NAPLIA's Professional Liability Blog / Resources / Articles

Why a stop-work caveat for engagement letters?

Posted by Gary Sutherland on Tue, Apr 11, 2017 @ 12:48 PM

By John Raspante, CPA, MST, CDFA, Director of Risk Management

Many claims faced by CPAs have their origin in breach of contract causes of action. While the more prevalent claims assert negligence as the cause of action, breach of contract is growing in frequency. NAPLIA’s book of insureds have been indoctrinated on the use of engagement letters and client termination letters. Nevertheless, when a CPA ceases to provide services or simply stops work, the knee jerk reaction by the client is to allege a breach of the contract has occurred.  Consider the following claim scenario:

ABC accounting firm has provided bookkeeping, payroll tax preparation, and corporate tax preparation services for their longtime client BEST Manufacturing (BM). An engagement letter is in place, but contains no stop-work provision. Thirty days prior to the due date for the corporate tax return the CPA firm decides on ending the client relationship and sends BM a standard client termination letter. The letter contains the basics of a solid termination letter and includes the status of unpaid fees, ABC's willingness to assist the new CPA firm, pending due dates, and the reason(s) for the termination. It should be noted, the reasons for the termination centers around the unpaid fees and possible corporate tax filings in other states as a result of what ABC feels are BMs satisfying corporate tax NEXUS requirements is these states. BM insists that the fees will be paid as they have just opened locations in other states and cash flow will improve. With respect to the NEXUS requirements being satisfied, BM states they will register later in the year and other manufacturers they know of do not file in those states. 

As a result of the termination, BM is appalled and feels this should have been discussed and not facilitated by a letter. After all, the relationship has spanned several decades and the managing partner’s father serviced the BM prior to the formation of ABC. Second, BM feels they were not provided ample time to locate a new CPA Firm, and opposes going on extension. Several calls are placed to ABC by BM and they go unanswered. As the managing board at BM grows more infuriated, they finally call their corporate council and serve a complaint to ABC alleging breach of contract. In addition, they file an ethical complaint with the state board of accounting alleging violations of the accountancy act.

LESSONS

While the majority of the problems faced by ABC could have been averted by a stop-work caveat (the focus of this article) which we have included, the following are also recommended to effectively deal with client terminations: 

  • Allow for ample time, if possible, when terminating. This termination occurred 30 days prior to the due date of the corporate tax return.
  • Begin the process of terminating with a phone call and or a meeting as opposed to simply sending a letter giving BM little time to shop for a new CPA firm.
  • Discuss the reason(s) for termination. While the unpaid fees were important, the NEXUS issue was the real reason for terminating. ABC should have explained that a NEXUS study should have been conducted and what others do or don’t do does not satisfy professional standards.

 

SAMPLE WORDING 

If I elect to terminate my services for nonpayment, or for any other reason provided for in this letter, my engagement will be deemed to have been completed upon written notification of termination, even if I have not completed your return.  You will be obligated to compensate me for all time expended, and to reimburse me for all of our out-of-pocket costs, through the date of termination. In addition, I will be held harmless from any resulting damages caused by this termination.

 

Tags: risk management, engagement letter

Find sample engagement letters at NAPLIA's newly relaunched website

Posted by Alexandra Swan on Wed, Apr 10, 2013 @ 12:41 PM

NAPLIA has partnered with leading legal professionals for the development of sample engagement letters that are essential to your practice as well as articles and resources for your company's risk management.

http://www.engagementletters.com

Tags: accountants, Sample, engagement letter, engagement letters

Massachusetts Supreme Court holds that limitation periods may be shortened by contract

Posted by Tom Henell on Tue, Dec 11, 2012 @ 10:19 AM

Creative Playthings Franchising, Corp v. James A. Reiser, Jr., 463 Mass. 758 (2012)

The Supreme Judicial Court, Suffolk County, Duffly, J., held that limitations period in a contract shortening the time within which claims must be brought was valid and enforceable under Massachusetts law, under certain conditions. A limitations period in a contract shortening the time within which claims must be brought is valid and enforceable under Massachusetts law, if the claim arises under the contract, and the agreed-upon limitations period is subject to negotiation by the parties, is not otherwise limited by controlling statute, is reasonable, is not a statute of repose, and is not contrary to public policy.

Nancy Reimer, attorney for LeClairRyan of Boston, stresses the relevance of this ruling for CPA's. Attorney Reimer suggests Accounts include a provision in their engagement letters limiting the time in which a claim can be brought to 2 years, or less depending on the circumstances of the engagement. Reimer stated, "We typically include clauses like this in letters we draft and have not had any issues with them, but now we have a definitive ruling from the SJC as to their validity."

Reimer further clarified that contract limitations are determined on a state by state basis.  Although this ruling is great for Massachusetts, not all states concur.  Florida, for example, has a statute stating a party can not limit the SOL period.

Tags: accountants, cpas, engagement letter, engagement letters

Certifying Acceptance Agents - Sample Engagement Letter

Posted by Tom Henell on Fri, Oct 19, 2012 @ 10:27 AM

An Acceptance Agent is a person or an entity (business or organization) who, pursuant to a written agreement with the IRS, is authorized to assist individuals and other foreign persons who do not qualify for a Social Security Number but who still need a Taxpayer Identification Number (TIN) to process a Form 1040 and other tax schedules.

The Acceptance Agent facilitates the application process by reviewing the necessary documents and forwarding the completed forms to IRS.

View NAPLIA's Resources for Acceptance Agents

As a Certifying Acceptance Agent it is important to define your actual services for your clients and ultimately protect your practice.  Your services as an Acceptance Agent are unique and you will want a specific engagement letter to address exactly what you are, and are not, providing to your client.

The Acceptance Agent Sample Engagement Letter can:

  • Provide protective wording to minimize your exposure
  • Assist you in marketing your practice by addressing additional services you can provide
  • Mitigate your exposure with a Mediation Clause

Download NAPLIA's Sample Engagement Letter for Acceptance Agents now!

Tags: ITIN, Sample, acceptance agent, engagement letter