A robust document will help protect your practice from legal action as well as delivering business benefits
In the same way that a lifebelt can mean the difference between swimming and sinking, an effective engagement letter can help ease the sinking feeling that occurs when faced with a claim notification.
The lack of a properly scoped letter of engagement has been identified as a key element in successful claims against accountancy professionals. A robust engagement letter may protect your practice from a claim, assist greatly in the defence of any claim or at very least, mitigate any loss.
Engagement letters are often seen as time-consuming administration. Some practitioners doubtless regard them as merely a compliance box to tick. If that is how they are viewed in your practice, could you be missing out on the advantages and risk management benefits of properly crafted engagement letters?
At your initial meeting, you will have discussed the client’s requirements, the services your firm can provide and what the client can expect to receive. Then comes the process of writing up that client’s transaction into an engagement letter.
Many individuals regard that step as an administrative burden or a compliance necessity. Rather than viewing an engagement letter as a non-value-added activity, think of the positive business benefits that it can deliver.
A properly drafted engagement letter can be a powerful tool to:
This leaves more time for actually delivering the service and obtaining payment rather than resolving complaints or miscommunication.
If you do find yourself facing a claim, one of the first questions your professional indemnity insurers are likely to ask is: what services were you providing and what does your letter of engagement say?
All too often, the answer is 'I don’t have a letter of engagement', in which case you will likely find yourself immediately on the back foot when trying to build a defence.
It is too simple to suggest that a letter of engagement does, of itself, offer full protection, but a well-drafted letter almost certainly will.
There are a number of areas where letters don’t achieve their desired result. One such area is what would best be described as 'scope creep'. How often do your undertake a client engagement for a specific piece of work, then halfway through you’re suddenly being asked questions about a completely different area of work?
In that situation, do you try to answer the question and then just leave it, or do you specifically state you are not advising on such matters and to do so must first amend the terms of business? If the former, it may be that the client is entitled to accept that 'ad hoc' advice as being something on which they can rely.
In a similar vein, do you ever think about setting out in your engagement an area of work that are specifically excluded for the agreement? As with 'scope creep', the client may (wrongly) assume that you have agreed to give certain advice if it is not specifically noted as being excluded.
To avoid the client losing interest at page one, there are a number of principles to consider to get the best out of your letters of engagement. These are:
There is nothing to be lost in asking the question whether a more effective initial communication could be developed by putting some (if not all) of the above principles into practice.
If you have any questions, please contact your Lockton account manager, call 0117 906 5057 or email ACCAaccountants@uk.lockton.com.
Lockton is ACCA’s recommended broker for professional indemnity insurance