INTHEBLACK July/August 2023 - Magazine - Page 51
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MITIGATE RISK
WITH AN EFFECTIVE
ENGAGEMENT LETTER
Engagement letters play a critical role in professional risk management. Here’s how to ensure
they are up to the challenge of preventing commercial disputes and liability claims.
As in many professional service
industries, public practitioners
use engagement letters as
a fundamental part of their
onboarding process with new clients.
Aside from lessening professional
risk exposure, stipulating the terms
and conditions of a new engagement
before undertaking any work is
simply “good business practice”,
says Drew Fenton CPA at Fenton
Green.
“In addition to clearly defining
to your client how your business
operates and the costs involved, an
engagement letter articulates what
you are going to do for the client,
as well as what you are not going to
do,” he explains.
STRENGTHENING
LINES OF DEFENCE
Engagement letters serve several
purposes. First, they provide
transparency, ensuring both a
practice and its client are on the
same page regarding the work to be
undertaken. This not only mitigates
the potential for “scope creep”, but
also helps to protect the practice
should any misunderstandings
lead to a complaint, or even a
professional negligence claim.
“You’re trying to cut out any
commercial disputes – whether
about hourly rates or maybe who’s
going to undertake the work, as well
as the commercial liability aspect,”
Fenton says.
In the event of a professional
indemnity insurance claim, solicitors
will likely ask for engagement letters,
and many professional indemnity
insurers require them as a condition
of their policy. Yet, too often, Fenton
says practitioners do not have an
engagement letter, or it is out of
date and the scope of services has
changed, or it has not been signed
by the client.
“In an ideal world, you would send
a new one every year – and we’d like
it signed,” he says.
WHAT TO INCLUDE IN
AN ENGAGEMENT LETTER
APES 305: Terms of Engagement,
issued by the Accounting
Professional and Ethical
Standards Board, offers in-depth
guidance on the contents of
an engagement letter.
Fenton says that, in general, an
engagement letter should outline
the scope of work to be undertaken,
who will complete it, timelines,
client responsibilities, engagement
outputs, limitations of liability and,
ideally, an overview of fees and
credit terms.
“There’s also the privacy aspect
now,” Fenton adds. “If you decide to
seek external advice, you need to say
it is within your rights to share client
information with your subcontractors
or consultants.”
While Fenton admits time is a
precious (and limited) resource for
public practitioners – and it can
be all too easy to let engagement
letters fall by the wayside – in our
increasingly litigious society, he says
it is critical that practices do what
they can to protect themselves from
client disputes. Engagement letters
offer a simple and effective solution
to reduce that risk.
If you are seeking any assistance with risk management and transfer of your practice risk, don’t hesitate
to contact the Fenton Green team via email or on 1300 760 123.
intheblack.cpaaustralia.com.au 51