AICPA Professional Liability Insurance Program Preparing and

AICPA Professional Liability Insurance Program

Preparing and Using Engagement Letters

Updated November 2013

Executive Summary

 Engagement letters should be customized for each engagement based on the terms agreed upon

with the client. This guide provides CPAs with examples of how common topics can be covered

in engagement letters.

 The content of draft engagement letters should be discussed and agreed upon by the CPA firm

and the client. If an engagement letter template is used for drafting individual letters, the letters

should be tailored to each engagement to reflect the objectives, scope and limitations of the

engagement, the responsibilities of the CPA firm and the client, and other terms and conditions

as required by the firm.

 An engagement letter is often the controlling factor in determining the responsibilities of both

parties in client-asserted professional liability claims against CPAs.

 Attorneys who specialize in defending CPAs facing professional liability claims agree that

obtaining a signed engagement letter before services are rendered is an effective defense tool,

especially if the scope of the engagement is disputed.

 Since statutes and case law addressing privity of contract vary from state to state, engagement

letter language addressing third-party usage of the CPA’s work product must be customized to

the jurisdiction in which services are rendered.

 The statue of limitations begins upon discovery of the error or omission in some states.

However, in many states, the statute of limitations for suits against CPAs alleging professional

malpractice begins to run on the date the services are concluded. In order to help establish proof

of this date, the engagement letter should indicate that the services will conclude with the

delivery of the final work product or by a specific date. In an ongoing engagement, a new

engagement letter should be issued each year, and whenever the scope of service changes.

 Certain courts view engagement letters as contracts, and local laws applicable to the matters

included in engagement letters vary significantly. Certain governmental bodies, commissions,

regulatory agencies, state boards of accountancy or professional organizations have established

requirements that may prohibit entities subject to their regulation or professional standards from

including engagement letter provisions that limit the rights of clients. Accordingly, before using

an engagement letter, a competent attorney should carefully review it for conformity with

applicable law.

Table of Contents

When Should I Issue an Engagement Letter?..........................................................................................7

Reviewing Engagement Letters with Clients............................................................................................8

Client Communications Required by the AICPA....................................................................................9

Third Parties and Engagement Letters...................................................................................................11

Identification of the Client and Description of Scope of Services to be Rendered..............................13

Restricting the Use and Distribution of Deliverables.............................................................................14

Description of Client Responsibilities .....................................................................................................16

Responsibility for Detecting Fraud and Illegal Acts..............................................................................18

Timing of the Work ..................................................................................................................................20

Alternative Dispute Resolution................................................................................................................24

Loss-Limiting and Indemnification Provisions......................................................................................27

Designation of Venue and Jurisdiction ...................................................................................................29

Statute of Limitations Clauses.................................................................................................................30

Severability Clauses..................................................................................................................................31

Withdrawal and Termination..................................................................................................................32

Addressing Potential and Actual Conflicts.............................................................................................35

Electronic Data Communication and Storage and Use of Third Party Service Provider..................37

Records – Retention, Requests, and Ownership ....................................................................................40

Client Signature and Date........................................................................................................................42

Closure Letters..........................................................................................................................................43

Appendix....................................................................................................................................................45

Setting the Stage

Both large and small CPA

firms continue to be subject to

claims and lawsuits regarding

work performed for clients.

More than two-thirds of all

professional liability claims in

the AICPA Professional

Liability Insurance Program

(the Program) arise from

allegations of malpractice

against the CPA by the client

(rather than third parties). In

such disputes, the engagement

letter (or lack thereof) is an

important to determine the

responsibilities of the CPA

and the client. Expectation

gap problems can often be

mitigated through the use of

engagement letters that clearly define the scope of the engagement and the responsibilities of the client

and CPA firm, especially in non-attest engagements.

As hypothetical examples, consider the following:

Engagement Letter Used

A small CPA firm was engaged to compile a retail client’s annual financial statements. The CPA

responsible for the engagement prepared an engagement letter for signature by the client. The letter, in

part, included disclosure language in the illustrative engagement letter in the AICPA Statements on

Standards for Accounting and Review Services pertaining to the scope and limitations of the engagement.

The signed engagement letter was placed in the CPA’s work paper file.

Approximately six months after the CPA delivered the financial statements, the client discovered that its

bookkeeper had embezzled more than $100,000 by altering and forging checks. The bookkeeper was

tried and convicted on criminal charges, but was unable to make restitution, as the stolen funds were lost

supporting a gambling habit.

The client sued the CPA firm, alleging that the firm failed to discover the theft in connection with its

“audit” of the client’s books and records. However, the engagement letter clearly defined the scope of the

CPA’s work, as well as the CPA’s responsibilities related to that scope. Therefore, the CPA firm’s

defense attorney was able to use the engagement letter as evidence that the CPA firm was not responsible

for identifying the fraud while performing a compilation in accordance with AICPA professional

standards. This evidence thus became a key element in the successful defense of the lawsuit.

Engagement Letter Not Used

For several years, a CPA firm had been preparing state and federal corporate income tax returns for a

client that performed restorations to antique ornamental ironwork and installed prefabricated ornamental

ironwork. No engagement letters were issued.

During the fourth year of rendering services for the client, the client received a deficiency notice from the

state of domicile, stating that the company owed sales tax on the sale of prefabricated ironwork. The state

sought in excess of $200,000 in penalties and interest in addition to the sales tax owed.

After losing on appeal to the state taxing authorities, the client sued the CPA firm. The client alleged that

the CPA firm was engaged to provide ongoing advice on all tax-related matters, and that the firm was

negligent in failing to advise the client of the requirement collect and remit sales tax to the state on the

sale of prefabricated ironwork.

