FIRM MANAGEMENT
Engagement Letter Provisions in a Dynamic and Rapidly Changing Profession BY JOHN F. RASPANTE, CPA, MST, CDFA, MCGOWAN PRO AND ANTHONY CANDELA, CPA, MST, CANDELA AND ASSOCIATES, LLC
As the accounting profession undergoes dynamic and rapid changes, engagement letter clauses must spell out any additional services and how any increased risk will be managed. The letters need to include such clauses with a brief reason(s) for their use and the resulting benefit(s). The clauses below represent some of the areas of practice that contribute to heightened claim exposure. CANNABIS Still in the growth stage, the cannabis industry is causing claim exposure in both tax preparation and financial statement preparation. The tax exposure results from the difference in tax treatment for state and federal purposes. Financial statement concerns have centered on disclosure requirements including, but not limited to, risks and uncertainties and compliance with laws and regulations. y Download sample engagement letter language at bit.ly/EngagementLetterText. PASS-THROUGH ENTITY TAX As of the writing of this article, 30 states and one locality have enacted a passthrough entity (PTET) tax since the Tax Cuts and Jobs Act state and local tax (SALT) cap was first put into place. Claims have included failure to make a timely election, failure to advise clients of the benefit of a PTET, and application of the PTET to non-resident shareholders, members and partners. y Download sample engagement letter language at bit.ly/EngagementLetterText. FORCE MAJEURE The following clauses were seldom used prior to the COVID-19 pandemic. These clauses are now strongly recommended and, unlike many engagement clauses, they have been met with little client resistance.
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y Termination language — Our engagement may be terminated at will by either party upon thirty (30) days written notice, but may be terminated immediately upon written notice for your non-payment of our invoiced fees and costs; your inability or unwillingness to fulfill your obligations to us as described above, including the provision of documents or other information in a timely fashion; or if, in the sole discretion of the terminating party, any continuation of the engagement would be contrary to law or professional standards, or otherwise harmful or improper. y Force majeure language — Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any obligation under this Agreement when such failure or delay is caused by or results from causes beyond the reasonable control of the affected party, including but not limited to fire, floods, embargoes, war, acts of war, insurrections, riots, strikes, lockouts or other labor disturbances, or acts of God; provided, however, that the party so affected shall use reasonable commercial efforts to avoid or remove such causes of nonperformance, and shall continue performance hereunder with r
easonable dispatch whenever such causes are removed. Either party shall provide the other party with prompt written notice of any delay or failure to perform that occurs by reason of force majeure. WAYFAIR/NEXUS Though it is not a new clause, the clause below has helped with both claims defense and sorting out client confusion on the scope of the CPA’s responsibility with the passage of the Wayfair Act: From information you provide to us, our firm will prepare [INSERT YEAR] federal and state corporation/partnership income tax return(s) for the state(s) of: [INSERT SPECIFIC STATE(S)’ NAMES]. This firm is responsible for preparing only the returns listed in the preceding sentence. Please note that if your corporation/partnership has an income tax filing requirement in a given state but does not file the required income tax return, it is possible that the nonfiling could have adverse ramifications including (i) an unlimited assessment statute of limitations and (ii) inability to claim net operating losses or other tax attributes on any future years’ income tax returns. If your business has any operations in states other than those specifically listed, you are responsible for providing our firm all information necessary to prepare any
