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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