If you’re a member of a professional body, it’s likely that you’re required (or strongly recommended) to issue engagement letters to each of your clients. I would suggest that, in practice, engagement letters are a practical necessity, even if you’re not bound by the regulations of a professional body. Engagement letters will serve you and your practice well. They provide clarity for both parties to the engagement, but they also demonstrate compliance with regulatory requirements, including those required by legislation. The effective use of engagement letters will also help to demonstrate that your practice has high standards of professionalism and will treat its clients fairly.
Ethics
Members of professional bodies are required to comply with a code of ethics and, in the case of an accountancy body, that code of ethics is very likely to be aligned with that of the International Ethics Standards Board for Accountants (IESBA). Regardless of whether you’re a member of a professional body, you doubtless aspire to high professional and ethical standards. (Afterall, you are reading this blog.) More than 170 accountancy bodies, representing more than 3 million accountants worldwide have a code of ethics aligned to the IESBA Code. Therefore, a practising accountant who is not a member of such a body would be well-advised to look to the IESBA ethical principles as a benchmark.
The IESBA Code is founded on five fundamental ethical principles, namely:
Integrity,
Objectivity,
Professional competence and due care,
Confidentiality, and
Professional behaviour.
Why is all this relevant to the use of engagement letters? First, your engagement letter provides an opportunity to make clear that you’re committed to high professional and ethical standards. Engagement letters are also key to managing threats to compliance with the fundamental principles. In defining the terms of the relationship between your practice and each of its clients, you are demonstrating integrity through the honest management of the client’s expectations. The fundamental principle of professional behaviour is also safeguarded by including information needed to comply with laws and regulations.
Elements of an engagement letter
Compliance for Accountants can help you to construct a clear and effective engagement letter. But here we consider various elements of an engagement letter that will almost always be required.
The identity of the client
This may appear obvious. However, the distinction between different clients must be clear. The potential danger area is where you act for a business and also for some (or all) of its partners or directors. Even where spouses are partners in a business, there is no guarantee that their interests will always be aligned. Although you will usually advise them together regarding the business and how to manage their financial affairs between them, you must be alert to their individual needs (including confidentiality) and be clear where the practice’s fees are being incurred. Separate engagement letters for each partner (and the business) help to manage threats to the fundamental principles.
Where the client is not an individual, the engagement letter must make clear on whose authority you and your practice may act. You might assume that a company director, for example, has the authority to instruct the practice. But take care not to act solely on assumptions. Only those responsible for governance of the organisation are privy to how authority is delegated.
The breakdown of services
Within the engagement letter, there is likely to be a schedule of the services to be provided to the client. In respect of each of those services, you must set out the respective responsibilities of the practice and the client. An estimate or fixed fee may be provided in respect of each service if sufficient detail is also provided regarding the respective responsibilities in respect of that service.
For each service to be provided, you must define the scope. For example, the scope of payroll work should state the expected number of employees on the payroll and the frequency with which they are to be paid. If the scope is later expanded (eg beyond a certain number of employees), that would prompt a new engagement letter (or an addendum) and perhaps a new agreement regarding fees and respective responsibilities.
Of course, it would be undesirable for you and your client to need to review the engagement letter every time an ad hoc piece of advice, or other work, was sought by the client. So you should consider the services where such ad hoc demands might be anticipated, and ensure those paragraphs are drafted in such a way that the client isn’t inhibited from consulting you whenever the need arises.
Respective responsibilities
You should be equally clear when setting out your expectations of the client. For example, if the payroll is to be operated efficiently, and the employees are to be paid on time, you would wish the engagement letter to set out the form in which the practice will receive the necessary payroll information, to whom that information will be provided, the deadline for receiving it each week or month, and the client’s responsibility for its accuracy.
The client must take their responsibilities seriously, and you must be prepared to enforce this aspect of the engagement letter if, for example, the payroll information is provided late. Your instinct might be to try to impress the client by processing the information quickly and completing the payroll work on time. But there is no requirement of you to do that and, in doing so, you would be exposing your practice to risks – that other clients might be served less well, or that those performing the payroll function might feel pressurised to ‘cut corners’.
