Beginning the Relationship: The Engagement Letter

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. Better communication, goodwill, and understanding will be promoted through the engagement letter.

It's unlikely that you would enter into an important business relationship without a written agreement. Good business sense dictates that you "get it in writing." In the past, services provided by your CPA may have been performed on the basis of an oral agreement. But the significance of the relationship between your CPA and you does warrant a written agreement. Many accountants are committing these agreements to writing; they take the form of Engagement Letters.

In a professional engagement, the CPA agrees, on the one hand to comply with professional and ethical standards; you, on the other hand, agree to cooperate, to render assistance, and to compensate the CPA. An Engagement Letter clarifies these mutual obligations; it insures that the CPA and staff members understand the type of engagement to be performed and the expectations they agree to fulfill.

CPAs provide such services as audit, review, compilation, tax and management advisory services. Each service yields benefits, and in each instance the CPA assumes certain responsibilities.  An Engagement Letter spells out those services, including the type and extent of the services to be provided, any limitations of these services agreed to, and the timing and deadlines for performance. The letter may describe what is expected of you, the client, including what assistance will you provide, what payment terms are, and how the fee will be determined.  It is in your interest and your CPA's interest that there be a clear, written statement and understanding of the services to be provided.

Signing an Engagement Letter does not alter the relationship between the client and the CPA, nor does it change the obligations of either party. What the letter does do is commit to writing precisely what is involved in an agreement, and thereby reduce the possibility of misunderstanding later.

Even if there are no changes in the services provided, Engagement Letters should be reviewed periodically. This is because professional standards for CPAs change, and the scope of their services may be modified. In addition, your situation may change, which could affect your needs for CPA services. Renewal of the Engagement Letter permits reassessment of your needs for professional services.

Read the Engagement Letter with care. Give it the same careful attention given to any significant agreement. Discuss its content with your CPA. Be sure you understand the services described, the limitations of the services, the fee arrangements, and any other significant provision. When you sign the Engagement Letter, be aware that you are accepting the terms of the agreement. Retain a copy of the signed Engagement Letter as you would any other written agreement.