At trial, the CPA testified that the firm was only engaged to prepare the federal and state income tax

returns for the client, and that the client never requested advice on sales tax issues. The client’s

bookkeeper refuted this testimony, countering that he relied upon the CPA to advise him on all tax-related

matters, as did the owner of the company.

The jury awarded over $250,000 to the client, including interest and attorney fees. In polling the jury

after the trial, the defense attorney for the CPA firm learned that jurors found the client’s version of what

happened more credible than that of the CPA. Several jurors commented that in the absence of written

evidence, they could not find that the client knew and understood that services would be limited to the

preparation of the state and federal income tax returns. They believed that the client was not sophisticated

in accounting and tax matters and that it was reasonable to assume that the client was relying on the CPA

for all tax-related advice.

Purpose of This Guide

The AICPA Professional and Personal Liability Insurance Program Committee (“PPLIP”) monitors the

Program’s performance to understand and meet the needs of CPAs in public practice. PPLIP recognized

a need for tools to assist CPA firms in drafting effective engagement letters, which can help CPAs avoid

misunderstandings with clients and defend themselves in the event of a claim. As such, CNA risk

control professionals developed this guide. CNA has also developed resources to supplement this guide,

including An Introduction to Engagement Letters podcast and sample engagement letters for various

client service engagements. These resources are available to CNA policyholders via the Policyholder

Resource Center at www.cpai.com.

This guide discusses and provides suggested language related to general use engagement letters. Specific

types of services or engagements require engagement letters customized to the client situation. Any

matters or terms unique to an engagement that are agreed upon between the CPA firm and the client in

advance of rendering professional services should be documented in the engagement letter.

When Should I Issue an Engagement Letter?

The accounting profession remains under significant scrutiny by regulatory agencies, businesses, and the general

public. Much of this scrutiny has focused on the scope of accountants’ responsibilities when rendering client

services. The engagement letter can be an effective tool in defending claims where the engagement scope is in

dispute. Professional standards promulgated by the AICPA, including AICPA Ethics Interpretation 101-3, and

Treasury Department Circular No. 230 also reinforce the importance of documenting the understanding between

the accountant and the client.

It is recommended that CPA firms issue engagement letters for all engagements prior to rendering any services,

even if an engagement letter is not required by the AICPA Professional Standards. A new engagement letter

should be issued annually for recurring work. If the scope of an ongoing engagement changes during the year,

depending on the significance of the changes, either an amendment to the existing letter or a new engagement

letter should be issued. When a client requests either a change in services or additional services, the principal in

charge of the engagement should discuss, clarify, and document the proposed changes with the client. Sending a

follow-up letter to the client and including documentation in the client’s work paper file are effective methods of

memorializing changes to the engagement. Follow-up letters can explain and confirm the change in services and

fees and refer the client back to the engagement letter, indicating that the change in services will continue to be

governed by the terms of the engagement letter issued for that year.

If the CPA firm provides services to both a business entity and its owners, the services should be covered in

separate engagement letters addressed to the entity and to the individual owners.

Evergreen Engagement Letters

A well-drafted engagement letter defines the timing of the engagement. In the interest of saving time or

reducing administrative burden, some CPA firms issue engagement letters that indicate services will

continue until either party terminates the professional relationship. These types of engagement letters,

which are often referred to as self-renewing or evergreen letters, either renew automatically or do not

specify a time period for the performance of services.

Clients sometimes attempt to assert a claim several years after the service was rendered. In many cases,

these claims would be time-barred based upon applicable state statutes of limitations. A successful statute

of limitations defense may be dependent upon producing evidence that an engagement ended on a specific

date. An engagement letter, which defines the timing of the engagement and is signed by both the client

and the accounting firm, can serve as such evidence. In the event of a claim, evergreen letters have the

potential to jeopardize a successful statute of limitations defense

Unilateral Engagement Letters

Some firms issue unilateral engagement letters that do not require a client signature. Unilateral

engagement letters may be appropriate for comparatively low-risk engagements with standard terms (i.e.,

preparing individual income tax returns for wage earners with ordinary income). When unilateral

engagement letters are used, there is a risk that the client will allege either that it did not consent to the

arrangement or requested different or additional services, or that the terms and conditions were not fair or

equitable and had they fully understood them, they would not have engaged the CPA firm. For these

reasons, engagements with increased exposure, such as the preparation of returns for self-employed

individuals and corporations, should be governed by engagement letters signed by both the CPA firm and

the client, not a unilateral engagement letter. If a unilateral letter is used, the firm should not start the

work until the client has acknowledged receipt of the letter or acknowledged agreement of the terms of

the engagement by actions such as providing a completed tax organizer to the CPA. The unilateral

engagement letter may include the following language:

“To accept our firm’s offer to perform services on the terms set forth in this engagement letter,

forward the tax organizer and/or other tax return information requested to us. By doing so, you

agree to be bound by the terms and conditions set forth above.”

Reviewing Engagement Letters with Clients

Managing client communications is a key element in a risk control program. Reviewing engagement letters with

clients helps ensure the client understands the scope and limitations of services, and the respective responsibilities

of the client and the CPA firm. This protocol is especially important when issuing an engagement letter to a

client for the first time.

Whether being engaged by a new client or a longstanding client, the principal in charge of the engagement should

discuss the engagement objectives and the content of the engagement letter with the client’s authorized

representative prior to both having the client sign the engagement letter and commencing services. If the firm’s

practice requires signed engagement letters, the client should be informed that the requirement applies equally to

all clients.

When discussing the engagement letter with a client, the firm should think from the client’s perspective – what do

they need to know in order to feel comfortable signing the letter? Clients should understand what an engagement

letter is, why it is required, and what benefits it provides to the client and the CPA firm.

