
14:13
Well, I thought you were doing this versus no,
14:16
I thought I was only going to do that.
14:18
That is the technical cause
14:23
of loss is called a failure to advise,
14:25
but we also commonly call them
14:27
the you didn't tell me claims.
14:30
These are the claims that maybe it's
14:32
a tax planning opportunity
14:34
that the client said the CPA didn't inform them about.
14:38
Or maybe it's a different return that should have been
14:42
filed by the client that the CPA didn't file.
14:46
Engagement letters are a great way to help
14:49
avoid this type of misunderstanding,
14:52
and therefore, this type of you didn't tell me claim.
14:56
Nicole Graham: I would have to agree. Yes, we see both,
14:59
but when we review claim
15:01
trends over the course of years,
15:04
you didn't tell me or the failure to advise is
15:07
a theme that is so consistent year to year.
15:11
Sarah is right. If you have
15:12
the engagement letter with a clear scope defined,
15:16
it really helps defend the claims.
15:19
It's just something that we have seen
15:21
consistently year over year and it doesn't go away.
15:24
Stephanie Otero: I'm really understanding the
15:26
importance of scope.
15:28
Are there any warning signs that
15:30
scope creep is occurring? Sarah, we can start with you.
15:34
Sarah Ference: I was in practice for several years
15:35
prior to coming to CNA,
15:37
and I know from my own personal experience,
15:39
when I saw my unbilled WIP
15:41
build up and my engagement code,
15:44
I knew something was going awry.
15:46
Something wasn't going according to plan.
15:49
When things are taking longer than you expect and you
15:51
start to see that buildup in your unbilled WIP,
15:55
it's usually a signal that you're doing
15:57
more than maybe you anticipated.
15:59
Scope creep cannot only be financially
16:03
detrimental because you may not be able to bill
16:05
for that additional work that you're doing.
16:07
It also runs the risk of
16:09
diminishing the effectiveness of
16:11
your very well crafted
16:12
engagement letter such that it might not
16:14
be as helpful as you
16:16
thought it might be in the event of a dispute.
16:19
Looking out for unbilled WIP and seeing
16:22
it increase is a warning sign, I would say.
16:25
Stephanie Otero: Nicole, any other warning signs?
16:29
Nicole Graham: One of the warning signs I would see
16:31
is when you get from the client,
16:34
I have a quick question.
16:36
Or I need to talk to you about something
16:38
else and you have these additional requests,
16:41
and if there is no documentation
16:46
or agreement about
16:47
these quick questions or additional requests,
16:50
you're really opening yourself up to
16:53
the engagement now being whatever
16:55
the client later claims it was.
16:57
Over the course of the engagement,
17:00
it's very important to document any of
17:03
these quick questions, additional requests.
17:07
Are you actually going to take on more work as
17:10
a result of this conversation and have
17:13
that documented in the file and
17:17
also in a follow-up email to the client
17:21
if it was a phone conversation or something
17:23
just to support what you were
17:25
expected to do resulting
17:27
from the client, having another ask.
17:30
Stephanie Otero: I remember this when I was in practice,
17:32
I'd be meeting with a client going over a tax return,
17:34
and then they would say, just one more thing,
17:36
one more question.
17:37
I know Nicole touched on this, but, Sarah,
17:39
what's the best way to document
17:41
those additional services?
17:43
Sarah Ference: I think you have to look at, well,
17:44
what is the additional request?
17:46
Is it a small add-on?
17:48
Is it more of the same of what you've been
17:50
engaged to do or is it
17:51
something that's completely different?
17:53
Because I think the answer to
17:55
that question and documentation is going to
17:57
vary based on what the extra service is.
18:01
If it's a small add-on,
18:04
say, replying to a notice, potentially,
18:07
or doing more of the same,
18:09
which is maybe you identified
18:10
an additional state return that needs to be prepared.
18:13
I think an email is fine.
