Education is your best defense in guarding against professional liability claims. Sign up for our Email Newsletter and receive Alerts, Articles, and White Papers on protecting and managing your practice.
Negative Engagement Letters
We regularly hear from accountants who ask about the effectiveness, and enforceability, of "negative engagement letters".
A Negative Engagement letter is one that includes wording that indicates even if the client does not sign the letter, certain action taken by the client (submission of tax returns) will be deemed as acceptance of the engagement letter terms.
We spoke with Ralph Picardi, Esq, specialists in Accountants Professional Liability and author of, The Accountants Risk Management Handbook, Mara Press, Inc 2002, and received the following insight on negative engagement letters.
A signed engagement letter is by far the best course of action in any engagement. By obtaining the client's signature on an engagement letter, the firm creates a clear contract with the client including all of the important terms of the engagement. Most firms, however, have a very difficult time receiving back completed organizers and sufficient source documentation, let alone signed engagement letters in 1040 engagements.
To address that concern, many firms have opted for negative letters, i.e., letters that do not require a signature. They can take many forms. Attorney Picardi clarified that every state recognizes that contracts can be formed by something other than a signed writing. Oral contracts and those formed by actions are examples. In the absence of a state law requiring a signed writing (and you should check this with local counsel), the reasonableness of the communication will probably control the matter if litigation ultimately ensues.
Attorney Picardi further recommends the following approach. The firm should continue to style its engagement letter to be signed by the client, but should also include language that purports to make the terms of the letter binding even in the absence of a client signature.
Example language would be as follows:
If you agree to authorize this firm to prepare your 200_ personal income tax returns pursuant to the terms set forth above, please execute this letter on the line below designated for your signature, and return the original of this executed letter to this office along with a completed copy of the enclosed tax organizer and the supporting documentation requested therein. You should keep a copy of this fully executed letter for your records. If this firm does not receive from you the original of this letter, in fully executed form, but receives from you a completed copy of the enclosed tax organizer and/or supporting documentation requested therein, then such receipt by this office shall be deemed to evidence your acceptance of all of the terms set forth above. If, however, this office receives from you no response to this letter, then this office will not proceed to provide you with any professional services, and will not prepare your 200_ income tax returns.
Negative engagement letters may not be the best, but they are useful and are certainly recommended over no engagement letter at all.
For more information, visit McGowanPRO's dedicated website to engagement letter education, www.engagementletters.com
This information is intended solely for general educational purposes. It is not intended for the purpose of providing specific legal, accounting, or other professional advice to any particular recipient or with respect to any particular jurisdiction. The author, publisher, and distributor of this document (1) make no representations, warranties, or guarantees as to its technical accuracy or compliance with any law ( federal, state, or local) or professional standard; and, (2) assume no responsibility to any recipient of this document to correct or update its contents for any reason, including changes in any law or professional standard. Before using any engagement letter in your practice, you should formally retain the counsel of an attorney knowledgeable as to the accounting industry, your practice, and the laws of any jurisdiction(s) within which you conduct your practice to ensure the documents maximum usefulness and compliance with applicable laws and professional standards.