Engagement letters: the latest guidance

Mark Lee explains what the professional bodies have done with their latest guidance on engagement letters for tax work and advice.

At the end of May a collaborative working party comprising ACCA, ATT, CIOT, ICAEW Tax Faculty, ICAS and IIT published fresh guidance relating to engagement letters for tax related work. The guidance has been approved by leading counsel.

The latest guidance updates that which was published in March 2009 and which I described in an article on AccountingWEB as ‘Letters of engagement for the 21st century’. Back then I chaired the working party and was very proud of the guidance that we subsequently published. It was clear even in 2009 that the guidance would need to be updated. Although I am no longer involved I am pleased that the new working party has simply updated the 2009 guidance and sample letters.

The rest of the article includes the following sections:

  • Summary
  • Key changes
  • Structure
  • Enforceability of engagement letters
  • Conclusion

Continued...

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Comments

How long are these new engagement letters?

BryanS1958 | | Permalink

I haven't had a chance to read the guidance yet, but if they are anything like past recommendations they are so long that no client is going to bother to read them.  They really should have a simplfied version for small businesses, no more than a couple of pages.

multiple engagement letters

mcleanreid | | Permalink

If we follow the recommendations for tax engagement letters for, say, a self employed individual, would they not also require an "accounting" engagement letter and Terms of Business?  A small trader getting two bulky letters of engagement may well conclude that over-kill is being practiced.

I've just had a look at one    6 thanks

BryanS1958 | | Permalink

I've just had a look at one of the links - 66 pages, 25,000+ words for the 'Word version for tailoring.....', plus numerous links to other material.  And that is just one link to look at, there are three others above for the ICAEW.  Absolute madness! As usual, just shows that the ICAEW is totally out of touch, as a sole practitioner all I do with my time is jump through ICAEW hoops....one day I might be able to get on with client work and earn some money!

Are electronic versions valid ?

Barkster | | Permalink

I suspect I am going to be made to do engagement letters shortly by the AAT and, as a one-man-band, I don't have the time nor inclination to be doing these retrospectively for 350+ existing clients.

I was thinking of a way I could get clients to logon to my website and create their own engagement letter and then somehow "sign" it electronically, or just e-mail it to me.

Would this be feasible and would the engagement letters stand up in court as being properly signed or authorised ?

As others have said, few are going to read 66 pages and it seems madness generating 2 copies of this for each of 350 clients (46,200 sheets of paper) and then both us and the clients having to store it all ad infinitum !!

johnjenkins's picture

All getting rather complex

johnjenkins | | Permalink

but is it REALLY neccessary. Don't get me wrong, arses have to be covered, but surely a simpler format can be found. Something on the grounds of fairness with a definition of the word fairness. Bit similar to the "true and fair view". I agree with previous posters that if you make it too complex clients will not bother reading them and might not even sign.

Keeping pace with other business sectors.    1 thanks

Michael Rowe | | Permalink

As a firm we have dedicated significant time and resource to 'perfecting' engagement letters. It is a never ending project and the administration involved is impossible for small accounting firms. We need more assistance from the accounting bodies. What I can't understand is why we can't simply provide (paper or electronic) a schedule of agreed services, T&C's and a covering letter that states "if you are happy with the attached then there is no need to do anything. Your contract will be renewed and we will invoice you £xxx on (date)". The insurance companies seem to have successfully adopted  this approach. Therefore when as accountants we ask for a client to sign 2 versions of lengthy documents they see this as a nightmare (even more so if we request it every year!). Quite understandably the client then ask why they have to do it when all other companies they deal with make the process so much easier (insurance companies, on-line user agreements, etc). We live in a virtual world and the accounting industry is being left behind! What would be useful is if the accounting bodies could fund the development of an electronic/web-based application that accountants could use (perhaps even at a small fee) to make the process simpler for clients. 

 

Existing LOE

carliwebb | | Permalink

Hi, what are the thoughts on updating existing letters? This would be time consuming, therefore not sure it would ne necessary in all cases.. 

bookmarklee's picture

It's so easy to criticise and hard to please everyone

bookmarklee | | Permalink

I totally sympathise with those who desire short, simple and straightforward sample engagement letters.

