Trends in Engagement Letters

Source: Practical Accountant

Engagement letters are becoming more inclusive and are used increasingly in non-attest engagements. It is common to see six- or seven-page engagement letters. The engagement letter is a good risk management tool. Here is a summary of some new engagement letter practices:

• Engagements are described in more detail including responsibilities of each party, explicit limitations, and objectives of the engagement. AICPA Ethics Rule 101-3 is relevant here. Clients should be advised of their responsibilities for accountant independence.
• Although engagements may be ongoing, engagement letters should be revised annually.
• Work papers belong to the firm. If a court issues a subpoena, the client pays expenses of complying, including time.
• Ethics rules require disclosures of use of outside vendors.
• Fiduciary responsibilities are disclaimed.
• State laws governing the agreement should be specified.
• Liability in non-assurance engagements is limited.
• Clients are notified of tax deadlines and of when information must be received by the firm. Included should be the possibility of penalties and interest for late filing.
• Engagement letters are specifying how fees may be affected if the client does not perform its responsibilities.
• Liability insurance carriers will provide suggested wording for many types of engagements.
• Clients are responsible for understanding the impact of proposed journal entries.
• Client personnel who have been assigned responsibility for overseeing accountants’ services must be qualified.
• A proposed revision to AICPA Ethics Interpretation 101-3 will provide guidance on how forensic and tax compliance engagements, as well as indemnification and liability limitation provisions, may affect accountants’ independence. Reliance on these provisions should not affect the amount of work accountants perform.
• Alternative dispute resolution procedures are being put into some engagement letters.
• Billing and collection policies may be stated in engagement letters.
• Some firms use engagement letters instead of proposals. This should be discouraged.
• Because of SAS-99, firms are adding provisions stating that since they did not review every transaction, fraud may not be discovered. Ultimate responsibility for fraud prevention and detection is the client’s.
• The work may preclude an opinion on the adequacy of internal controls.
• Accountants must be sure to be engaged by the appropriate party. For example, in some cases it is more appropriate to be engaged by, and communicate with, the audit committee.
• The engagement letter should protect the firm’s independence if a client hires a firm employee.
• Electronic delivery of financial statements should be covered by protections for the CPA firm. Emails or other electronic communications may be incorrectly delivered. Additional representations should be given if financial statements are published electronically (i.e., on a Web site).
• Clients should agree that the firm has the right to destroy files after a specified period of time.
• In government engagements, where a municipality issues statements about a debt offering, it should acknowledge that the accountant is not associated with such statements.
• CPAs are typically not involved in implementing like-kind exchange transactions, only in planning them. The engagement letter should acknowledge this.
• Unless there’s an agreement to extend bank reconciliation services to protect against embezzlement, standard reconciliation services should be acknowledged as having limitations in fraud detection.

From Practical Accountant, December 2006, SourceMedia Inc., One State Street Plaza, 27th Floor, New York, NY 10004, 800-221-1809. For the complete article, click on the following link:
http://www.webcpa.com/article.cfm?articleid=22554&;pg=pracacc.