18:15
Certainly the most efficient way to handle
18:17
that from a documentation perspective,
18:19
and that's just a quick email to
18:21
the client outlining what's the additional request?
18:25
What's the firm going to deliver?
18:27
What's it going to cost?
18:28
Because it's additional work.
18:29
You want to get paid for that additional work,
18:31
and then just a statement that
18:32
the terms and conditions of
18:34
the other engagement letter apply
18:35
to this additional stuff.
18:37
I think that's a quick and easy email to the client,
18:41
get the client to confirm back that they agree,
18:43
and you put that email on your engagement file.
18:46
If it's something bigger, say,
18:50
you're preparing the tax return for the client,
18:52
but their books and records are always a mess,
18:54
so now you want to do some bookkeeping for them.
18:58
That's a new service. That's a different service.
19:01
You want a separate engagement letter
19:03
for that additional service.
19:06
I think trying to be as efficient as possible,
19:09
but making sure there's some sort of documentation
19:11
in place will always be preferred.
19:13
Stephanie Otero: I like that. Nicole, on
19:15
the other hand, what do you do?
19:18
I know we talked a lot about scope,
19:19
but what do you do if, say,
19:21
you feel like you have a really clearly defined scope in
19:23
your engagement letter but then
19:24
a client later says to you,
19:26
I thought that that was included, say,
19:28
Sarah used the example of replying to an IRS notice.
19:32
Nicole Graham: Because it is not in
19:34
our engagement letter that I would assist you with that.
19:37
It is not documented in any of
19:38
our communications that I
19:40
was going to assist you with that.
19:42
If you look at my billings,
19:44
I have billed no time and you have
19:46
paid for none of those services.
19:48
Why exactly would you think that was included?
19:52
Now granted, having that response to
19:55
the client only works if your engagement letter and
19:57
your documentation and
19:59
your communications with the client
20:00
and your billing all tell the same story.
20:04
If everything you have tells the same story,
20:07
then it makes their claim of,
20:09
I thought this was included much less credible.
20:12
Stephanie Otero: The practitioner really needs
20:13
to cover themselves still.
20:15
In my role, I often meet with small firms,
20:18
and one of the things they're always
20:19
telling me is that they're stretched
20:21
thin and administrative tasks
20:23
fall to the bottom of their list.
20:25
How can they make engagement letters
20:27
a part of their normal routine?
20:29
How can they really fit that into
20:30
their everyday workflows?
20:31
Sarah, we'll start with you.
20:33
Sarah Ference: We hear that from
20:34
small practitioners all the time, too,
20:35
and I say this with any kind of big project,
20:38
take it one step at a time and remember,
20:40
The way to eat an elephant is just one bite at a time.
20:43
Thinking that you're going to
20:45
implement engagement letters on all of
20:46
your clients overnight is
20:48
just an unrealistic expectation.
20:50
Put that to the side for now.
20:53
But start early.
20:54
Certainly, take the time to implement
20:57
engagement letters when you are less busy, less stressed.
21:00
Sometimes starting that process a little
21:03
bit during the summertime can help.
21:06
Certainly fall is engagement letter season and a lot of
21:09
practitioners do look at
21:11
engagement letters during the fall,
21:13
leverage templates that are available to you,
21:17
but break it off into
21:19
chunks and do it over a multi-year process,
21:22
but also making it just
21:23
foundationally part of your process,
21:26
not a separate administrative task.
21:29
Nicole Graham: Yes, I agree. It is
21:31
a mindset shift, correct?
21:32
You want to make sure that you
21:34
are doing it and not looking
21:37
at it like this is just another administrative check
21:41
the box thing I have to do.
21:42
Instead, it's what I can actively
21:45
do to protect myself, protect my firm.
21:48
Making it part of your process and setting up
21:51
your procedures is a big part of that.
21:55
One of the ways you can help do that is try to
21:58
leverage AI to help you create your templates.
22:02
There are various resources available and
22:05
templates available to help you even if you can't,
22:10
you don't have the resources or time to engage
22:12
outside counsel to help you draft engagement letters.