Some important topics to address include:

 Clarifying the objectives of the engagement;

 Defining the nature, scope, and timing of the services the CPA firm is being engaged to perform

and the limitations of these services;

 Identifying the deliverables or work products to be issued, including any restrictions on the use

or distribution of deliverables;

 Identifying the responsibilities of both the CPA firm and the client under the engagement, and

potential consequences if either party fails to perform fulfill them;

 Explaining the cost of services as well as the billing and payment terms;

 Communicating the circumstances under which the CPA firm may withdraw or terminate the

engagement without completing the work; and

 Requiring written acknowledgment of any change in scope of services – either by amending the

existing engagement letter or issuing a new engagement letter.

Client Communications Required by the AICPA

The CPA firm should establish an understanding with the client regarding the nature of the engagement. This

should be documented in the engagement letter or in firm workpapers. For certain types of engagements,

professional standards require this understanding to be memorialized in the form of a written communication.

For other types of engagements, such as consulting and valuation, the AICPA professional standards require

CPAs to obtain an understanding of the engagement with the client, but do not expressly require written

communication with the client. Use of engagement letters is recommended, even if the standards do not require

it.

AICPA Professional Standards do not require engagement letters to be signed by both the CPA firm and client

(or, if applicable, those charged with governance). However, obtaining the client’s signature on the engagement

letter before commencing services is recommended. Doing so helps demonstrate the client’s affirmative

acknowledgement of the terms and conditions related to the services to be provided.

Audit and Attestation Engagements

For audit and attestation engagements, AICPA Statements on Auditing Standards (SAS) No. 122, Planning and

Supervision (AU-C Section 210) and AICPA Statements on Standards for Attestation Engagements (SSAE) No.

10, Attest Engagements, (AT Section 101.46), state that the practitioner should establish an understanding with

the client regarding services to be performed. These Statements indicate that the understanding should include,

for example, the nature and objectives of the engagement, management's responsibilities, the practitioner's

responsibilities, and limitations of the engagement. Audit standards state that this understanding should be

documented in the form of a written communication between the auditor and the client. For attest engagements,

the standards indicate that the practitioner should document the understanding in the workpapers, preferably

through a written communication with the client.

AICPA Ethics Interpretation 101-3, Performance of Non-attest Services (ET Section 101.05), requires written

documentation of an understanding with an attest client when a member renders non-attest services to the client.

Compilation and Review Engagements

For financial statement compilation and review engagements, AICPA Statements on Standards for Accounting

and Review Services (SSARS) No. 19, Compilation and Review Engagements requires that an accountant

document the establishment of an understanding with the client in an engagement letter, regardless of the level of

service or the intended users. The understanding should include a description of the nature and limitations of the

services to be provided and a description of the report the accountant expects to render.

Tax Services

U.S. Treasury Department Circular No. 230, §10.33 promotes best practices for tax advisors, including

communicating clearly with the client regarding the terms of an engagement (e.g., the form and scope of the

advice or assistance to be rendered).

Additional Guidance

The AICPA Professional Standards, practice guides, training materials, and other reference materials identify

topics for inclusion in engagement letters and provide guidance regarding the content of engagement letters.

Sample engagement letters are also included in these materials. In addition to this engagement letter guidance

and CNA’s sample engagement letters, practitioners should review these sources for assistance in drafting

engagement letters. Listings of selected AICPA professional standards and other reference materials relevant to

establishing an understanding with a client are available in the Appendix.

Third Parties and Engagement Letters

Third parties, such as lenders, investors, or client

vendors sometimes assert professional liability

claims against CPA firms alleging that in making a

business decision, a third party relied in some way

upon services performed for the client by the CPA

firm, and that they suffered damages as a result.

Legal standards that establish who has standing to

sue an accountant vary by state. Generally, four

approaches have been taken by the courts

regarding this issue: foreseeability, restatement,

near-privity, and privity.

Foreseeability

Under the foreseeability approach, the CPA

owes a duty to anyone whom the court

subsequently determines the CPA should have

reasonably foreseen as a recipient of his or her

work product. Foreseeability represents the

most expansive approach.

Restatement

In the majority of states, the CPA owes a duty to a limited class of third parties that the CPA knew at

the time services were being rendered were going to rely upon their work product for a specific

purpose. This standard has been adopted in a treatise called the Restatement of Torts and is thus

referred to as the Restatement approach.

Near-Privity

This approach sets forth a three-part test that must be met by third-party plaintiffs to establish

standing to sue an accountant:

1. The accountant must have been aware that the work product would be used for a specific purpose;

2. The accountant must have known that a certain party or parties intended to rely on their work;

and

3. There was conduct by the accountant linking the accountant to the party or parties, evidencing the

accountant’s understanding of their reliance.

Strict Privity

Under this approach, only the accountant’s client has standing to sue the accountant. Strict privity

reflects the least expansive approach recognized by the courts but has only been adopted by a few

states.

In many instances, accountants have the ability to affect the rights of third parties who may rely on their

work. The engagement letter provides the accountant an opportunity to do this. Certain third parties can

be named and acknowledged as recipients or users of the work product. Conversely, accountants may

restrict the use of the work product to certain parties by noting this in the engagement letter and work

product documents, such as the audit report.

Because the law varies from jurisdiction to jurisdiction, engagement letter language regarding this issue should be

customized to the facts of each case and the jurisdiction in which services are being rendered. Both written

communication and other contact between a CPA and third parties can significantly affect the rights of third

parties to sue a CPA (e.g. attending a meeting with a client’s lender). For more information on the legal standard

applicable in a specific state, practitioners should consult with their state CPA society and local counsel for

guidance. The AICPA also maintains relevant information on its website at http://www.aicpa.org. Because the

law regarding who has standing to sue an accountant may change and CPAs often practice in multiple

jurisdictions, it is important to keep abreast of the status of the law in this area and adapt your engagement letter

practices to such changes.