For everyone who asks for their professional body to produce A pro-forma there are dozens of members who resent the idea of being 'forced' to use a format that doesn't suit their style and approach.

 

bookmarklee's picture

Responding to @BryanS1958

bookmarklee | | Permalink

Hmm. First you criticise without reading the document. Then you complain and misrepresent what the professional bodies have done. The length of the guidance is due to the desire of the working parties (largely comprising practitioners) to explain all of the issues, variations and factors to consider when drafting your own engagement letters. This adds to the length of the guidance document and the number of words. But it's all clearly laid out and upto you to pick out those bits relevant to your practice

As I noted in the article:

"Last time round we considered trying to create a model simplified engagement letter and schedules for the smallest of firms. We concluded this wasn’t possible as there are too many variants that individual accountants must choose for themselves."

Unlike the ACCA the ICAEW does NOT oblige members to issues letters of engagement. It's simply good practice and worth considering as it can help protect the member in the event of disputes. 

If you're going to issue letters of engagement then it's upto you to decide how comprehensive you want them to be and which clauses you want to exclude to shorten them.

In my experience some members seems to assume that everyone else does everything the same way as they do such that 'The Institute' should produce standard letters that ALL small practitioners could use without changes. I am 100% certain that such an approach would lead to far more complaints as the majority want the facility to adapt sample letters to suit their own working habits. 

bookmarklee's picture

Responding to @mcleanreid re multiple engagement letters

bookmarklee | | Permalink

Sorry? That's not what was suggested in 2009 or now.

The suggestion is simply one covering engagement letter, one set of terms and conditions and one set of schedules of services. 

bookmarklee's picture

Responding to @Michael Rowe

bookmarklee | | Permalink

The professional bodies, largely through the volunteers on the working party, have devoted an enormous amount of time and effort to producing updated guidance. It was the same in 2008/09.

Maybe one day additional resources will be found to produce electronic versions etc. In the meantime the facility is provided by third-party providers such as Bizezia.

 

Deregulated Hooray!

JackHarper | | Permalink

I stopped jumping through ICAEW hoops when they told me in 2008 that any chartered accountant who gave tax advice had to have a practising certificate. I resigned (after 36 years of membership). I had been smarting since 2002 from passing with flying colours a serious technical interview at Clark Whitehill to be told by an admin partner that I was too old (my CV showed my age of 55 upfront) I still pay my sub to the CIOT and £20 to the Law Society (non-practising solicitor). No one can actually afford to practise as a solicitor, indeed their PI cover is so expensive that some solicitors cannot obtain insurance at economic cost.I have been able to choose who I have as a client for the last 20 years unhindered by partners whose current specialisation was drawings, adultery and lunch. This makes for uncomplicated risk assessment.As a result my engagement letters are very short. A line on each of moneylaundering (bureaucrap), job to be done, timescale for delivery and fee structure. I rarely ever have to remind myself of the firm's policy as it has a flat management structure comprising only me. I deeply resent having to produce written evidence of anything as an audit trail for self-aggrandising bureaucrats (and in the case of the SRA incompetent psychopaths).

johnjenkins's picture

Trouble is Jack

johnjenkins | | Permalink

people like you and me will never get into REAL power positions because we WOULD sort all the bureaurocrap. So all we can do is have a little whinge on the sidelines while the jobsworths rub their hands all the way to the bank. 

Tom 7000's picture

ICAEW

Tom 7000 | | Permalink

We all pay our subs...they have to spend them on something....

 

Don't rush to criticise the long letters    2 thanks

Jonathan Mann | | Permalink

I am with Mark. 

If the examples used didn't cover the increased legal complexity of the business environment we work in,  the bodies that published them would be neglecting their duty to us.

Everyone has a choice to tailor them as they feel appropriate (and indeed the advice provided says you should), but I bet when asked to state which elements should never have been included at all, most will struggle to find the areas that are irrelevant to every client and every size of practice.

If you want to complain,  complain about the increasing complexity of regulation and legislation that we are all subject to in the UK,  not about those who seek to protect us from a world where everyone looks to place blame on those who have bigger pockets (or insurance cover) regardless of where the blame actually lies.  How long was the contract the last time you took advice from, say, an investment adviser, lawyer, an insurance broker, took out any form of loan, service agreement or warranty?  We all choose not to read elements of them but I think it is naive to suggest that tax advisers are a separate class of financial adviser that don't need to worry about any of this.

