BLOG - Why does my accountant want me to sign an Engagement Letter?

Kathryn Harris, FCPA, CA, CTA TrustOne Partners

What is this Engagement Letter you get asked to read and sign when you need your accountant to do something?

BLOG - Why does my accountant want me to sign an Engagement Letter?

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Firstly, we need you to at least read it as the professional bodies and Tax Practioners Board tell us we have to do! No, it doesn't mean we intend to marry you!

In reality, it is quite important that you not only read, but understand the Engagement Letter and ask questions if you don’t understand any aspect of it. Make sure you see this before the job is started. For us the client gets the Engagement Letter before we do anything. It’s pointless being asked to sign an Engagement letter at the same time you sign your tax return!

So what is it? In basic terms it sets out what the accountant is responsible for and what you are responsible for. There are lots of different sections and it can be quite a lengthy document. In our practice we ask clients to sign off that they have seen and read it and ensure they get a copy – either electronically or in a hard copy.

Let’s have a look at the different parts of an Engagement Letter:

Purpose, Scope and Engagement

This is usually the first part of any engagement letter. It describes what the accounting firm is going to do for you and what this is actually limited to. Usually this will say that the accountant is not intending to find fraud or anything illegal, however, if they do they may have to report it. It will also usually say that the job will be limited to tax legislation and regulations. The importance of this is to understand what your accountant is going to do – if you’re not sure, ask!

Period of Engagement

Pretty straightforward – which financial year or years the accountant is taking responsibility for preparing.

Responsibilities

This is the important bit

This section talks about who has to do what. Firstly, the accountant isn’t going to tell anybody your stuff unless you authorize them or they have to by law. There are some government departments that can demand information from us.

It talks about the fact that we have to have a system of quality control as a CPA firm. As part of this every 3 years, usually, we have to have undergo a quality review which involves the reviewer checking our policies and procedures and making sure we use workpapers and checklists when we do your work. When you sign the engagement letter you acknowledge that we may choose your file for review but if we do we’ll let you know. It’s important to remember the reviewer is not looking at your personal information – just how we do the job. Only accountants that are members of the major professional societies, CPA Australia, CA ANZ and the IPA have to undergo the Quality Review Process.

The next two paragraphs are all about your responsibility. It talks about how it’s up to you to keep your records and provide us with accurate information. Although we are not required to audit our clients we do have an obligation to not use information we know is not accurate, is false or is not allowed. It also says you have to allow us reasonable access to the info. If we can’t see the records, we can’t do the job! The second paragraph is all about your responsibility as a tax payer under the ATO self assessment rules. It explains the ATO can have another look at your return any time within 5 years of your lodging it with them. So if you lodge your 2017 tax return on the 31/10/17 they can look at it and make changes up until 31/10/22. If they think you’ve been fraudulent though, or done something illegal they can make changes whenever they like. It also says it is up to you to make sure the return is correct before you sign it and you have to keep all your receipts and records, not us.

The final paragraph in this section talks about when tax law isn’t clear on your circumstances you have the right to request a private ruling. This basically means we write to the ATO, tell them what’s going on, and ask them how to treat it. You have to be truthful and give the ATO all the facts and documents or else the ruling won’t apply. Getting a ruling means the ATO have ticked off on how the circumstance is treated for tax purposes.

Fees

This bit is pretty self explanatory. How much the accountant is going to charge you to do the job. We work to fixed fees so we have a lengthy price list in our engagement letter. Some firms may have an hourly rate or they may refer you to another schedule. Either way you want to see this before they start work so you have some idea how much it’s going to cost you.

Limitation of Liability

This is another one of the CPA requirements. As members we have extra insurance through legislation, which is really a good thing for you the client. All tax agents have to have a minimum level of Professional Indemnity Insurance. CPAs have to have a lot more plus we have the professional scheme.

Ownership of Documents

Who owns what bits of paper? This section explains that anything the accounting firm produces to do the job – such as work papers, checklists, file notes – remain the property of the firm. You are only paying for the output – the financial statements, tax returns etc. Any original documents like company folders, bank statements etc. remain yours. Often when there is a fee dispute accounting firms will hold onto original documents to try and get the client to pay. In all honesty, there are very limited circumstances where they are allowed to do this.  However, they don’t have to provide you with things that are an ouput of the job if you haven’t paid. You can’t walk out of the supermarket without paying for your groceries!

Collection of your personal information and communication

This paragraph covers off communication. Basically, when you sign the engagement letter you agree to be contacted electronically. We try very hard to avoid snail mail wherever possible – it’s costly and so slow being rural that we can’t rely on it. The other part of this paragraph talks about the fact that we use cloud storage. What this means is we store your information electronically on computers that we don’t necessarily own or manage. We only use reliable providers and we have very strong password requirements. It’s important for you as the client to know that some of this information maybe stored offshore but we choose providers that have their storage in countries with high security, such as the US.

For our engagement letter we have also decided to cover off on our privacy policy in the last few paragraphs. This isn't compulsory we just thought it was important.

Some Engagement Letters will also include a paragraph about offshore outsourcing – this is where your work may be completed by an external provider located overseas. We don’t do this, it’s not our thing. We strongly believe in keeping employment local and for our own quality control Allison and I like to have complete oversight of the work we do.

Our Engagement Letter is always available online so you can read it whenever you like. If you book an appointment you will get a link to it in an appointment reminder text and email.

You can find more info about Engagement Letters at the TPB website, or through CPA Australia.

If you also have an accountant prepare Financial Statements you will need to understand what the Compilation Report is all about. You can read that here.

Kathryn Harris, FCPA, CA, CTA TrustOne Partners

Kathryn Harris is a Fellow of CPA Australia, a member of CA ANZ, a Chartered Tax Advisor and an alumni of the Australian Graduate School of Management at UNSW.

A partner in a rural accountancy practice she champions woman in their business and leadership roles and relishes her role as tax queen.