Professional standards
Where the work to be performed is governed by published technical standards, it will be useful to identify those standards in the engagement letter. As mentioned earlier, it’s also important to make the client aware that you’re required to comply with a code of ethics. Not only will that demonstrate that you’re committed to high professional and ethical standards, but it says to the client that you will not be unduly influenced by any threats (of intimidation, for example) intended to pressurise you to act unethically.
If you’re to provide taxation services to the client, your engagement letter might also state that you are expected to pay due regard to HMRC’s Standard for Agents, which itself refers to the guidance known as Professional Conduct in Relation to Taxation (PCRT), developed by a number of professional bodies in the UK.
Provision of Services Regulations 2009
The Provision of Services Regulations 2009 require service providers, including accountancy practices, to provide specified information to clients. Although there are a number of ways of providing the relevant information, some of that information (set out in regulations 7 and 8) might best be provided in the engagement letter. Regulation 7 concerns how to complain about the service provided by your practice, which is discussed later.
Regulation 8 includes the sort of information that would be expected to be in an engagement letter (such as the features of the engagement, and the general terms and conditions) or on the firm’s letterhead (such as its name, address, contact details and VAT registration number). But it also includes a requirement to identify the provider of your professional indemnity insurance (if you hold it), including their contact details. In accordance with the Regulations, you must ensure that you disclose somewhere:
the practice’s legal status and form,
where the practice appears on a register held by a professional body, the name of the register and the practice’s registration number, and
where the practice is carrying on a regulated profession (eg audit or insolvency), the professional body with which the practice is registered.
Although your practice’s engagement letter would seem a convenient and effective means of demonstrating compliance with regulation 8, the required information might also be made available to clients at your place of work (ie at offices usually visited by clients), or on your practice’s website.
Information set out in regulation 9 is only required to be provided if requested by the client. However, it includes information with a degree of permanence, namely, details of any codes of conduct to which your practice is subject, and the address at which those codes may be consulted by electronic means. If your practice is regulated for any activities under statute (eg audit), the practice will also be required to comply with the regulations of the relevant competent authority, and the client would have to be informed accordingly. The relevant information may already be available through your website. However, it might be useful to disclose the information in the engagement letter – without the client asking for it.
Complaints and disputes
Advising your clients, at the outset, of how they would be able to complain if they are dissatisfied with the service they receive is a matter of professionalism, and it demonstrates to your clients that you aspire to high technical and ethical standards. But it’s also a requirement of the Provision of Services Regulations 2009, which require you to make available to clients contact details that the client may use to raise a complaint. The details required by regulation 7 are:
your practice’s postal address or e-mail address,
a relevant telephone number, and
where applicable, the address of your registered office.
Although this doesn’t have to be in the engagement letter, the information must be provided at the outset of the engagement. It could be provided, for example, on the practice’s website. However, we suggest that including this information in the practice’s engagement letter ensures that the information is sufficiently clear and seen to be timely.
In addition to providing your contact details, it is advisable to make clear in the engagement letter that your practice has a complaints-handling process and, if relevant, state the client’s right to complain to your professional body if the matter remains unresolved after that process has been followed. Not only is this potentially helpful to the client, but it may help you to defend your actions should the client later complain to your professional body without first attempting to resolve the complaint through your practice.
Alternative Dispute Resolution
The Alternative Dispute Resolution for Consumer Disputes (Competent Authorities and Information) Regulations 2015 are relevant to accountancy practices in respect of the services they provide to consumers (as opposed to other businesses). They apply to practices in situations where their internal processes for handling complaints have not succeeded in resolving a dispute. In such a situation, the practice is required to inform the client about the way in which the practice would engage in Alternative Dispute Resolution (ADR).
ADR is the term used to describe a process for resolving disputes that doesn’t involve going to court, but involves an independent third party in an attempt to bring about a solution to which both parties are in agreement. An agreement by both parties to use ADR to solve a dispute can help maintain the professional relationship. It also demonstrates to the client (and perhaps eventually to a court) that your practice has been willing to seek a resolution.
