what to do now … before the big rush
ways to update engagement letters
Engagement letters are one of the best tools in your risk management toolkit. Take the time to update your templates now.
Review prior year engagement letters and update, as needed. Sample engagement letter resources include your professional liability insurer, the AICPA, and others. CNA’s sample engagement letters are available to policyholders in the Policyholder Resource Center. AICPA Tax Section members can access engagement letter templates in the Annual Tax Compliance Kit. If clients (or you) believe the sample engagement letter templates are too long, consider using a Terms and Conditions Addendum. The article, Use Standard Terms to Build a Liability Shield, describes how an addendum can help accomplish this goal.
Review firm policy on issuing engagement letters. While obtaining signed engagement letters is always the preferred risk management practice, unilateral engagement letters sent with tax organizers may be more practical for low-risk individual tax return preparation engagements. A unilateral engagement letter requires signature only by the CPA firm. The client indicates its acceptance with the firm’s terms and conditions by returning the organizer and providing other tax information to the CPA firm. A sample unilateral engagement letter is included in CNA's sample letters. Which Engagement Letter Reigns Supreme? includes a more detailed discussion of the benefits and drawbacks of using unilateral engagement letters.
Emphasize use of engagement letters for all tax services. These services include tax planning, tax consulting and tax audit representation. In 2020, approximately 44% of tax claims asserted against CPAs in the AICPA Professional Liability Insurance Program failed to utilize an engagement letter related to the service that was the subject of the claim. Although CPAs may be diligent about obtaining engagement letters for compliance services, experience demonstrates that they are less conscientious when providing higher risk tax services, such as audit representation, planning and consulting. A single engagement letter may not suffice for a client that engages the CPA firm for multiple services.
Inform clients when the firm will begin preparing tax returns. Advise clients that the firm will begin tax return preparation upon receipt of the retainer fee, if requested, and a signed engagement letter; or, if a unilateral engagement letter is sent, the completed and signed tax organizer is received.
Questions on engagement letters? Please read the article, Frequently Asked Engagement Letter Questions, which provides additional guidance.