22:14
There's a lot out there that you can
22:16
use to get yourself started on the process.
22:20
Stephanie Otero: I like the mention of
22:21
templates because I think there
22:22
are a lot of templates available to them.
22:24
Nicole, question for you.
22:26
Sole practitioners, you mentioned legal counsel,
22:29
and they often don't have access to legal counsel.
22:32
They often don't even have
22:33
dedicated IT teams, anything like that.
22:35
What are some risk management considerations
22:38
that are most relevant for them?
22:40
Nicole Graham: In terms of engagement letters,
22:43
I think it's very important
22:45
to just have them even if they're not perfect.
22:48
Do you want to make sure that you are at the very
22:50
least setting forth the scope
22:52
and responsibilities of the party,
22:54
what is going to be expected of you,
22:55
what is expected of the client and have
22:58
your termination provisions when
22:59
the contract ends as part of your engagement?
23:02
If you can remember any risk transfer provisions, great.
23:05
Just making sure that you have
23:08
them for all of your engagements.
23:10
Again, if you need to start small with
23:12
new clients and high risk clients as you build
23:15
towards reaching that engagement letter
23:18
for every engagement, that's great.
23:20
You just have to take it one step at a time and aim for
23:23
uniformity as much as possible. Good advice.
23:26
Stephanie Otero: I know small firms,
23:27
they want simple and easy to implement.
23:30
What are top three engagement letter practices that
23:33
every small firm should implement immediately?
23:37
Sarah, we can start with you.
23:39
Sarah Ference: I would say, first,
23:41
identify what templates are available to you.
23:44
A lot of whether it's
23:46
AICPA tax section has sample engagement letters,
23:49
professional liability insurance carrier,
23:51
such as the CNA,
23:53
the AICPA member insurance program carrier.
23:56
We have templates available.
23:57
I know other carriers do as well,
24:00
but there are templates available to you to start with.
24:03
You do not have to start from scratch.
24:06
Then another suggestion I would say,
24:09
Nicole mentioned it, start with new clients.
24:11
Long-term clients, those are maybe
24:14
harder to implement engagement letters for
24:17
or maybe it might be perceived
24:19
as a more difficult conversation to have.
24:22
Start with new clients and put your process into
24:25
place so that it
24:27
will never be a change for those new clients.
24:29
It's just part of your routine.
24:32
Stephanie Otero: Part of the process.
24:34
Nicole, anything to add?
24:36
Nicole Graham: I would say another thing you should do
24:39
is have everyone use the same templates for
24:43
the same services and have a process in place that if
24:47
there need to be changes
24:50
to any of the engagement letters,
24:53
that there is a review and approval process for
24:58
that so that you don't have everyone
25:01
making different changes to
25:02
your engagement letter templates.
25:04
Stephanie Otero: I know Sarah mentioned
25:05
this about if you have
25:06
a client for 20, 30 years.
25:09
I remember, too, when I was in practice,
25:11
it's easy to get processes set up for new clients.
25:14
But what if you have a client that you've had for 25,
25:16
30 years and Joe is not
25:18
used to signing an engagement letter,
25:20
and how do you go about that with
25:22
tackling clients that you've had long-term?
25:25
Nicole Graham: You want to have
25:26
a situation in place where
25:27
you are managing the risk with new clients,
25:31
but even your old clients because quite frankly,
25:33
the old clients, there are more potential hidden issues.
25:37
The longer you have a client,
25:39
there's more chance for there to
25:41
be issues or disputes that come up.
25:44
You want to make sure that
25:45
even though they are long-term,
25:47
they still present the same risk as new clients.
25:51
Sarah Ference: One of our firms that we
25:53
insure said to me once a long time ago.
25:56
It's like Sarah, they're called clients,
25:57
not friends for a reason.
25:59
In close client relationships are great,
26:02
but they will always be clients.
26:04
It was one of my favorite parts of being in
26:06
practice and getting to know my clients.
