Practitioner engagement letters: Strategies for increasing compliance

Editor: James W. Sansone, CPA

In an accounting practice, the engagement letter is a fundamental document that formalizes the agreement between the accountant and the client. It is a critical tool for establishing transparency and managing client expectations. The engagement letter mitigates the risk of misunderstandings and reinforces a professional relationship grounded in trust and accountability. It does this by clearly defining the scope of the CPA’s and client’s responsibilities in tax and other engagements, the nature and limitations of the services provided, fee arrangements, and key deadlines.

Critical elements of an effective engagement letter

The key components of an effective engagement letter are as follows:

• Scope of services: Define the specific services to be provided in detail to avoid any expectation gaps. Clearly delineating the services to be provided eliminates any ambiguity about what is and is not covered during the engagement. A well-defined scope of services ensures that all parties are on the same page regarding deliverables, timelines, and the extent of the practitioner’s responsibilities.
• Responsibilities: Detail the responsibilities of both the CPA and the client. Specifying responsibilities in the engagement letter is critical because it establishes clear boundaries for both the CPA and the client, ensuring that each party understands exactly what is expected of them throughout the engagement. When responsibilities are well defined, it becomes much easier to hold each party accountable for their respective roles, supporting smoother collaboration and more efficient resolution of any issues that may arise.
• Engagement period: Specify the duration of the engagement, including the start and end dates. This sets clear boundaries for professional relationships from the outset. By outlining the exact dates of the engagement, both the practitioner and the client know precisely when the agreed-upon responsibilities begin and end. Ultimately, defining the engagement period protects both parties, ensuring that expectations are met and that neither side is left uncertain about their commitments or the timeline of services provided. This also helps protect against any future claims in the event of practitioner error by providing a clear beginning to any “discovery” period (the time frame during which a claim can be made after an error is discovered).
• Communication: Outline the preferred methods of communication and the frequency of expected updates. By establishing communication guidelines at the outset, practitioners align with best practices recommended under Section 10.33 of Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), which emphasizes due diligence and effective client relations in tax practice. Ensuring that clients are kept consistently informed about progress, deadlines, and emerging issues not only fosters transparency but also demonstrates the practitioner’s commitment to the standards of professionalism and compliance set forth in Circular 230.

Benefits for CPAs

In addition to the foregoing components of the engagement letter, it is essential to address potential risks and how they will be managed. This includes outlining procedures for dispute resolution and specifying how any amendments to the agreement will be handled. By addressing these issues proactively, the engagement letter can provide a clear framework for navigating challenging circumstances that can arise in the engagement.

Compliance among practitioners remains low

According to Sarah Ference, risk control director for the Accountants Professional Liability Program at CNA, the underwriter for the AICPA Professional Liability Insurance Program, “An engagement letter helps set the stage for success throughout the engagement. That kind of understanding really aids in mitigating risk and resolving issues that might arise or may even prevent them from arising. Yet CPAs tend to shy away from using engagement letters” (quoted in Russell, “Liability Insurance for Accountants: New Times, New Risk,” Accounting Today (Oct. 31, 2024)).

“We continue to see areas of practice like tax which lack engagement letters,” Ference was quoted as saying. “Of the claims asserted in 2023 against CPA firms in the AICPA Professional Liability Insurance Program, about 75% stemmed from tax services. Of those, over 50% didn’t have an engagement letter, which puts the CPA in a difficult position to defend the claim. We have seen similar percentages in prior years. Intuitively, if there was an engagement letter that spelled out what you’ve agreed to do, what a client’s responsibility was, and limitations of your responsibility, a claim may never arise. In that case, a client disagreement wouldn’t appear on our radar because the disagreement would have already been resolved before it turned into a claim.”

Strategies to increase compliance

To enhance client compliance with engagement letters, practitioners can adopt several strategies. First, it is crucial to educate clients about the importance and benefits of engagement letters. When CPAs explain how these documents protect both parties and ensure a smooth working relationship, clients are more likely to appreciate and adhere to the terms.

Secondly, practitioners should ensure that engagement letters are comprehensive yet clear. Avoiding overly technical jargon and keeping the language straightforward can make the document more accessible to clients, increasing the likelihood of compliance. Using bullet points to outline key terms can also aid in clarity.

Regular reviews and updates of engagement letters are also essential. This ensures that the document remains relevant and accurately reflects any changes in the scope of services or other terms. Encouraging feedback from clients regarding the engagement letter can help identify areas for improvement and foster a collaborative approach.