Identification of the Client and Description of Scope of Services to be

Rendered

Identifying the client by name evidences that the engagement is between the CPA firm and the identified party.

Without documentation of the client name, third parties may assert that the engagement was performed for their

benefit. This issue can be particularly important in the event of disputes involving divorcing clients, partnerships,

trusts, joint ventures, and closely held businesses. When services are being rendered to an entity, identify the

entity as the client, rather than the individual who hired the CPA firm.

The engagement letter should define the scope of services a firm will perform for the client. The description of

services should be clear and include sufficient details to avoid any possible misunderstanding or misinterpretation

by the client. “Bookkeeping services,” “accounting services,” and “tax services” are examples of broad

descriptions of services, which are subject to interpretation and do not sufficiently define the scope of services.

Additionally, clients may assume that certain services are included in the scope of the engagement. For example,

“We will prepare your U.S. Individual Income Tax Return (Form 1040) and California Resident Income Tax

Return (Form 540)” is preferable to “We will prepare your federal and state tax returns.” The broader description

can expose the firm to allegations of failure to prepare other tax returns (e.g., payroll, sales and use, property,

excise, or transfer tax, etc.) or other state tax returns.

Engagement letters should separately address each service to be rendered. For each service, the scope, terms of

service, applicable professional standards, limitations to services, laws, and regulations may vary. Depending on

the extent and complexity of services to be rendered, consider issuing an annual engagement letter for each type

of professional service.

Additional Services

In many claims made against Program policyholders, plaintiffs have alleged that the CPA firm did not fulfill the

expected scope of services. For example, the engagement letter may state that the client engaged the firm to

prepare his or her federal individual income tax returns. The client may expect that this includes additional

services such as preparing all

federal and state tax returns, identifying and advising on tax planning strategies, and

handling all inquiries from tax authorities. This “expectation gap” often develops as the relationship with the

client matures. Additional services beyond the scope specified in an engagement letter may be addressed as

follows:

“You may request that we perform additional services not contemplated by this engagement letter. If

this occurs, we will communicate with you regarding the scope and estimated cost of these additional

services. Engagements for additional services may necessitate that we issue a separate engagement letter

or addendum to this engagement letter to reflect the obligations of both parties. In the absence of any

other written communications from us documenting additional services, our services will be limited to

and governed by the terms of this engagement letter.”

When clients request additional services, miscommunications may be avoided by having the engagement

principal respond to such requests and follow-up on client discussions with a letter that recaps the discussion and

details any agreed upon changes in services and fees. If the change is a minor deviation from an existing

engagement, the letter may indicate that the additional services will continue to be governed by the terms and

conditions of the previously issued engagement letter, a copy of which would be enclosed, with the changes

identified in the new letter. If the additional services significantly expand the scope of engagement, or are

completely unrelated to an existing engagement, the firm should consider issuing a new engagement letter to

cover only the additional services.

Restricting the Use and Distribution of Deliverables

CPA firms can limit their liability to third parties by restricting the use and distribution of the firm’s report or

work product to the client. If the report will also be used by known third parties, the use of the report can be

restricted to the client and those specified parties. Several accounting and auditing standards apply to the

restriction of the accountant/auditor’s report.

 SAS No. 125, Alert That Restricts the Use of the Auditor’s Written Communication (AU-C Section 905),

SSARS No. 80, Compilation of Financial Statements (AR Section 80.30–.38), and SSARS No. 90

Review of Financial Statements (AR Section 90.37–.45) provide guidance about restricting the use of

reports.

 In an attest engagement, the use of a report may require restrictions in certain circumstances. See SSAE

No. 10, Attest Engagements, (AT Sections 101.78–.83, 101.114–.115), SSAE Nos. 10 and 11 Agreed

Upon Procedures (AT Section 201.06) for further information.

 In an engagement to compile a client’s financial statements for management’s use only, the use of

the compiled financial statements should be restricted to the client (AR Section 80.22–.24 and

80.63 (Compilation Exhibit A)).

 Under other professional standards, the CPA may consider restricting the use of the resulting

report. See AICPA Statements on Standards for Valuation Services sections VS 100.12 and

100.49 and AICPA Statement on Standard for Consulting Services section CS 100.02.

Additionally, Practice Aid 04-1 Engagement Letters for Litigation Services, paragraph 46, provides

guidance to restrict the use of work without authorization.

Restriction on Use of Deliverables

After reaching an understanding with a client concerning the use of a report, this understanding should be

documented in the engagement letter.

Such language might read as follows:

“The financial statements to be compiled are intended solely for the information and use of [include list

of specified members of management] and are not intended for and should not be used by any other

party.”

“The deliverable(s) presented as part of this engagement are for the internal use of your management and

the Board of Directors and are not to be distributed externally to third parties, in whole or in part, or used

for any other purpose.”

Restriction on Distribution of Deliverables

Except in cases where a client is subject to regulation requiring the distribution of a report to a third-party user

(for example, in an audit engagement for a client receiving government funding), the use of any CPA firm report

may be restricted to management-use only by including language in both the engagement letter and the report.

Consider the following sample language:

“You agree not to distribute, reproduce, or publish our report, or any portion of it to other parties not

specified in this engagement letter without our consent. If we consent, you agree to provide us with

copies of masters’ or printers’ proof of the entire document in sufficient time for our review and approval

before distribution or print. You also agree to provide us a copy of the final reproduced or printed

material for our approval before it is distributed.”

Consent Considerations

In accepting the appointment as an auditor, CPA firms should consider restricting the use and distribution of the

firm’s audit report to prevent use in connection with a private securities offering or SEC filing without the firm’s

written consent.