26:08
But no one likes to lose money.
26:10
We've had claims even when
26:12
a CPA's family members
26:14
or friends who they provide services to,
26:16
they've sued their CPA.
26:18
If friends and family can sue,
26:20
certainly it's open clients.
26:22
That's just because a long-term client,
26:25
it doesn't mean they're not going
26:26
to blame you for something.
26:28
Stephanie Otero: Good point. On that note,
26:30
so if a practitioner has a long-term client and they
26:32
are pushing back on signing an engagement letter,
26:35
Nicole, you have any advice for that practitioner?
26:38
Nicole Graham: Yes. We always like in it, too.
26:41
You're never going to have a contractor show up
26:43
at your house and just start working.
26:45
You shouldn't allow a CPA
26:48
to come in and start advising on
26:51
your business without having
26:53
a plan and scope and an agreed upon price in place.
26:57
Why would you insist on a contractor having
27:01
a contract but not your professional service provider?
27:03
It's just counterintuitive.
27:05
Stephanie Otero: I love that analogy.
27:07
A hot term right now in our profession is advisory.
27:11
That's the big A word.
27:12
The other big A word, of course, is AI.
27:14
But as firms expand into
27:16
advisory services, CAS, consulting,
27:19
outsourced accounting and AI related services,
27:21
what engagement letter considerations become important?
27:25
Sarah, can we start with you?
27:26
Sarah Ference: Sure. Well, I worked in
27:28
the consulting arm of my firm for many years
27:31
prior to coming to CNA and when I
27:33
moved from audit to consulting,
27:35
one of the biggest differences I
27:37
noticed immediately was the time that we spent
27:40
talking to clients about their needs and
27:42
really sorting through what was
27:45
going to be the scope of
27:46
the eventual consulting engagement that we would deliver.
27:50
Agreeing and determining and
27:52
agreeing upon that scope of services,
27:54
working with the client to
27:56
figure out what is it you're actually going to
27:58
consult on and what
28:00
your deliverable is going to
28:02
be and what are the limitations
28:04
of that deliverable is really critical to
28:07
services like CAS or other consulting or
28:11
advisory services because the nature of
28:13
a consulting and advisory service is
28:16
what is determined between the CPA and the client.
28:20
If you don't have that scope of
28:22
service laid out in an engagement letter,
28:26
how are you going to
28:28
demonstrate what you actually agreed upon?
28:31
Stephanie Otero: Good point. Nicole.
28:33
Nicole Graham: In addition to scope,
28:35
I think it's very important
28:37
to have clearly defined client responsibilities.
28:41
When you have an advisory service engagement letter,
28:45
you want to make sure that the client is
28:48
aware that they also have responsibilities,
28:52
that if you are doing outsourced CFO work,
28:56
that you are saying, hey,
28:57
I will make recommendations,
28:59
you ultimately have any management decision making
29:03
and responsibilities in that regard.
29:04
Make sure that the client knows
29:06
that while you are assisting them,
29:08
they still are responsible
29:11
for certain aspects of the engagement.
29:13
Stephanie Otero: Important. We talked
29:15
about the one big A word advisory.
29:17
Let's talk about the other big A word AI.
29:20
Nicole, what should firms be considering when
29:22
it comes to engagement letters and their use of AI?
29:25
Nicole Graham: I'm actually getting this question a
29:27
lot from the firms that I work with,
29:29
and I think in your engagement letter,
29:32
you should absolutely disclose that you may be
29:35
using AI in assisting with performing client services.
29:40
Sarah, anything to add?
29:42
Sarah Ference: I think one of the reasons you want to
29:45
do that is just about managing client expectations.
29:48
Think about how a client might feel if they
29:51
realize that you're using AI to deliver their service,
29:53
but you hadn't told them that
29:54
you're going to do that in advance.
29:56
I think it just helps avoid some potential friction and
30:00
unnecessary friction between you and
30:03
the client if you disclose it
30:04
upfront and engage in alarm.