Practitioners can implement a follow–up system to remind clients of their responsibilities and deadlines outlined in the engagement letter. This approach can prevent lapses in compliance and help maintain a strong professional relationship.

The firm’s leadership plays a crucial role in implementing and achieving engagement letter compliance. It is essential that both the firm and its employees understand the importance of obtaining and maintaining client engagement letters. Firms should consider providing ongoing training to staff members about best practices in drafting, updating, and enforcing engagement letters. Creating a culture where compliance is valued and prioritized can lead to higher adherence rates.

Embracing technology is a transformative step in optimizing the management of engagement letters. Modern software solutions and digital tools offer a wealth of opportunities to make the process not only more efficient but also more secure and client–friendly.

Digital engagement letter platforms can automate the drafting, customization, and distribution of documents, significantly reducing administrative burdens on practitioners. These platforms often come equipped with libraries of customizable templates, allowing firms to ensure consistency while rapidly generating engagement letters tailored to specific client needs.

E–signature technology, now widely accepted in professional services, enables swift and secure execution of agreements. By allowing clients to sign documents electronically — from any device, at any time — firms can eliminate the delays associated with physical signatures. These platforms typically generate detailed audit trails, recording every step of the signing process for improved transparency and future reference.

Document management systems add another layer of efficiency by tracking the status of engagement letters throughout their life cycle. Automated reminders can alert practitioners and clients to unsigned documents, while centralized repositories ensure executed agreements are securely stored and easily retrievable during audits or in case of disputes.

Integration with practice management software further streamlines workflow, enabling seamless linking among engagement letters, client records, and billing systems. This connectivity supports real–time tracking of compliance rates and generates actionable insights into bottlenecks or lapses in the process.

By adopting these technological solutions, firms not only enhance operational efficiency and reduce the risk of oversight but also elevate the client experience — positioning themselves as forward–thinking, responsive, and attentive to the evolving demands of modern professional practice.

Lastly, benchmarking compliance rates and regularly reviewing internal procedures can highlight areas for improvement. By tracking metrics such as the percentage of engagements with signed letters and the time taken from draft to execution, firms can set goals and measure progress. Recognizing and rewarding staff who consistently achieve high compliance can further encourage best practices across the organization.

Below are some additional tips and resources for improving compliance.

CPA compliance checklist

Incorporate a checklist into the new client protocol. Here are some items to consider:

• Select an appropriate engagement letter template.
• Customize letters (client name, services, and fees).
• Match scope to client needs.
• Send using an approved e-signature tool.
• Confirm signatures and upload them to the file.
• Report missing signatures weekly.
• No work without a signed letter.

Client cover letters: How an engagement letter helps you

Since many engagement letters are sent electronically, provide the client with a brief cover letter explaining the reasons for the engagement letter. Train staff on how to address inquiries or concerns from clients regarding signing. Emphasize the following points:

• No surprises: Clear scope and fees.
• Protection for both client and the firm.
• Smooth service delivery.
• Signing is quick and easy electronically.
• Thank you for partnering with us!

Firm policy: Engagement letter requirement

Set clear and concise firm policies regarding engagement letters, such as:

• Mandatory signed letter before starting work.
• Templates and e-signature required.
• Upload within a designated number of days.
• Monthly audits that affect evaluations and bonuses.
• Begin annual engagement updates in December to have letters ready for the start of the new year.

Resources for engagement letters

• AICPA Tax Section members have access to sample engagement letters for tax services as part of the Annual Tax Compliance Kit.
• Professional liability insurance carriers typically offer a comprehensive suite of resources for engagement letters, including no-cost review services and sample templates.
• A variety of accounting research organizations offer subscriptions to access helpful tools, templates, and resources. By utilizing these platforms, CPAs can create effective engagement letters that protect their practice and enhance client relationships.
• Consider having engagement letter templates reviewed by the firm’s legal counsel to ensure they comply with applicable federal and state laws.

Building quality and effectiveness

Establishing firm policies for engagement letters is essential for maintaining transparency and professionalism in client relations. By mandating signed letters before commencing work and conducting regular reviews and audits, firms can ensure compliance and safeguard their practice. By utilizing available resources, firms can further enhance the quality and effectiveness of engagement letters and, ultimately, foster stronger relationships and reduce liability risks.

Contributors

Tara E. Adams, CPA, CGMA, CFE, is a partner with Adams & Delp PC in Wytheville, Va., and a member of the AICPA Tax Practice Responsibilities Committee. James W. Sansone, CPA, is managing director, Office of Risk Management, with RSM US LLP in Atlanta. For more information about this column, contact thetaxadviser@aicpa.org.