Your CPA and You

Beginning the Relationship: The Engagement Letter
Discussing Fees
The Value of a CPA [PDF Brochure]

What is an engagement letter? Why did your CPA ask you to sign one? What should you expect if you have a conflict with your CPA? The engagement letter, offered by your CPA at the start of your working relationship and whenever you authorize him to begin a new project on your behalf, fosters effective communication between the professional advisor and you. Through better communication, goodwill and understanding will be promoted.

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Beginning the Relationship: The Engagement Letter

When you ask your CPA to undertake a project for you, does your CPA know what you expect to achieve? Do you have an accurate understanding of what you will be charged for services rendered? The purpose of the engagement letter is to clearly identify the work to be performed, fees to be charged and how conflicts will be resolved.

Engagement letters are not specifically required by professional standards. A CPA is required only to establish an understanding of the engagement with the client. However, the use of a formal engagement letter spells out the expectations between the CPA and you.

These formal agreements do more than merely help avoid misunderstandings between CPA's and clients; a well written engagement letter will also:

• Help the CPA's staff understand the agreement between you and your CPA and gives them an authoritative reference to supplement oral instructions.
• Clearly define the duties and responsibilities of both you and your CPA.
• Establish that you agree to pay for the services rendered and your CPA agrees to provide said services.
• Provides a written understanding of your responsibility for your financial statements.

When preparing engagement letters, a CPA should carefully consider elements of the engagement that could be a source of misunderstanding. At a minimum, the following matters should be discussed:

• Clearly define the services to be performed in as much detail as necessary. As part of this discussion, the CPA should identify you (the client), the scope and timing of the work to be accomplished under the engagement (financial statements, tax returns, management services) and perhaps even the opinion or report that you (the client) expects issued. When outlining the services, the CPA should not hold back. The more clearly defined the scope of the work is, the less chance for a disagreement.
• Discuss fees before entering the engagement. Ask for a written estimate of the CPA's fees or fee range. Make sure you understand the CPA's billing policy (rates, frequency and terms). Find out if the fee assumes that you will provide clerical assistance (schedules, spreadsheets and word processing). Ask about unforeseen developments and how these developments may affect estimated fees. Request that your CPA call you if this situation occurs. The engagement letter might reflect these agreements by including statements such as: “Our charge for the above work will be [list range]. If we should encounter situations which would cause our fees to be greater than the above amount, we will notify you on a timely basis.”

Every engagement is a contract and sound business practice calls for written contracts. Getting the terms of the engagement in writing is good for you and helps build a strong long-term relationship with your CPA.

Many engagement letters will include a paragraph that indicates the CPA's desire to resolve potential disputes outside of the court system.

As a client unfamiliar with engagement letters you might be hesitant to sign it when you see one for the first time. Your CPA may follow these steps to help you overcome your hesitations. The CPA may:

• Explain that engagement letters are required for all clients as a matter of firm policy, that most CPA firms require them and that you are not being singled out for any reason
• Explain the reasons for the letter and how it benefits both you and the CPA (See "The Engagement Letter")
• Do his best to use non-technical language in his letter and make sure you understand any technical terms used
• Review the letter with you in person before issuing it

The primary reason for using an engagement letter is to avoid misunderstandings, disagreements and disputes. Engagement letters help defuse potential problems before they arise and help avoid costly courtroom battles.

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Discussing Fees

One of the CPA's most difficult tasks is to initiate a discussion on fees. Here are some tips that will help both you and your CPA establish good communication regarding fees.

Discuss the Subject Early

Make sure that you and your CPA discuss fees before getting started. Don’t wait until the end of the engagement before finding out about the fees involved. Talk fees with your CPA before he begins your work. The following phrases will help break the ice on fee discussions:

• Let’s talk about your fees
• Before I go can we to discuss your fees?
• Will you tell me about your fee structure?

The CPA Provides Options for You (the client)

One problem inherent in fee discussions is the difficulty of predicting the final fee. If your CPA can’t clearly anticipate the boundaries of the work required to complete the engagement, make sure you understand why he can't predict the actual cost and you are comfortable with the plan he proposes to keep you informed regarding fees. Make an agreement with your CPA to keep you informed on the progress of the project. Between you and your CPA, set points at which you will make a decision on whether your CPA should proceed with your work. Knowing that you can end the engagement at any time is sometimes all that is necessary to prevent fee disputes.

Another communication tool used to build a strong relationship is for the CPA to establish a “not-to-exceed” fee amount in their engagement letter. This tells you (the client) that he will under no circumstances bill for any fees beyond "X" amount without your advance authorization. If the CPA's time is likely to exceed the budget, he should be prepared to call you immediately.

Engagement Letters are communication tools that allow you and the CPA to come to a better understanding regarding the nature of the relationship and expectations of the services rendered. By using an engagement letter and communicating what is in the engagement letter prior to rendering services, you and your CPA can enjoy a mutually-satisfying relationship. Discussing fees at the beginning will also help dissolve misunderstandings down the road.

If however, you feel that you and your CPA are at an impasse please read the article on "How Fee Disputes are Handled". You may also contact Cheryl Langley at the OSCPA at 503-641-7200 / 1-800-255-1470 Ext. 25 or email rhmranru@yuyti.cvt.