The American Institute of CPAs warns that accounting firms who work with clients across state lines may face greater lawsuit risks if they don't tailor their engagement letters to specify a legal jurisdiction. We'll go into detail about how your accounting contracts can protect you, but first a word about interstate accounting practices.
What Accounting Firms Need to Know
What Accounting Firms Need to Know before Working with Clients across State Lines
Depending on where your firm is located and the kind of work you do, you may have the opportunity to work with clients in different states. For instance, an accountant in Philadelphia may have clients in New Jersey, Delaware, and New York, simply because of how close these states are. Or a client you've served for years may want to keep working with you when they move to a different state.
When you work across state lines, you need to be aware that you can be sued in the client's state. Why does that matter? Because…
- Different states have different laws.
- Statutes of limitations may be longer in your client's state (i.e., you could be held liable for longer).
- If you're sued you may have to travel to another state for court.
- Your lawyers might be less familiar with the law in your client's state.
When you're sued, you don't want any disadvantages, so it's important to make sure you've accounted for interstate liabilities. Let's look at what you can put in your contracts to protect your business.
Contracts Can Protect
How Contracts Can Protect Accounting Firms Sued by Out-of-State Clients
If your accounting firm is sued, you'll want to make sure it's on your home turf where your lawyers are most familiar with the law. For this reason, accountants often include an "exclusive jurisdiction" or "forum selection" clause in their contracts to stipulate where they can be sued.
If you write your own engagement letters and have never had a lawyer review them, you might not have realized that you should stipulate where your client has the right to sue you. If you do, you can define jurisdiction in two ways…
- Exclusive jurisdiction. Lawsuits can only be filed in the county court you specify.
- Non-exclusive jurisdiction. Lawsuits can be filed in the court you specify, but can also be filed elsewhere.
Interstate accounting firms should use an exclusive jurisdiction clause. For instance, a Chicago-based firm could add a clause saying, "The parties agree that the only venue for any suit brought by either of them with respect to the services sold hereunder shall be in the State Court of Cook County." This clause would mean that any Indiana or Wisconsin clients would have to file a lawsuit in a Cook County courthouse in Chicago.
Tips on Accounting Contracts
Tips on Accounting Contracts
As with any legal matter, it's always best to have a lawyer draft and review your contracts. Many owners of small accounting firms hire a lawyer to write a basic engagement letter template that they can adapt for various clients. If you do this, your lawyer will probably know to include an exclusive jurisdiction clause, but you should double check to make sure they have done so. If you write your own engagement letters, consider including an exclusive jurisdiction provision.
Engagement letters and client contracts are your first line of defense when it comes to preventing a client lawsuit. So it pays to get them right. Check out "4 Things to Include in a Retention Letter" for more tips on preventing accounting lawsuits.