The following sample language may be used for this purpose:

“[Client Name] may wish to include or incorporate by reference our audit report on the financial

statements in a private offering or SEC filing by another party. You agree to not include our audit report

or make any reference to our firm without first obtaining our written consent to same. Additional

services may be required prior to providing such consent related to a private or public offering of

securities, or inclusion in an SEC filing. Such services will be undertaken as a separate engagement at

an additional fee.”

For further discussion of considerations when asked to consent to include the firms’ previously-issued report in a

securities offering, please see An Auditor’s Dilemma: To Consent or Not to Consent,” at www.cpai.com.

Description of Client Responsibilities

While a CPA has specific responsibilities in an engagement, the client also has responsibilities, many of which

are defined in the AICPA professional standards. For example, the client is responsible for establishing and

maintaining a system of internal controls, making all management decisions, and performing all management

functions. These responsibilities should be included in the engagement letter to illustrate clearly what the CPA

firm expects from the client, and, conversely, what the client cannot and should not expect from the CPA firm.

Additionally, AICPA Ethics Interpretation 101-3, Performance of Non-attest Services, requires that a CPA who

performs non-attest services for an attest client establish and document their understanding with the client

regarding, among other things, the client’s acceptance of their responsibilities to perform all management

functions and make all management decisions in connection with the CPA’s non-attest services.

Sample language that could be used is:

“As a condition to our performing the services described above, you agree to:

 make all management decisions and perform all management functions, including determining

account codings and approving all proposed journal entries;

 designate an individual who possesses suitable skill, knowledge, and/or experience, preferably

within senior management, to oversee the services;

 evaluate the adequacy and results of the services performed;

 accept responsibility for the results of the services, including decisions regarding the

implementation of any recommendations provided by us; and

 establish and maintain internal controls as well as monitoring ongoing activities.”

In certain engagements, such as consulting or bookkeeping engagements, consider stating that the CPA will not

make any management decisions or perform any management functions. In these instances, the following

language may be appropriate:

“[CPA Firm], in its sole professional judgment, reserves the right to refuse to take any action that may be

construed as making management decisions or performing management functions.”

Additional client responsibilities are expected when performing audits of financial statements and should be

communicated to the client in the engagement letter. Sample language that could be used is:

“Management is responsible for the following functions:

 establishing and maintaining effective internal control over financial reporting, including

monitoring ongoing activities, including but not limited to supervision of your staff;

 Selection and application of an applicable and appropriate financial reporting framework;

 designing, implementing and maintaining programs and controls to prevent and detect fraud;

 identifying and ensuring that the company complies with the laws and regulations applicable to its

activities;

 establishing and maintaining adequate records;

 making all financial records and related information available to us on a timely basis and assuring

that the records and information are complete and accurate;

 selecting and applying accounting principles;

 safeguarding of assets;

 adjusting the financial statements to correct material misstatements and affirming to us in the

management representation letter that the effects of any uncorrected misstatements aggregated by

us during the current engagement and pertaining to the latest period presented are immaterial, both

individually and in the aggregate, to the financial statements taken as a whole;

 informing us about all known, alleged, or suspected thefts or fraud that involves company

management, employees, former employees, or others where the thefts or fraud could have a

material effect on the financial statements;

 confirming certain representations made to us in the management representation letter;

 reviewing and approving the financial statements prior to their issuance, and assuming

responsibility for the fair presentation of financial statements, including all footnote disclosures;

and

 [Optional – if non-attest services are provided to the attest client] assuming all management

responsibilities; overseeing the service [specify the non-attest service(s)] by designating an

individual, preferably within senior management, who possesses suitable skill, knowledge and/or

experience; for evaluating the adequacy and results of those services, accepting responsibilities for

the results of those services, and making significant judgments and decisions.”

The client typically must provide information needed by the CPA firm to render services. The

engagement letter should specify the scope and timing of these responsibilities, and that the information

must be provided in a format usable by the firm. Without such communication, frustration, service

delays, and fee disputes may follow. Providing the client with specific guidelines may help avoid these

problems.

The following examples could be utilized:

“We will provide you with an income tax organizer to help you compile and document the

information we will need to prepare your income tax returns. It is your obligation to complete the

tax organizer with accurate and complete information, including worldwide income.”

“If the requested information you provide is not submitted in a timely manner, or they are

incomplete or unusable, we reserve the right to charge additional fees and expenses for services

required to correct the problem. If this occurs, we will contact your representative to discuss the

matter and the anticipated delay in performing our services.”

See CNA sample tax engagement letters for additional responsibilities to include.

Responsibility for Detecting Fraud and Illegal Acts

A CPA’s responsibility for detecting financial statement misstatements or asset misappropriation caused by fraud

and/or illegal acts varies depending on the level of services performed. No matter what type of service is

performed, there is a risk that the client and/or a third party could misconstrue the CPA’s responsibility for

detecting fraud and illegal acts. For example, allegations of failure to detect theft or fraud have been made

against accountants who provided tax compliance or bookkeeping services.

Engagement letter content regarding a CPA’s responsibility for detecting fraud and illegal acts by client

employees and others is an important element in the defense of such allegations. All engagement letters

should reflect this critical issue regardless of the scope of services being provided.

Audit Engagements

A CPA’s responsibilities for detecting financial statement misstatements caused by fraud and for detecting illegal

acts in connection with a financial statement audit have been the subject of study and discussion for many years.

Professional standards and guidance on these matters are included in AICPA Professional Standards, AU-C

Section 240, Consideration of Fraud in a Financial Statement Audit and AU-C Section 250, Consideration of

Laws and Regulations in an Audit of Financial Statements. Although duty of auditors is limited to “…a

responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements

are free of material misstatement, whether caused by error or fraud” (AU-C Section Overall Objectives of the

Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards

200.12), clients as well as the public-at-large increasingly expect auditors to detect any or all fraud and

embezzlements regardless of the level of materiality. Therefore, the auditor must communicate his or her

responsibilities related to fraud and illegal acts in the engagement letter with the client.

