Engagement Letters 101 – The Professional Rule Book

The first rule of engagement letters: obtain a signed engagement letter.

The second rule of engagement letters: obtain a signed engagement letter.

The remaining rules are a bit more complicated. A well written engagement letter is absolutely critical to managing risk. It defines the scope of the engagement and, as a result, sets appropriate expectations with the client. An engagement letter may help to discourage meritless malpractice claims and may serve as “Exhibit A” in a dispositive motion. On the other hand, the lack of an engagement letter may result in an undefined engagement and may promote meritless, protracted litigation.

There are many sources for engagement letter templates or guides such as those maintained by CAMICO, CNA, XL Insurance and others. By way of example, Travelers publishes an excellent guide for accounting professionals’ engagement letters. This guide provides various templates depending on the type of engagement and offers other insights for the creation of a bullet-proof letter for accountants. Below, we expanded a version of Travelers’ engagement letter matrix to include all professionals. In later posts, Engagement Letters 201, we will dig deeper into some of the more difficult concepts for professionals.

Considerations for Engagement Letters

  • Specific Identification of the Client;
  • Description of the Scope and Nature of the Services to be Provided;
  • When will the Engagement be Completed;
  • Identification of Applicable Professional Standards/Regulations/Rules;
  • Identification of the Limitations of the Services/Responsibilities you will Perform;
  • Responsibilities of the Client;
  • Fees for Professional Services;
  • Method for Resolving Disputes;
  • Right for Professional to Withdraw from Engagement;
  • Limitation of Liability;
  • Indemnification; and
  • Statute of Limitations, i.e., Deadline to Initiate Dispute.

Engagement letters must be narrowly tailored to address the specific engagement and the specific client. Accordingly, the professional should minimize boilerplate language, particularly when defining the scope and limitations of the engagement. That said, the foregoing clauses should be considered when drafting all engagement letters. During this process, the professional should consult with her attorney and keep an eye on the ultimate goal: limiting risk.

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