There are various types of ADR process available, including mediation, conciliation, and arbitration. The Regulations require your practice to provide the client with the following information at the point it becomes clear that a complaint cannot be resolved under the practice’s internal complaints-handling process:
a statement that the practice has been unable to settle the complaint with the client,
the name and website address of an approved ADR provider that could deal with the complaint, and
whether your practice is prepared to submit to the ADR process operated by that body.
Although this information is only required to be provided after a dispute has arisen (and attempts to resolve it have already been made), it would be useful to include information about the practice’s willingness to submit to an ADR process in your engagement letter. Doing so would provide greater transparency at the point of the client engaging your practice, and would be particularly beneficial to a practice that is not required to submit to the investigation and disciplinary processes of a professional body.
The ADR body that a practice chooses to use must be approved as an ADR body by a competent authority. Currently those competent authorities approving ADR bodies in the UK include the Chartered Trading Standards Institute (on behalf of the Secretary of State for Business, Energy & Industrial Strategy). A list of the ADR bodies approved by the Chartered Trading Standards Institute is available here.
Interest earned on clients’ money
If your practice is regulated by a professional body, it is likely to be required to hold clients’ money in a bank account separate to that of the practice. In any event, it would be good practice to do so (assuming that the practice would be willing to hold clients’ money, in light of the impact it might have on the clients’ anti-money laundering risk assessment). The question then arises of how to treat any interest earned on a client bank account.
Some professional body regulations require that the practice must account to the client for any interest earned on the client’s money. This can be administratively very burdensome, especially where the money of more than one client is pooled in a single client account. Usually, an obligation to account to a client for the interest earned may be overridden by agreement with that client (to the extent that it is reasonable to do so). Given the very small amounts of interest one might expect from a client bank account, it is sensible to make provision for this in your engagement letter. For example, clients might, through the standard terms of engagement, agree to forgo amounts of accrued interest of less than £3.
Fees
It will often be difficult to recover fees from a client that are in excess of the client’s expectations, unless you can show the client that they received sufficient information in advance of receiving the professional services concerned. The more information you can comfortably provide to a client, the better will be your chances of recovering your fees. Therefore, while a broad description of the basis for charging fees may be appropriate within the body of the engagement letter, a separate schedule (annexed to the engagement letter and referred to within it) should carry the detailed terms of business. These might include:
a schedule of staff charge-out rates,
additional services available for additional fees,
the usual billing points of the practice, and
payment terms, including the implications of late payment (such as interest charges and reasonable debt recovery costs).
One advantage of including this much detail in a separate annex is that it will apply to most clients, and will only require tailoring occasionally – for example, when staff charge-out rates are reviewed. But make sure that you and your fellow principals are satisfied with the practice’s standard terms and conditions, as the practice must be prepared to enforce interest charges and debt recovery costs when necessary.
Limitation of liability
The engagement letter is a form of contract between your practice and your client, and so it is an appropriate place in which your practice might attempt to limit its liability - to the client and to third parties. However, the terms of the engagement letter cannot override the law. In particular, any attempt to limit liability must be reasonable and fair.
Limiting the practice’s liability to third parties is slightly easier than limiting its liability to the client. Although reasonableness and fairness are still relevant factors to consider, there are two specific clauses that could be included within your practice’s standard terms of engagement:
First, you should make clear that the practice accepts no liability in respect of advice provided to the client that the client (or one of its officers or employees) subsequently discloses to a third party.
Second, there should be a statement that the terms of the engagement are not enforceable by any party other than the parties to the engagement letter.
(If you attempt to limit your practice’s liability to third parties in the engagement letter, you should nevertheless continue to include similar disclaimers, as appropriate, in correspondence relating to specific pieces of work performed on the client’s behalf.)