In an audit engagement letter, this communication may read as follows:

“We will conduct our audit in accordance with auditing standards generally accepted in the United States

of America [or the applicable auditing framework used]. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the financial statements are free of

material misstatements, whether caused by error or fraud. Because an audit is designed to provide

reasonable, but not absolute, assurance and because we will not perform a detailed examination of all

transactions, account balances, and disclosures, there is a risk that material misstatements, whether

caused by error or fraud, may exist and not be detected by us. In addition, an audit is not designed to

detect immaterial misstatements or incidents of fraud or illegal acts that do not have a direct and material

effect on the financial statements. However, we will communicate to management and those charged

with governance, any errors, fraud, or other illegal acts that come to our attention during the audit, unless

clearly inconsequential.”

Compilation and Review Engagements

CPAs engaged to provide compilation and review services are often alleged to have failed to detect fraud

and illegal acts despite the fact that the scope of these services is significantly less than that of an audit of

financial statements. In many cases, clients sustaining fraud losses do not understand the nature and

scope of these services and the limited responsibilities assumed by the CPA. In addition to educating

clients about the scope of compilation and review services, CPA firms should incorporate a description of

their responsibility for detecting fraud and illegal acts in engagement letters covering these services.

The following is a sample of such a disclosure:

“Our engagement cannot be relied upon to disclose errors, fraud, or illegal acts that may exist.

However, we will inform the appropriate level of management of any material errors and of any

evidence or information that comes to our attention during the performance of

[compilation/review] procedures that fraud may have occurred.

In addition, we will report to you

any evidence or information that comes to our attention during the performance or our

[compilation/review] procedures regarding illegal acts that may have occurred, unless they are

clearly inconsequential.”

Other Services

Engagements to provide other services such as tax, bookkeeping, business valuation, personal financial

planning and consulting services (except certain specifically defined and detailed forensic and litigation

services) do not generally include any procedures designed to detect fraud or illegal acts. Engagement

letters for such services should disclaim any responsibility for detecting fraud and illegal acts. The

following is an example of language that may be used:

“Our engagement does not include any procedures designed to detect errors, fraud, or theft.

Therefore, our engagement cannot be relied upon to disclose such matters.”

Timing of the Work

In most engagements, information deadlines, filing deadlines, and scheduling requirements affect the timing of

services provided by the CPA firm. An explanation regarding when the work is expected to be performed may

help reduce the risk of disputes with the client relating to the timing of the work. In some states, the statute of

limitations period for a client or third party to file a claim for professional liability begins to accrue on the date

that the professional services at issue were completed or reliance was placed on the work performed. In those

jurisdictions, establishing proof of when services were completed is critical to determining the statute of

limitations period. To address both issues, the CPA firm should document in the engagement letter the estimated

starting date for professional services, as well as any filing or other deadlines. Explain when services will end,

either by identifying the final work product and indicating that services are concluded when the work product is

delivered to the client, or by providing an estimated date for the completion of services. If services are ongoing,

such as monthly bookkeeping services, specify an end date, no longer than one year from the start date. Any

services provided after that date should be governed by a new engagement letter.

The following language could be used:

“We are prepared to begin work upon receipt of a signed copy of this engagement letter and at a

time mutually determined by you and [CPA Firm Name] and the information requested in the

attached Schedule X. Our services will conclude with the delivery of our [report] to you,

issuance of our closure letter to you,

or written notification by either party that the engagement is

terminated, whichever occurs first. [Note: Limit timing of engagement to no longer than one year

to allow the statute of limitations to begin to accrue.] Any extension of this engagement must be

set forth in writing and signed by both parties.”

For audit services:

“We plan to begin our audit on approximately [Date] and currently plan to issue our report on

approximately [Date]. The timing of our work is dependent on the timely receipt of the

information we requested from you.”

For tax services:

“We expect to begin the preparation of your returns upon receipt of the completed 20XX tax

organizer and all tax documents requested either in the organizer or by our office.

If your return is electronically filed, our services will conclude upon the earlier of the filing and

acceptance of your 20XX tax returns by the appropriate taxing authorities or one year from the

execution date of this letter. You will be required to verify and sign a completed Form 8879, IRS

e-file Signature Authorization, and [state equivalent authorization form] before your returns can

be filed electronically. You are responsible for reviewing the accuracy of all tax returns and any

accompanying schedules and statements prior to filing.

If your return is filed by mail, our services will be concluded upon the earlier of delivery to you

of your 20XX tax returns for your review and filing with the appropriate taxing authorities or one

year from the execution date of this letter.”

See CNA sample engagement closure letter available via the Policyholder Resource Center at www.cpai.com.

As statutes of limitation periods vary by state and by the type of legal action (e.g., tort, contract, fraud, etc.), local

counsel should be consulted for guidance regarding their application to a specific engagement.

Consequences of Extending Completion Deadlines

Clients should be informed of the possible consequences of extending the deadline to file a tax return or to extend

the due date for other government filings. In the absence of evidence establishing that this occurred, clients may

allege that the CPA firm failed to inform them of these potential consequences, and that any damages they

suffered due to the extension of time (e.g., penalties, interest, lost benefits) should be attributable to the CPA firm.

These problems may be avoided by including an explanation of the potential consequences of delayed filings:

Sample wording is as follows:

“The original filing due dates for your income tax returns are [month & date, 20XX] for federal

and [month & date, 20XX] for [State]. [If a large number of returns are included, consider

including this as an appendix].