30:06
Nicole Graham: AI is basically embedded into
30:09
almost everything these days, it seems.
30:11
Clients may have questions about it.
30:13
I think it's a good opportunity to set
30:16
forth that you may be using it in assisting,
30:19
but that you are ultimately responsible for
30:22
the quality of the deliverables
30:25
that you are still
30:27
exercising your own professional
30:29
judgment and that you are taking
30:31
necessary steps to maintain
30:33
their confidentiality and data security.
30:37
Even when you're using these tools.
30:39
I think if you put that in the engagement letter,
30:42
that might answer a lot of questions that
30:44
a client may have initially and then
30:47
help skeer any further conversation
30:49
that they may have if they have additional questions.
30:52
Stephanie Otero: I love that you mentioned
30:53
quality and professional judgment
30:55
because those are so important,
30:56
I think, when using AI.
30:58
Anytime, but especially with AI.
31:01
We're down to my favorite part of the segment,
31:03
which is rapid fire questions.
31:05
Are you guys ready for this?
31:07
Sarah Ference: Sure.
31:08
Nicole Graham: Yes.
31:09
Stephanie Otero: First question, Sarah goes to you.
31:11
Biggest engagement letter myth.
31:13
Sarah Ference: That they're not a value added activity.
31:17
Not only are they helpful in the defense of a claim,
31:21
but they are certainly helpful when you're having
31:24
any disagreements with a client over scope,
31:26
over fees, they help you unbundle.
31:28
They help just keep everybody on the same page.
31:30
Stephanie Otero: Love it. Nicole.
31:32
Nicole Graham: That the risk
31:34
transfer provisions are not enforceable.
31:36
When you have these negotiated
31:38
engagement letters and especially when you have
31:40
sophisticated clients and you can see that
31:43
the engagement letter was negotiated,
31:46
you have very good enforceability arguments and
31:48
even if it is not 100% enforceable,
31:52
these provisions provide
31:54
really good leverage in negotiations.
31:56
Stephanie Otero: One more rapid fire question.
31:58
Nicole we'll start with you.
31:59
Biggest mistake firms make.
32:02
Nicole Graham: Not having uniformity in
32:04
their engagement letters in the processes
32:06
and allowing different practitioners
32:08
to do it their own way.
32:10
Stephanie Otero: Sarah?
32:11
Sarah Ference: Not having an engagement letter at all.
32:13
We still see claims come
32:14
in that don't have engagement letters,
32:17
and that just makes those claims really hard to defend.
32:20
Stephanie Otero: Any closing thoughts
32:21
before we sign off here?
32:23
Sarah Ference: I think and Nicole
32:24
mentioned it earlier is,
32:26
starts with a change in mindset
32:27
around engagement letters.
32:29
They're not a separate administrative process.
32:32
They're not a burden.
32:34
They don't have to be. There's just part
32:36
of the way you do business.
32:37
If you start to frame
32:39
your thoughts on engagement letters in that way,
32:42
I think you'll find that
32:43
getting them and putting them into place and
32:46
modifying them appropriately is
32:48
just going to come a lot easier.
32:50
Stephanie Otero: Sarah and Nicole, thank you
32:52
both so much for sharing
32:53
your insights and practical guidance
32:55
with me today. Appreciate it.
32:57
If there's one takeaway from our conversation,
32:59
it's that engagement letters
33:01
are much more than just paperwork.
33:03
They are a communication tool
33:04
that helps set expectations,
33:06
clarify responsibilities, manage risk,
33:09
and strengthen client relationships.
33:11
Thank you for joining us on
33:12
transforming tells of business evolution.
33:15
We hope this conversation gave you
33:17
practical ideas you can put to work into your firm.
33:20
For additional resources, be sure to
33:22
check out the links in the episode description,
33:24
and don't forget to subscribe
33:26
so you don't mess up your episodes.
33:28
Until next time, thanks for listening.
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