Do I share your frustration - yes.  But do I think there is a quick and simple solution that someone can put on just one or two pages to fit on one page that applies to a vast range of practitioners and client - no.  I suspect if asked, our PI insurers wouldn't think so either !

And if you do find a client trying to sue you, one or two of those long boring paragraphs may suddenly seem a little more appealing.

Locutus's picture

Another vote in favour of engagement letters    1 thanks

Locutus | | Permalink

When ACCA updated their engagement letter CD a few years back (I think following the work done by Mark's working party) my first thought was irritation that the previous four / five page letter for a limited company had multiplied into an accounts engagement letter, plus a tax engagement letter, plus corporation tax schedule of services, often a VAT schedule of services and an over-arching terms of business - about 15 pages all told.

However, once you get the templates in order, it's not particularly difficult to change the name, address and a few other details for each new client - the schedules of services and terms of business rarely if ever change.

I like to think I do a competent job and have never had a PI claim or had to "hide behind" the terms of an engagement letter.  However, if I were to get an unreasonable client, I would feel much, much safer having a comprehensive engagement letter in place.  A good engagement letter will probably also help to prevent a bad client "trying it on" by claiming the accountant was responsible for something that they were not.

So thank you Mark for the original work and the others involved in the original and more recent working parties.

Gutted

North East Acco... | | Permalink

I spent untold hours last year updating our 18 different services engagement letters. Brings me out in a cold sweat thinking about it.

As it was a couple of year's since we had updated in February this year one of our tax staff spent three weeks re issuing the new letters to all clients and getting signed copies back in.

No one reads them and I am unsure how effective they would prove to be. Bottom line is if you get a claim the handling will be out of your hands and decided by the insurance company.

How about Professional Indemnity Insurance Companies get together and produce a definitive set of engagement letters and terms of business that we can just slot client's name into?

Worked long and hard to get qualified as chartered accountant and registered auditor and the temptation to join Jack Harper, outside regulatory net, can be overwhelming.

Now, how to tell tax lady she has got to do it all again!!!

 

 

johnjenkins's picture

It really should be simple

johnjenkins | | Permalink

for the "bodies" to come up with an engagement letter which suites all so that when a client comes on board they are referred to that letter. If the client wants to go on line and have a look at what they have signed up for then they can. Any dispute is referred to the "body". I mean that is surely what they are paid for, pity we weren't their shareholders.

bookmarklee's picture

Responding to @johnjenkins

bookmarklee | | Permalink

If it were "that simple" we would have done it in 2009 or the new working party would have done it this year.

As Jonathan Mann says above the real problem is all of the related legislation and our litigious society.

Believe me we did think about it but concluded we couldn't please all of the people all of the time. And avoid the risk of the Prof'l bodies being sued for failure to cover key issues in our guidance.

Maybe I'm wrong but I felt that the huge step forward was moving away from publishing 'proforma' letters that members might be tempted to use without any thought - and would continue to complain were too long and unwieldly.  Instead we produced detailed guidance to explain all of the elements that you might want to include in your eng letters. If you choose not to do so that's fine but at least you have the choice of understanding what the consequences might be. And beyond the guidance we produced samples from which you can pick and mix as you choose. If you don't think you need bits in your practice then cut them out. 

I've already addressed the desire for a one-size fits all standard above. We'll have to agree to disagree as to whether it would be a good thing for a professional body to attempt to produce something intended to suit everyone - as distinct from the sample letters contained in the guidance.

 

 

bookmarklee's picture

Reply to @gutted

bookmarklee | | Permalink

North East Accountant wrote:
No one reads them and I am unsure how effective they would prove to be. Bottom line is if you get a claim the handling will be out of your hands and decided by the insurance company.

How effective your letters will be depends on the extent to which you have followed and understood the guidance. Counsel has advised that the terms proposed in the guidance and the sample letters are reasonable. It's not all about protecting you against negligence claims. The guidance is also focused on helping ensure that you have a right to pursue payment for your services. And also that there is sufficient clarity as to what it is reasonable for a client to assume the fee they are paying covers. This then makes it easier to charge additional fees for additional work. 