It may become necessary to apply for an extension of the filing deadline if there are unresolved

tax issues or delays in processing, or if we do not receive all of the necessary information from

you on a timely basis. Applying for an extension of time to file may extend the time available for

a government agency to undertake an audit of your return or may extend the statute of limitations.

All taxes owed are due by the original filing due date. Additionally, extensions may affect your

liability for penalties and interest or compliance with government or other deadlines.

To the extent you wish to engage our firm to apply for extensions of time to file tax returns on

your behalf, you must notify us of this in writing. Our firm will not file these applications

unless we receive either a signed copy of this engagement letter or your express written

authorization to do so. In some cases, your signature may be needed on such applications

prior to filing. Failure to timely file for an extension of time to file can result in penalties for

failure to file tax returns, which accrue from the original due date of the returns, and can be

substantial.”

See CNA sample engagement letters for tax services for additional provisions regarding extensions of time to file

tax returns.

Fees and Billing

Billing Policies and Payment Terms

Providing clear explanations regarding

the firm’s policy on billing of fees and

expenses is critical to avoiding client

disputes regarding payment and the

accumulation of receivables. The

engagement letter should provide an

estimate for anticipated client fees and

expenses, and the method of billing

(hourly rate or fixed fee, for example).

In situations where a fee estimate is not

determinable (litigation services, for

example), a range of fees and/or how

they will be calculated should be

included in the engagement letter. If a

CPA firm’s home state regulates client

billing methods, verify that the firm’s

methods comply with applicable

regulations.

Sample language regarding fees and billing methods might include the following:

Time and Materials

“Our fee is based upon the complexity of the work to be performed and our professional time to

complete the work. Based upon the estimated effort to complete the scope outlined above, we

estimate that our total fees for this project will range between $[XX] and $[XX] excluding out-of

pocket expenses. Circumstances encountered during the engagement or scope changes may

require additional time and expense. We will notify you of such circumstances as they arise, and

we will obtain your approval before proceeding.

Resource Hourly Rate

Estimated

Hours

Estimated

Fees

Partner $ xxx

Director $ xxx

Manager $ xxx

Senior Associate $ xxx

Associate $ xxx

Total XXX $XXX

Our fees are not contingent on an action or event resulting from the analyses or conclusions in, or

the use of, our report deliverable.

Fees for the services outlined above will be billed monthly at the standard billing rate for each of

the professionals performing the work, plus out-of-pocket expenses. Invoices are due [upon

receipt or within XX days of the date on the billing statement.].”

Fixed Fee

“Our professional fee for the services outlined above is estimated to be $[XXX]. This fee is

based upon the complexity of the work to be performed and our professional time to complete the

work. Additionally, this fee depends upon the availability, quality, and completeness of your

records. You agree that you will deliver all records requested by our staff to complete this

engagement on a timely basis.

In the event your records are not submitted in a timely manner, or are incomplete or unusable, we

reserve the right to charge additional fees and expenses for services required to correct the

problem. If this occurs, we will contact you to discuss the matter and the anticipated delay in

completing our engagement prior to rendering further services.”

Retainers

For new clients, clients with a history of payment problems, or high-risk engagements (clients with delinquent tax

obligations or litigation services engagements, for example), CPA firms should consider obtaining a retainer prior

to commencing services. Doing so helps avoid the accumulation of receivables and minimizes the risk of

uncollectibility.

Sample language regarding retainers is as follows:

“Our firm’s practice is to obtain a retainer upon execution of this agreement. The required

retainer amount is $XXX. This will be applied to the final billings and any unused retainer will

be refunded immediately at the end of the engagement.”

“$XXX is due as a retainer upon execution of this agreement. The retainer paid will be applied to

the final billing.”

“We require an advance payment of 50% of our estimated fee before beginning our work. Please

submit your payment with the completed tax organizer and related materials.”

Consequences of Non-payment

Clients understand that there are specific consequences for failing to pay vendors and lenders in a timely manner;

payments for professional services are no different. Clients should be informed of the CPA firm’s policy

regarding non-payment. CPAs who fail to do this may place themselves in the difficult position of having to

complete an engagement for which future payment is questionable, rather than risk the threat of legal action from

the client for damages allegedly suffered due to missed deadlines, for example. Addressing the consequences of

non-payment in the engagement letter helps position the CPA firm to suspend or terminate the engagement, if

warranted:

“If payment is not received by the due date, you will be assessed interest charges of XX% per month on

the unpaid balance. We reserve the right to suspend or terminate our work for non-payment of fees. If

our work is suspended or terminated, you agree that we will not be responsible for your failure to meet

government and other deadlines, for any penalties or interest that may be assessed against you resulting

from your failure to meet such deadlines, and for any other damages (including but not limited to

consequential, indirect, lost profits, or punitive damages) incurred as a result of the suspension or

termination of our service.”

In litigation service engagements, CPAs may require payment of fees before providing deposition or trial

testimony. There may be a concern that the parties will resolve their dispute and the CPA will not get paid. A

large outstanding fee at the time of testimony also may result in a credibility challenge by opposing counsel.

Accordingly, the following language could be incorporated into the engagement letter:

“If you request that we testify, we will require payment in full prior to such testimony for all

work performed to date.”

Alternative Dispute Resolution

Alternative dispute resolution (ADR,) is increasingly being used by CPA firms to resolve client disputes. The

primary methods of ADR are arbitration and mediation. Some CPA firms include provisions in engagement

letters requiring the use of ADR to resolve disputes that arise related to the engagement. However, for reasons

discussed below, some types of ADR are preferable to others.

Mediation

Mediation involves a skilled facilitator (mediator) who assists the parties in attempting to reach a mutually

acceptable resolution to their dispute. It can be an effective and efficient means of resolving disputes that would

otherwise result in complex, expensive, and protracted litigation.

