Engagement Letter

An engagement letter is the written contract between a CPA firm and its client defining the services to be performed, the responsibilities of each party, and the commercial and legal terms of the relationship. Professional standards require one for attest engagements, and firm risk management and professional liability insurers effectively require one for every engagement, including tax compliance and advisory work.

A well-constructed letter addresses several essentials. It identifies the specific services in scope and, equally important, states what is excluded - that a tax return preparation engagement does not include representation on examination, that a compilation does not include an opinion, that no procedures will be performed to detect fraud. It allocates responsibility, confirming that management is responsible for the accuracy and completeness of the underlying records and for the representations made.

It defines the reliance basis: the firm will rely on information provided without independent verification unless the engagement specifies otherwise. It sets fees, billing frequency, and terms including suspension rights for non-payment. It addresses document ownership, retention, and the handling of third-party requests. And it typically includes limitation of liability, indemnification for knowing misrepresentation, dispute resolution, and termination provisions. Scope creep is the failure mode the letter is designed to prevent. Tax and advisory relationships evolve, and work that begins as return preparation drifts into transaction structuring, financial projections, or lender communications - each carrying different risk. The disciplined response is a new letter or a written amendment before the additional work begins, not an invoice afterward.

Annual renewal matters as well. Rolling forward last year's letter without reviewing scope, entity list, and fee terms is a common source of disputes, particularly where the client's structure has changed through acquisitions or new state filing obligations.