For what it's worth I wonder if some firms have yet established cost-effective systems for producing, issuing and recording their engagement letters.

johnjenkins's picture

@ Mark

johnjenkins | | Permalink

I fully understand your thinking and to a certain degree agree. However, as the Nat West were always saying "there must be another way" If the "Bodies" produced a document which covered almost everything (as you say there will always be a new scenario with new legislation) and was updated every 2 years, subscribers could then refer clients to that document as opposed to loads of different letters being sent out to loads of different clients who really aren't interested anyway. There are only going to be one or two that might take advantage. Any dispute can then be resolved by the "bodies". I'm sure they could also come up with a suitable disclaimer.

Responding to @Bookmarklee

BryanS1958 | | Permalink

My first post was, as it clearly stated, based on experience of past ICAEW offerings; even their website is so badly laid out and indexed it takes an age to find anything and I end up having to phone the library.

I'm not entirely sure how I'm misrepresenting what the Institutes have done...it seems to me that what they have done is created another set of lengthy templates and even longer guidance.

Anyway, the way things are going everything is stealthily being driven into the hands of big business....small IFAs have already been forced to close shop due to reams of FSA rules and regulations, forcing most of the public to use banks and other large institutions, who are often tied and offer, at best, mediocre products.  The accountancy profession is going the same way - soon the small practitioners will be forced to close shop, leaving the public no choice but to use large firms of accountants who have enough resources to cope with all the rules and regulations and again tend to offer mediocre service, based on the experience of clients I have taken over from large firms.

I agree with @michaelrowe....it would be a great idea if the professions could get together and do something similar, perhaps using an all encompassing standard letter and referring clients to a link which is updated by the institutes whenever they decide we need more regulation.

In the meantime, for non-audit clients perhaps the way to go is, as Mark suggests, to do away with engagement letters and rely on PI if anything goes wrong.  Touch wood I've never had a successful claim against me, so rather than losing thousands of pounds of chargeable time each year reading and updating engagement letters, etc. I should just do away with them, saves time and better for the environment:-)

bookmarklee's picture

Responding to @BryanS1958

bookmarklee | | Permalink

BryanS1958 wrote:
soon the small practitioners will be forced to close shop, leaving the public no choice but to use large firms of accountants who have enough resources to cope with all the rules and regulations and again tend to offer mediocre service,

I see a very different future with far more smaller practitioners who have invested in modern systems and processes that enable them to be more nimble, cost-effective and client-friendly than larger firms will ever be.  I see the middle ground, between the largest firms and the smallest ones, opening up to present an increasingly stark choice for clients.

Mark

ps: I'm not sure I did suggest doing without eng letters. I certainly do NOT advocate this; but it is an option if you have strong feelings that they are of no value to you or your clients. Unless you're a member of ACCA of course.

Paul Scholes's picture

These are our letters    1 thanks

Paul Scholes | | Permalink

Whilst I'm struggling to remember whether I have, in over 30 years of practice, ever had to wave an engagement letter in front of a client, let alone a judge, I still believe in them but they are my letters dealing with the things I do for my clients AND what they do for me.

They were fine with my current version 2 years ago at a monitoring visit but if the ACCA ever tell me they don't like my tailoring as it looks like a pair of shorts & a T shirt rather then a grey suit, tie, belt, braces, bra and cuff-links, it'll be time to lose their letters.

Given that they are doing what I pay my annual fees for, I'll have to ask them why they expect me to pay for the CD of examples etc but I'll read through them and pick out the bits that apply to my practice and amend my current letters accordingly, this is unlikely to touch the first 5 of 6 pages that mine take up.

Thinks......putting my objective/reasonable hat on, I suppose they have to make available every possible term that might be needed as it is going to firms with thousands and tens of clients, consequently I'm sure they do not expect a small practice to incorporate stuff that they are unlikely ever to encounter.  My own approach these days is that if anything contentious or over-risky appeared in the tax work I was doing, I'd get someone else in to do it for the client with their 50 page engagement letter.

rampanesar's picture

No right answer    1 thanks

rampanesar | | Permalink

I can see the reason why they have to be so detailed.

