Inadequate letters of engagement have affected accountants and their professional indemnity insurers' ability to defend claims
One of the most costly areas of loss to professional indemnity insurers, in recent years, has related to accountants introducing their clients to firms specialising in tax mitigation schemes. Often it was just that – an introduction – but in many cases the accountancy firm themselves benefited from a commission or introducer fee, meaning they were intrinsically linked to the transaction.
All too regularly, these schemes failed, often with the firm providing the advice failing at the same time. The client then sought to recover their losses and sued their accountant for negligence in recommending them to the tax scheme provider.
Where the accountants' letter of engagement remained silent on the tenet of that introduction and failed to specifically exclude any responsibility for the advice given by the third-party provider, the claim against the accountant was successful. In some cases, the losses were substantial, with clients having taken out loans to invest into the scheme. At the very least, many clients incurred interest and penalties on unpaid tax and had to find the money to pay a large, unexpected bill.
In any circumstances where you are introducing a client to a third-party provider, we recommend that you exclude liability for advice given by them and ensure, where possible, that the client enters into a separate agreement with the third party.
The services you originally contract to undertake can often evolve with a client over time. Do you always make sure your letter of engagement evolves at the same time?
In one situation, the accountant's client passed the VAT threshold and became liable to pay VAT on sales. However, the client failed to take the accountant's verbal advice and register with HMRC. Unfortunately, this verbal advice was not recorded by the accountant, nor was their letter of engagement updated.
The accountant continued to carry out his contracted services and eventually HMRC caught up with him and demanded payment of the outstanding VAT. The client’s defence was that the accountant should have advised him appropriately.
At a subsequent hearing, the decision went against the accountant as there was no paperwork on file to support the accountant's position that their advice to register for VAT was properly given.
As the professional, the accountant was duty bound to evidence that the advice was given and should at the very least have recorded the call, but even better would have been to follow up with his client in writing.
To add insult to injury, although the accountant had a limitation of liability clause within their letter of engagement, the clause failed as it only applied to those services listed in the appointment document and did not apply to the VAT advice. The accountant’s professional indemnity insurer became liable for the full amount of the claim, which exceeded £150,000.
Fee disputes are all too common, and while most are unlikely to involve your professional indemnity insurers, these can take time to resolve and may not only result in a financial loss of income to your practice but, worse, a lost client.
Such disputes all too regularly lead to counterclaims where the client makes allegations of poor service or negligence to avoid paying a fee. You can reduce the chance of a fee dispute or even eliminate it completely with a carefully worded clause in your letter of engagement.
It’s so much easier to speak to a client about fees if they are clearly set out in writing for both parties, eliminating as far as possible any room for confusion or disagreement.
Time taken drafting and agreeing any letter of engagement is time well spent and will help significantly if you find yourself on the wrong end of a dispute.
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