In this article, I hope to show you that having a formal letter of engagement in place can help you avoid getting sued. And how, if you do it properly, you can earn more fees too.
It makes sense…
Setting out your terms of business with your clients, with specific agreement on the work you do for them and the fees you charge, is the only sensible way to deliver professional services. To do anything else is professional suicide. I feel very strongly about that.
We can’t complain if we get into trouble with our clients. After all, our professional bodies have been telling us for years that we must issue engagement letters.
Nevertheless, for many busy practitioners, the whole business of issuing an engagement letter to clients is a bit of a nightmare. And when something goes wrong, not having an engagement letter is going to bring you problems and cost you shedloads of money.
There had to be a better way and I found it!
When I was in public practice, I found the whole process of writing something down and agreeing it with the client to be a clumsy and time-consuming exercise. It often got in the way of doing the work itself. There had to be an easier way, I thought. Although there were plenty of standard formats available that covered a few situations, all too often the particular client assignment didn’t seem to fit those formats.
That’s when I set out to create an engagement letter system (called Contract Engine) to simplify the whole process, eliminate uncertainty with the client, and make it very easy to agree terms – including fees payable. It also had to be a management system that allowed me to find the original engagement letter and update it as and when required.
I came to the conclusion that what was needed at the front end was a very detailed “Terms of Business” letter that took into account all the risk management clauses we would all like to see. To this important letter, my idea was to append schedules for each category of work to be undertaken for the client.
Are Engagement Letters necessary?
The answer to the question, Are Engagement Letters necessary, is a resounding YES!
In recent years, litigation against professional advisers has increased both in scale and frequency.
Standard practice and indeed a requirement of many professional bodies, is for accountants and lawyers to issue a formal letter of engagement defining their relationship with the client.
Statistics gathered by the AICPA Professional Liability Insurance Program in the USA provide dramatic evidence of the importance of engagement letters:
More than two-thirds of professional liability claims in that Program arise from client allegations of professional lapses in tax practice and in approximately 25% of all claims made, the client alleged that the scope of the engagement went beyond the services which the accountant believed he or she had agreed to perform. The resulting claim then alleged that when performed, these disputed services were performed negligently.
Information from the AICPA Professional Liability Insurance Program shows that in over 40% of all claims, no engagement letter was issued at all.
Engagement letters are certainly necessary today as they form the basis of the contract between the professional and client for the provision of professional services. Your engagement letter could become a crucial controlling factor in determining the responsibilities of both parties.
Fail to have an engagement letter system in your firm at your peril. The risk is just too great.
Engagement Letters help to avoid getting sued
After Enron and other high profile failures, accountants and lawyers everywhere are right to worry about the potential of negligence claims and what the ultimate effect on their practice might be on increasing indemnity insurance premiums and an escalating level of claims.
As an accountant or tax advisor or lawyer, your primary aim must always be to make sure that you don’t get sued and that you get paid for what you do.
Unless you have an up-to-date engagement letter in place, you could be in big trouble if there is a dispute over fees or the work you’ve done (or not done, as the case may be). Your engagement letter ought to make it clear as to the scope of your responsibility and limitations on liability so that your first line of defence when a dispute arises is to show what was agreed at the start of the engagement – who does what and when.
One engagement letter is no longer enough – you should have separate engagement letters for each work assignment you take on for your client.
And you might consider updating your engagement letters at least once a year and whenever the nature of your engagement changes.
…and if you do get sued
Engagement letters are a very effective loss avoidance tool such that if problems arise in the client relationship, the engagement letter can provide essential evidence of the exact terms agreed, and may well head off an incipient legal action.
When professionals are sued, the first two questions they are asked are:
(1) Do you have indemnity insurance? and
(2) Do you have an engagement letter with the client that’s suing you setting out what was agreed?
The lack of either can make the defence against a professional indemnity claim all the more difficult.
Two good reasons…
- Engagement letters help drive down the cost of indemnity insurance: Increasingly, insurers will look at your arrangements on the issue of engagement letters and take this into account when setting the level of your indemnity premiums.
- Engagement Letters reduce the risk of fee disputes: Professionals should get used to using engagement letters for all new clients, new matters with existing clients and contingent fee matters. The likelihood of a fee dispute – leading to a possible later malpractice claim – can be substantially reduced if the key details of the fee arrangements are made clear at the outset and confirmed in writing.
