CAMICO has been developing solutions for CPA professional liability problems for more than 35 years, and tax season has always been a major part of that activity. The use of engagement letters for non-audit work, including tax engagements, was pioneered by CAMICO as an effective way to help document the CPA’s understanding with the client.
CAMICO recommends engagement letters for every engagement, and several other loss prevention practices are often just as valuable, such as follow-up documentation, fraud prevention, internal control advisory letters, client assessment, ongoing client evaluation, and disengagement.
The following are brief descriptions of each of these areas and some of the online resources available to CAMICO policyholders via the Members-Only Site to help manage risk exposures.
The first step in establishing effective communications with the client, managing client expectations, and avoiding misunderstandings and disappointments, is the engagement letter. In many respects it is a written contract between the CPA and the client, and as such it should clarify the services that the CPA will render, describe the scope and limitations of the engagement, and allocate, in limiting language, your responsibilities and the responsibilities of the client. In the event of a dispute, the engagement letter will serve as documented evidence of the duties your firm was to perform.
Best practices include always trying to get the client’s signature – an unsigned engagement letter may be interpreted by the courts as a non-agreement unless you have embedded unilateral language in your engagement letter. Although not as powerful as a client signature would be, unilateral clauses do afford some protection to the CPA. If additional services are going to be provided by the CPA, or the services cross into a different area (e.g., from the tax ramifications of a sale, to a business valuation), a new engagement letter may be needed.
CAMICO’s guidance on engagement letters is found in the Engagement Letter Resource Center, located on the CAMICO Members-Only Site (Policyholder Login is at www.camico.com). Sample tax letter templates for Individual, Partnership, Corporate, Estate/Trust, and other tax engagement letters are also found in the Engagement Letter Resource Center.
The engagement letter is often just the first in a series of documents needed in an engagement. For example:
- All significant client meetings should be documented with a written description of the subjects discussed at the meeting. This will help ensure that both you and the client are proceeding with the same expectations and assumptions.
- “Informed consent” letters should be used in certain situations, such as S corporation elections or estate tax planning. The letters help clarify that the CPA advised and informed the client, and the client agreed with the advice. Without this letter, it is easier for claimants to make it appear that the CPA made the decisions on behalf of the client. The letter will help prevent the client from successfully asserting later that your firm is responsible for unexpected events and for less-than-optimal results.
- Written confirmation should be obtained for the amounts used for calculations, such as those used with tax extension payments. The client can review the information and change any of it that is incorrect. The client can also send the data via email or fax, which becomes part of the records, support and documentation—always critical in the event of a dispute.
More documentation guidance and tips can be found on the CAMICO Members-Only Site under Knowledge Tree, Risk Management, Documentation Issues.
CPAs are not required to verify certain types of information, but if something looks irregular, a prudent course of action is to investigate, document, communicate, and get it right. Client and public expectations of CPAs have increased in recent years to the point where CPAs are expected to: 1) always detect fraud, and 2) advise and warn clients about their exposures to fraud.
The public expectation that CPAs should always detect fraud can be extremely difficult to meet, but the expectation to advise and warn is much less difficult. By advising and warning clients of their defalcation exposures, CPAs are better serving clients and minimizing liability stemming from the expectation to detect fraud.
Use an internal control advisory letter to advise and warn clients about their exposures to defalcation. The letter: 1) warns about general risks, 2) suggests steps clients can take to reduce risks, and 3) offers annual CPA services to address fraud risks. Examples can be found in the Fraud Resource Center on the CAMICO Members-Only Site under “Risk Management Tools and Engagement Letters.”
Firms should evaluate all potential new clients and re-evaluate all current clients on a regular basis, at least annually. This enables the firm to better monitor clients, consider any changes that might affect the professional relationship, and avoid situations that could escalate into crises. Firms can also stipulate in their engagement letters that the engagement is not binding until client acceptance procedures have been completed.
A “Client Assessment Checklist” can be accessed in the Engagement Letter Resource Center on the CAMICO Members-Only Site. The checklist also provides guidance on how to avoid fee collection problems and how to use mediation and arbitration clauses effectively. The “Ongoing Evaluation and Disengagement Checklist” is also in the Engagement Letter Resource Center and helps firms identify problem clients and other issues that may call for disengagement.
Contact CAMICO as soon as an issue with a client or engagement comes up. Taking advantage of CAMICO’s Loss Prevention services will help you avoid costly mistakes, problems, disputes and claims. Reporting a potential claim early also enables CAMICO to work on an early resolution, which helps the firm to get back to business as usual.
Policyholders can always contact the CAMICO Loss Prevention department for more advice and guidance. Call 1.800.652.1772, or email@example.com