Adding a set of simple sentences to your firm’s engagement letters could go a long way to making your firm safer from lawsuits, a legal expert told accountants at the Midwest Accounting Show.
In a session on “Protecting Your Practice from Internal and External Perils,” Michael Ripani, counsel at law firm Seyfarth Shaw, laid out the case for strong engagement letter,
To start, he noted that the American Institute of CPAs’ standards require a written engagement letter. They should describe the nature and scope of the work, the standards involved, the services you are providing (“Don’t just say Accounting services,’” Ripani cautioned. “Be specific.”), and your procedures and testing.
The letter should also include these liability-limiting statements:
- Limitation of damages. Include a short sentence to the effect that your errors & omissions liability will not exceed fees collected. A judge may overrule this, Ripani noted, but it may make a client think twice about suing.
- Modification of statute of limitations. The period within which a client can decide to sue you varies from state to state, but you can attempt to limit it with a sentence that says the client must take action within a certain period. “A lot of courts have considered one year to be a reasonable time,” Ripani said. In Illinois, which has a two-year statute of limitations, “That could cut your risk in half.”
- Alternative dispute resolution. Include a sentence that keeps disputes out of court by requiring either mediation (which is non-binding) or arbitration (which is binding). Among other things, you’ll avoid the public record of your firm having been sued for malpractice.
- Client lack of cooperation. Include a sentence to the effect that a client not living up to their responsibilities -- delivering source documents, meeting deadlines, etc. -- constitutes a violation of your agreement and gives you the right to withdraw from the engagement. At the very least, Ripani said, “This will scare the clients a little,” and make them more cooperative
- Attorney fee-shifting provisions. These require that the unsuccessful party in a lawsuit has to pay their opponent’s legal fees. It can be an effective deterrent -- but it also leaves you open to unreasonable fees from your client’s lawyer if you lose.
- Indemnification. This would reimburse you for any expenses you may incur if you’re dragged into a dispute your client has with a third party -- if you’re subpoenaed by the third party, for instance. “You don’t want to have to pay out of your pocket because of a dispute your client go into,” Ripani said.
Ripani suggested keeping these to one sentence each, and to keep your overall engagement letter short, so clients don’t balk at reading and signing them.
He also noted that if you have clients for whom you don’t have engagement letters, it’s never too late to create one. He told a story about an accountant who sent out engagement letters with all of his longstanding clients’ tax returns, and got 60 percent of them to sign.
In the end, Ripani said, “Having engagement letters won’t prevent you from getting sued. The hope is that before an issue blows up into a lawsuit, the client will think twice.”