It's always good practice to use a retention letter when you agree to do accounting or finance work for a client. When done right, a retention letter works just like a contract — it outlines what your work includes and doesn't include, prevents misunderstandings, and limits some of your liability.
By using retention letters, you make it less likely that you'll be sued, so it's important to get them right. Let's look at four things accounting retention letters should include.
What Does an Accounting Retention Letter Need to Include?
For an independent accounting firm, a lawsuit can be devastating, but many firms simply don't have the money to hire a lawyer to review each contract or engagement letter they write. As a consequence, many accountants rely on generic engagement letters. While that strategy is cost-effective, you'll need to go one step further if you really want to protect you firm from a lawsuit.
You can improve your risk management by tailoring retention letters so that they include these four things…
#1: Scope and exclusions.
Scope and exclusions.
Accountants need to be clear about what their work will involve and what it won't. Misunderstandings occur when clients think that you'll be doing more than you agreed to. For instance, bookkeepers can run into problems if a client thinks that they're watching the client's checks for signs of fraud, while the bookkeeper assumes they're only doing basic recordkeeping. Whatever area of accounting you work in, make sure your clients know exactly what you will and won't do. (For more on communicating the scope of your work, see "Prevent 55% of Lawsuits with These 2 Paragraphs").
Be clear about when your work will be done and when your clients are required to send you information. A tax preparer can get stuck if their clients aren't giving them all the necessary info they need to complete a return. Or a firm might make a mistake if they finish a tax return only to have a client send a bunch of new financial documents that necessitate a revision. Include client deadlines in your retention letter and make sure to go over them before clients sign the contract.
#3: Payment agreement.
Outline when and how clients should pay you. Be clear if you expect to be reimbursed for certain expenses. Include a termination provision that allows you to terminate the agreement if the client doesn't pay you.
#4: Cyber liability disclaimer.
Cyber liability disclaimer.
Because accountants and finance professionals frequently have access to private data, they need to have a clear cyber liability policy. In your engagement letter, make it clear that when clients transmit their records via email, their data could be hacked. This warning might not stand up in court, but it's good to remind clients about these risks. (See our page on Cyber Liability Insurance to learn how your insurance can cover data breach expenses).
One last tip: remember that as you work on a client's tax returns or finances, problems may arise that require you talk with them on the phone or in person. The scope of your work may change, you may offer additional advice, or you might need more documentation. Always document these verbal exchanges by sending a follow-up email to the client outlining what you agreed to.
Your engagement letter won't reflect these changes, so it'll be up to you to document them in writing.