The Need for a Signed Engagement letter before commencement of an engagement

A written agreement such as an engagement letter documents the terms of the engagement and it is recommended that you review the engagement letter with management so that both parties have a clear understanding of the scope of the engagement and of each party’s responsibilities. Management should sign and date the engagement letter to acknowledge their understanding, and the CPA practitioner may document any related discussion. Many CPA Canada Handbook Standards also mandate the use of an engagement letter.

Whether you include terms related to several engagements in one or more letters is up to the CPA practitioner’s judgment. In addition, it is advisable to discuss the contents of your engagement letters with your legal counsel to ensure that they serve their intended purpose.

Below are some important benefits of having an engagement letter signed and in place before any significant work is performed:

• Avoid misunderstanding of responsibilities
  By ensuring a written agreement is in place before the commencement of an engagement, the responsibility of each party (management and the CPA practitioner) is carefully documented. Not having the engagement letter in place (signed) before the onset of the engagement may lead to misunderstanding on the terms and respective responsibilities of the parties to that agreement.

• Clearly defines the scope of the engagement
  It is important for the client to be in agreement of the specific scope of the engagement before the commencement of any work by the CPA practitioner. This avoids any misunderstanding as to what exactly is included in the scope of the engagement and any potential disagreements on fees.

• Estimated fees for the services and billing arrangement
  Rule 214 of the  CPABC Code of Professional Conduct details a CPA’s responsibilities as it relates to fee quotations and billings. The Rule notes that a CPA should:

  1. obtain adequate information before providing a fee quotation to perform any professional service; and

  2. render billings for professional services on a fair and reasonable basis and provide such appropriate explanations as are necessary to understand the billings.

  It is not uncommon for clients to complain that a CPA practitioner did not adequately communicate fees to be charged for an engagement.

  A CPA firm may also incur loss of work in progress and loss of fees that could have otherwise been billed if the engagement letter is not signed before commencement of the engagement as the client may disagree on the scope of work, among other things, and subsequently walk away from the engagement.

  Providing a fee estimate helps to avoid fee related confusion in the future. To avoid instances where a client’s bill is left unpaid, a CPA firm should consider including in the engagement letter terms related to progress bills throughout the engagement. Many firms are using these types of arrangements to smooth revenue, and to ensure payment is received for the work performed.   If providing the client with progress bills or collecting fees prior to the work being done, CPA firms should ensure to comply with relevant regulations on retainers and/or funds held in trust.

• Form and content of report to be issued
  The engagement letters are a great way to communicate the expected form and content of the report or deliverable to the client, in fact, some standards mandate the inclusion of the expected report.

• Limitation of liability
  Engagement letters might include limitation of liability clauses. For discussion on those considerations, please refer to: https://www.bccpa.ca/news-views-kb/news-views-kb-entries/practice-management/risk-management/articles/best-practices-for-limiting-liability-by-using-an-effective-engagement-letter/

• Opportunity to include additional clauses
  Having a signed engagement letter in place before commencement of an engagement provides an opportunity for either the CPA or the client to add any additional clauses that they believe are necessary. It gives both parties an opportunity to discuss the engagement and ensure suitable terms are mutually understood and agreed to.

CPA practitioners and firms are reminded that they should always seek legal or other advice from an appropriately qualified professional to ensure that the engagement letters include all terms and conditions relevant to their specific engagements.