Accounting for Risk
Prevent 55% of Lawsuits with These 2 Paragraphs

The Journal of Accountancy reports New browser window icon. on a startling risk factor for accountants: 55% of accounting lawsuits have to do with tax prep, and yet tax prep is one of the areas where accountants are least likely to use an engagement letter. Why do so few accountants use contracts for tax engagements?

It's probably because tax work is often seen as an "easy" area of accounting (especially when you're only doing 1040s). Many accountants don't think that it's worth the hassle to have their clients sign a contract if they're just doing a personal tax return.

And yet this research shows that more than half of accounting lawsuits come from tax engagements. If you don't use an engagement letter for all your accounting work, it's time to start. What should you put in your engagement letter? You'll need to make sure you include two sections that cover your firm from some of its biggest liabilities.

Include these 2 Paragraphs

Accounting Engagement Letters Should Include these 2 Paragraphs

We started this article talking about tax prep liability, but the contract language we're about to look at could apply to nearly any area of accounting or financial advising. In general, you want your engagement letters to explain what your service does and does not include and make it clear that it's the client's responsibility to provide you with accurate records.

Here are two paragraphs that every accounting engagement letter should include:

  • One paragraph outlining the scope of your work. If you're preparing tax returns, you'll need to establish that your work is only for the particular year and state / federal returns your client has requested. If you didn't file the client's taxes last year, make sure to note that any errors that are carried over from last year are not your responsibility.
  • One paragraph explaining the client's responsibility to provide you with necessary and accurate data. Accountants and tax preparers can get in trouble if a client doesn't give them all the files they need to complete a return. If you've been in the business for long, you've undoubtedly come across the classic "shoebox full of receipts." Clients sometimes store their financial records haphazardly and may forget to include certain documents. Your engagement letter should outline your client's responsibility and set a deadline for them to turn in all relevant financial records.

Though these are just two paragraphs in your engagement letter, they'll go a long way to limiting your risk exposure and making sure you and your clients are on the same page. For more on what you should include in a client contract, see the article "4 Things to Include in a Retention Letter."

Sample Retention Letters

Sample Retention Letters for Accounting Firms

If you don't currently use a retention letter with your clients, you're lucky that the Internet has a number of free resources to help you out. Here are two free retention letter templates you can use:

Remember that before you use these or any other engagement letters, it's best to have a lawyer look over them. While independent accountants can't afford a lawyer for every contract, hiring one to review your contract templates is a smart and cost-effective way to further protect your firm from lawsuits.

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