I don't think I would have any clients if my LoE's were as long as suggested! I approach the clients with two parts of the LoE - Part I details the services to be provided and the costs. Part II has all the other "cr***p" and that runs to just three pages.

Obviously Part I varies client to client. But Part II is updated ongoing every 2-3 months, when I see a potential problem following comments on this site or at seminars. 

I have read the latest fact sheets and clearly one has to draw in the Enthusiasm of the writers BUT we should cast a practical eye on the matter.

So I will be changing my Part II but it will only be an addition of 2-3 paragraphs. Still trying to keep under a 4 page limit. So normally, old and new clients will get a 3 page - double sided letter.

My view is that an LoE is a contract and it has to be readable by average Joe, so making it long and legalistic, nobody is going to read it.

I would welcome any constructive comments - if any???

BTW - the latest version of Part II is always available to my clients via a website download. 

 

 

Engagement letter templates    1 thanks

mpollins | | Permalink

We agree that issuing engagement letters is very important for accountants, but we know they are time consuming to write. Contract Engine from Bizezia could help you: we offer a fully editable suite of downloadable engagement letter templates that are constantly kept up to date with the latest guidance and regulations, to help you save time and feel reassured that all the required aspects are covered and included. This is particularly useful at such times as when guidance is updated.

If you’d like to read more about what Contract Engine, visit our website: http://www.bizezia.com/products/contract-engine, or call us on 01444 884220 to if you have any questions.

Keeping pace with other business sectors.    1 thanks

Fijon158 | | Permalink

Hi Michael

I can put you in touch with a remote worker who I'm sure would quote you for completing your enagaement letters! Depending upon where you are in the country. She has taken on a lot of my secretarial duties freeing up a lot of my time, to do err... Fee earning work, yeahh!

What's the problem?    1 thanks

MJShone | | Permalink

I don't think it's possible to draft an engagement letter template that fits every practitioner, large or small. What the various bodies have done (thank you) is draft something that they hope covers as many practitioners as possible - which means that there's a lot of stuff in there that many of us will edit out. (And some stuff which needs to be added eg we have some clients where we review annually, for a small fee, the need to do a repayment claim - if we then go on and do one there's an additional fee. Sometimes we'll save them up and do several years at once in the interests of cost efficiency.)

What's the problem with editing the long template produced by the bodies to come up with your own standard? If you get it right, that template doesn't then have to be tinkered about with too much for each client.  

Is there any requirement to send out a whole raft of engagement letters every time the standard changes? (I'm not ACCA.) I suppose each practice has to decide whether the changes warrant that. Is there a requirement to send one out every year? Not that I'm aware of. Can't an engagement letter be drafted so as to cover "the future" with updates being sent out only when something that matters changes? If it's only the fee that changes (or not!), can't the info gathering letter for the tax return simply say the engagement letter dated x stands and the fee this year will be £y? 

I've edited the new template and come up with a standard for individuals, one for trustees and one for partnerships, with the appropriate schedules based on what we do. It will go out to new clients and clients where it's been a few years since they had an engagement letter.

The layout of the template issued by the bodies does make it easier for the client to read - at least not everything's in one long letter, but broken up into a covering letter, a separate schedule for each "service", and the detailed terms and conditions.

 

 

 

 

 

dialm4accounts's picture

Paper or electronic?    1 thanks

dialm4accounts | | Permalink

Does everyone send their engagement letters out in paper format?

In a previous life I had my own clients and I used to send the engagement letters (adapted from the ICAEW templates and put into plain English) out electronically using Echosign.  Saved a lot of paper and a huge amount on postage costs.

M

rampanesar's picture

PDFs - Yes

rampanesar | | Permalink

Yes - via PDF, but always got a signed paper copy for my file from the client

philhendy's picture

Signable    1 thanks

philhendy | | Permalink

I have been using Signable https://www.signable.co.uk/a/20379

This is an electronic signature package that can be sent to multiple parties and tracks when they have been opened, read, signed and returned.

I store them electronically; however, I do download a paper copy just to be safe.

Professional indemnity insurance

gsgordon | | Permalink

I expected that our PI insurers would dictate T's & C's, or as a minimum provide advice on this, but I can find nothing. Has anyone seen advice from insurers on the question of how liability should be dealt with in engagement letter or contract T's & C's?