Mitigate risk with an effective engagement letter

As in many professional service industries, public practitioners use engagement letters as a fundamental part of their onboarding process with new clients.

Aside from lessening professional risk exposure, stipulating the terms and conditions of a new engagement before undertaking any work is simply “good business practice”, says Drew Fenton CPA at Fenton Green. “In addition to clearly defining to your client how your business operates and the costs involved, an engagement letter articulates what you are going to do for the client, as well as what you are not going to do,” he explains.

Strengthening lines of defence

Engagement letters serve several purposes. First, they provide transparency, ensuring both a practice and its client are on the same page regarding the work to be undertaken. This not only mitigates the potential for “scope creep”, but also helps to protect the practice should any misunderstandings lead to a complaint, or even a professional negligence claim.

“You’re trying to cut out any commercial disputes – whether about hourly rates or maybe who’s going to undertake the work, as well as the commercial liability aspect,” Fenton says.

In the event of a professional indemnity insurance claim, solicitors will likely ask for engagement letters, and many professional indemnity insurers require them as a condition of their policy.

Yet, too often, Fenton says practitioners do not have an engagement letter, or it is out of date and the scope of services has changed, or it has not been signed by the client. 

“In an ideal world, you would send a new one every year – and we’d like it signed,” he says. 

What to include in an engagement letter

APES 305: Terms of Engagement, issued by the Accounting Professional and Ethical Standards Board, offers in-depth guidance on the contents of an engagement letter.

Fenton says that, in general, an engagement letter should outline the scope of work to be undertaken, who will complete it, timelines, client responsibilities, engagement outputs, limitations of liability and, ideally, an overview of fees and credit terms. 

“There’s also the privacy aspect now,” Fenton adds. “If you decide to seek external advice, you need to say it is within your rights to share client information with your subcontractors or consultants.”

While Fenton admits time is a precious (and limited) resource for public practitioners – and it can be all too easy to let engagement letters fall by the wayside – in our increasingly litigious society, he says it is critical that practices do what they can to protect themselves from client disputes. Engagement letters offer a simple and effective solution to reduce that risk.

If you are seeking any assistance with risk management and transfer of your practice risk, don’t hesitate to contact the Fenton Green team via email or on 1300 760 123.