Other points to note regarding engagement letters
The Bribery Act 2010
The Bribery Act describes the offences of bribing another person (section 1), the offences of being bribed (section 2), and the provisions concerning the bribery of foreign public officials (section 6). A person (perhaps you, one of your fellow principals or one of your employees) is guilty of an offence if they offer, promise or give a financial or other advantage to another person, and they intend the advantage to:
induce a person to perform improperly a ‘relevant function or activity’, or
reward a person for the improper performance of such a function or activity.
Perhaps most importantly, section 7 of the Bribery Act describes the offence of failure by a commercial organisation to prevent bribery on its behalf. Therefore, an accountancy practice would be guilty of an offence if a person associated with it bribes another person with the intention of obtaining an advantage for the practice. An ‘associated’ person is any person who performs services for or on behalf of the practice, regardless of the capacity in which they perform those services. It is a defence for the practice to prove that it had in place adequate procedures designed to prevent persons associated with it from giving or offering bribes.
Guidance issued by the Ministry of Justice acknowledges that a small business, which faces minimal bribery risks, will require minimal procedures to mitigate those risks. For example, you might consider:
a formal statement to all staff (and other ‘associated persons’), making clear that bribery will not be tolerated,
clear policies and procedures regarding entertaining and gifts, and
staff training and induction material for new staff.
Finally, you might consider how your communications with clients make clear that bribery will not be tolerated, and in this respect your engagement letter can serve you well. A statement of the practice’s anti-bribery policy in your standard engagement letter will reduce the risk that a client will offer a bribe to a principal or employee of the practice.
Data privacy and protection
As an accountancy practice, you collect information about individuals, such as employees, fellow principals, clients, and clients’ employees. Therefore, data privacy and protection legislation applies to your practice whenever you’re processing personal data, in the same way that it applies to many of your clients, whatever their size.
The United Kingdom General Data Protection Regulation (UKGDPR) sets out the key principles, rights and obligations regarding most processing of personal data. As a controller of personal data (ie a person who determines the purposes and means of processing personal data), your practice must comply with all the data protection principles as well as the specific requirements of the UKGDPR. Article 5 sets out the key principles, including the principle that the controller is responsible for (and must be able to demonstrate) compliance with the other key principles. Failure to comply with Article 5 will make your practice liable to enforcement action, which may include a significant fine.
Article 5 states that personal data must be ‘processed lawfully, fairly and in a transparent manner’. Article 6 sets out the lawful bases for processing personal data, namely:
consent from the data subject,
contract – where the processing of data is necessary in order to fulfil a contract between your practice and the data subject,
legal obligation, other than under a contract,
vital interests – in order to protect someone’s life,
public task – in order to act in the public interest, or
the legitimate interests of your practice or a third party.
It is likely that the basis on which you process a client’s personal data is either the consent of the client, or through necessity in order to fulfil a contract with the client. The UKGDPR requires you to keep records of consent, and an appropriate engagement letter can help to demonstrate consent.
With regard to fairness, you must process personal data only in a way that the data subject might reasonably expect. As part of your assessment of fairness, you should take into account the way in which the personal data came under your control, including whether each data subject was aware that you would have access to their data.
Transparency entails being clear, open and honest with data subjects about why and how you use their data. Transparency is particularly important at the start of a professional relationship, for example when a client is required to decide whether to enter into a professional relationship with your practice. The UKGDPR specifically gives a client the right to be told the lawful basis on which your practice claims to be processing their personal data, and this is best achieved in your engagement letter.
The UKGDPR affords clients (and others) a number of other rights, including the right to be informed, and the rights of access, rectification, erasure, restriction of processing, and more. Regarding the right to be informed, the following information must be provided at the time your practice receives the personal data (or within a reasonable period of time thereafter):
your practice’s name and contact details,
the name and contact details of the relevant person representing the practice,
the purpose for which the data will be processed,
the legal basis for processing the data,
the practice’s legitimate interest in processing the data,
the data subject’s rights regarding the processing of the data,
the data subject’s right to withdraw their consent,
the period for which the personal data will be retained, and
the individual’s right to complain to the Information Commissioner’s Office (ICO).