Engagement Letters make good business sense
Whilst engagement letters are not a panacea for all disputes and disagreements, and they don’t always protect professionals from litigation, they make good business sense, because:
- They help prevent misunderstandings with the client by describing, in writing, the mutual understanding of the terms and conditions of the engagement.
- They eliminate any staff misunderstandings by providing those involved on the engagement with the specifics of the services to be rendered.
- Enhanced client communications, such as regularly issued and updated engagement letters, help to avoid expectation gaps for services to be rendered. By re-emphasising both the value and the scope of services in advance, professionals can improve clients’ overall satisfaction with professional services rendered. A satisfied customer is more likely to continue or expand a relationship with the professionals involved.
- Engagement letters can also be an effective marketing tool for clients and prospects as the professional can easily promote related services by mentioning them in their engagement letters.
- Engagement letters reduce any potential legal liability by defining the responsibilities of both the professional and the client.
Introducing Engagement Letters to Clients
Proper communication of your firm’s risk management programme is important. Although other firms may have used engagement letters for years, introducing them in your practice may be new to many clients and will require some advance preparation.
It’s important that you should explain to the client why an engagement letter is required. Make the explanation from the client’s perspective to help build understanding of the change. You should mention that your engagement letter:
- Defines the services you are being engaged to perform;
- Identifies engagement responsibilities of both your firm and the client;
- Explains fees, billing, and payment terms; and
- Assures the client that additional services will not be initiated without advance approval
You may wish to emphasise that engagement letters are required of all clients. Some firms also mention “insurance requirements” when introducing engagement letters into a client relationship for the first time.
You want the best don’t you?
The chances are that you want the best, most effective and friendliest engagement letter system. That’s true isn’t it?
Well, now you can have what you want with Contract Engine. Don’t just take my word for it. Take a product tour by clicking on the video link to the right.
What is Contract Engine?
Contract Engine is the UK’s leading online engagement/client care letter system. It features a comprehensive suite of fully-editable engagement/client care letter templates (up to 150+ for accountants and 200+ for lawyers) together with market-leading terms and conditions.
Contract Engine is designed for professionals – this complete system for managing all your client engagement letters allows you to create work schedules (to cover exactly the scope of what you’ve agreed to do for the client) in seconds. And it includes your firm’s name and address details as well as properly identifying the client.
Features
- Fully-editable, regularly-updated templates
- Market-leading terms and conditions
- Edit and manage your client contracts online
- Fast and easy-to-use – create client work schedules in seconds
- New templates can be added upon request
- Single or multiple users, each with a secure username and password
- Highly secure back-up
- No set-up fees – just an easy affordable monthly or annual payment option with a minimum 12 month subscription
- Free support from Bizezia
Benefits
- Capture fee-charging opportunities
- Improve fee income
- Better cashflow
- Reduced risk of client disputes
- Save time and reduce admin costs
Pricing
There is no set-up fee for Contract Engine, just an easy, affordable monthly or annual payment option with a minimum 12 month subscription.
| Contract Engine for ACCOUNTANTS | Express | Classic | Pro |
| No. of Engagement letters | 26 | 150+ | 150+ |
| Usage across No. of Offices | 1 | 1 | Unlimited |
| No. of User Logins allowed | 1 | 1-10 | Unlimited |
| New Templates Added upon Request | ✗ | ✓ | ✓ |
| Pay monthly at: | £17 | £49 | £149 |
| Pay annually at: | £184 | £529 | £1609 |
| VAT is added to the above figures | |||
| Contract Engine for LAWYERS | Express | Classic | Pro |
| No. of Client Care /Engagement letters | 50+ | 200+ | 200+ |
| Usage across No. of Offices | 1 | 1 | Unlimited |
| No. of User Logins allowed | 1 | 1-10 | Unlimited |
| New Templates Added upon Request | ✗ | ✓ | ✓ |
| Pay monthly at: | £29 | £79 | £249 |
| Pay annually at: | £313 | £853 | £2689 |
| VAT is added to the above figures | |||
He has written over 700 business publications (see Glossaries at https://onesmartplace.com/resources/glossaries/) and is editor of Better Business Focus (see https://onesmartplace.com/resources/better-business-focus-magazine). His Blog, on a wide range of subjects can be found at: https://onesmartplace.com/blog/
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