In some cases, a practice will successfully meet its obligations by putting the relevant information on its website, but other information must be provided directly to the data subject.
Ceasing to act
When ceasing to act for a client, for whatever reason, there is more to do than simply wait to be approached by a successor accountant. A clean break from the client requires some care. A responsible accountant will issue a disengagement letter on behalf of their practice, which will help to provide clarity, including a written record of the respective responsibilities of the parties from the date of the letter. The disengagement letter may include some or all of the following areas.
Work completed and outstanding
Often clients will inform you that they no longer require your services only when they feel it is ‘safe’ to do so. In other words, they are likely to make sure that you have filed their accounts with the relevant organisations, submitted their tax returns, etc, before letting you know of their decision. However, there will also be occasions when work that forms part of the engagement is incomplete at the time the client gives you the news (or when a successor accountant approaches you unexpectedly for information).
If there is any uncertainty regarding the outstanding work that you are expected to complete, a telephone conversation is usually the best way to avoid any misunderstandings. Once you have clarity, the disengagement letter is an appropriate means of recording the work you have recently completed on behalf of the client and what remains to be done. Any work still to be completed must be addressed diligently, recognising that there may be a threat to the ethical principle of ‘professional competence and due care’ given the relationship with the client is not ongoing.
Fees
If the client has chosen the point of disengagement carefully, it is likely to be during a natural pause in the work you are engaged to undertake for the client. This will be a convenient point at which to bring the invoicing of fees up-to-date (if you haven’t already done so). You may even include the final invoice with your disengagement letter.
However, greater care will be necessary where there is further work to be done (as agreed between you and the client) at the point of sending the disengagement letter. It may have been decided that you are better placed than your successor to complete a piece of work. Having set out in the letter the work still to be performed, you must make clear any further fees to be incurred as a result. There is nothing improper about including the fee invoice in advance, with the disengagement letter, and it may even be prudent to remind the client of your payment terms and/or request payment in advance of completing the work.
Books and records
If you have been holding the statutory books on behalf of a limited company or LLP, you must return them to the client, along with the company’s other books and records, unless you have been instructed to forward them to your successor (in which case you should document that fact in the disengagement letter). Remember that, in the case of outstanding fees, you cannot exercise a lien over a company’s statutory books or its proper books and records. If your practice address is also the client’s registered office, you should state in the disengagement letter that you require the registered office to be changed.
HMRC
If, during the course of your engagement, you have been the client’s tax agent, you may wish to take steps to ensure you cease to be regarded as such. You may consider it likely that your successor will take over as tax agent, in which case you may not be required to do anything at this stage. However, you may wish to take steps to remove any uncertainty and inform HMRC that you are no longer the client’s agent, in which case you should inform the client that you have done so in your disengagement letter. It would also be advisable to make the client aware of any approaching deadlines, so you are seen to be exercising professional competence and due care.
Retention policy
Having returned all of the client’s documents and records, or made arrangements to return them in due course, you should make the client aware that you will continue to hold information about the client (and persons associated with the client) in accordance with the practice’s record retention policy. You should set out the relevant extracts of the retention policy in the disengagement letter.
It is advisable that client information is retained for no longer than is necessary, as a client may, in the future, require their personal information to be disclosed to them by way of a subject access request, which can be a disruptive exercise for a small practice. Care should be taken when drafting your data retention policies, which must comply with both data protection legislation and the Money Laundering Regulations.
Responding to a professional enquiry
A disengagement letter provides a written record of your understanding of how the engagement is coming to a close. It will provide clarity for the client, and an opportunity for them to correct any misunderstandings at that point.
The letter may be an appropriate place in which to state that you would expect a successor accountant to make professional enquiries of your firm in due course, and that this is a common procedure among professional accountants. The client will be asked to agree the contents of the disengagement letter, including any terms, by signing and returning a copy of the letter. Therefore, it is reasonable to state that the client’s acceptance will be deemed to include agreement that you may correspond with a successor accountant.
Comments