Before the mediation, the parties usually exchange documents and other information that they believe is relevant

and supports their position and also provide a summary of their case to the mediator and possibly, to the other

side. The mediator may confidentially share his or her opinions on certain aspects of each party’s case but the

mediator does not issue a decision on any particular issue or the case in general. If a resolution is not reached in

mediation, the parties are free to litigate if they so choose.

Typical engagement letter mediation provisions require the case to be mediated before litigation can proceed. If

the client files a lawsuit without first mediating the case, the CPA firm’s defense counsel can file a motion to

dismiss until the case is mediated. Early mediation can be an effective tool for dispute resolution, and use of

mandatory mediation provisions is recommended. Sample language is as follows:

“If a dispute arises out of or relates to this contract or engagement letter, or the breach thereof,

and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith

to settle the dispute by mediation administered by the American Arbitration Association under the

Dispute Resolution Rules for Professional Accounting Services Dispute Resolution Rules before

resorting to arbitration, litigation, or some other dispute resolution procedure. The costs of any

mediation proceedings shall be shared equally by all parties.”

Arbitration

Arbitration is a non-courtroom hearing in which an arbitrator or arbitrators decide the outcome of a

dispute. Arbitrators are typically lawyers or retired judges with expertise in the subject matter at issue.

Arbitration has several advantages including the following:

 The case is decided by finders of fact who are usually more knowledgeable regarding the CPA’s

standard of care than a typical jury.

 Decisions are generally produced sooner than litigation.

 The contents and results of arbitration proceedings may be kept confidential if stipulated by the parties.

The type and amount of evidence (documents, deposition testimony, and expert reports) introduced in an

arbitration is determined by the rules of the arbitration, which are agreed to by the parties, and to some

extent is within the discretion of the arbitrator. Arbitrations are generally performed in accordance with

the rules established by the American Arbitration Association (AAA).

The rules of the arbitration may limit evidence to be considered. While this can reduce costs, it may also cause

certain documents or testimony to be excluded. The arbitrator or arbitrators are paid by the parties, unlike a judge

and jury, who are paid by the government. The award of the arbitrators is usually binding on the parties and

generally cannot be vacated or appealed unless the award was obtained as a result of fraud, or either arbitrator

misconduct or abuse of discretion. As judicial decisions regarding arbitration vary, consult with legal counsel to

determine relevant guidelines in your jurisdiction.

Third parties cannot be forced to participate in an arbitration proceeding between a CPA firm and their client

because they are not a party to the agreement to arbitrate (i.e. the engagement letter). However, they may bear at

least a portion of the responsibility for the damages being claimed by the client. Thus, arbitration without all

potential parties may not entirely resolve the dispute. This may result in post-arbitration litigation between the

client and the third party, or the CPA firm and the third party. Because of these reasons, and the fact that

arbitration may not be appropriate in all cases, the use of mandatory arbitration provisions in engagement letters

is not recommended.

Alternative Dispute Resolution and the Impact on Independence

Ethics Ruling Nos. 95 and 96 of the AICPA Code of Professional Conduct, Agreement With Attest Client to Use

ADR Techniques and Commencement of ADR Proceedings, (ET Sections 191.190-.194), address ADR and the

impact on independence of a CPA. AICPA ethics rulings indicate that the existence of an agreement with a client

to use ADR to resolve future disputes regarding past services does not impair independence. However, the

commencement of ADR proceedings which are sufficiently similar to litigation would impair independence. The

existence of binding arbitration is considered sufficiently similar to litigation. As such, the existence of a binding

arbitration clause for ADR would impair independence of the CPA firm.

A CPA firm considering the use of ADR provisions in its engagement letters should first consult with its attorney

and professional liability insurer regarding their recommendations and with its professional liability insurance

agent or broker regarding insurance coverage considerations. Professional liability insurance policies generally

require claims to be immediately reported to the carrier. If a claim is made, ADR should only be pursued with

the advice and consent of the insurance carrier representative and legal counsel.

Loss-Limiting and Indemnification Provisions

CPA firms can further manage the risks associated with professional liability litigation by including loss-limiting

or indemnification clauses in engagement letters.

Loss-limiting clauses attempt to limit the liability of the CPA firm to its client in connection with services

rendered. This may help minimize the damages that could arise from a client claim and may reduce the

likelihood of a claim. An example of such a clause may read as follows:

“[CPA Firm’s] liability for all claims, damages, and costs of [Client Name] arising from this

engagement is limited to X times the total amount of fees paid by [Client Name] to [CPA Firm]

for services rendered under this agreement.”

Many CPA firms also include engagement letter clauses that provide for indemnification of the CPA firm

by the client for claims made against the CPA by third parties in the event that client management

knowingly makes misrepresentations to the firm, withholds or conceals information from the firm, or

participates in a fraud.

Indemnification and Attest Clients, including Audit

The AICPA Code of Professional Conduct has issued several Ethics Rulings and Interpretations on the subject of

indemnification provisions.

Ethics Ruling No. 94, Indemnification Clause in Engagement Letters (ET Section 191.188 - .189), indicates that

the use of an indemnification clause whereby the client indemnifies the CPA firm against all liabilities and costs

resulting from knowing misrepresentation by management does not impair the CPA firm’s independence.

However, Ethics Ruling No. 102, Indemnification of a Client, (ET Section 191.204-.205), indicates that if

an attest client requests the CPA firm to indemnify the client for damages, losses, or costs arising from

lawsuits, claims, or settlements that relate, directly or indirectly, to client acts, independence would be

impaired.

With respect to indemnity and limitation of liability provisions for audit and other attest service

engagements for certain governmental bodies, commissions, or other regulatory agencies, the AICPA

Professional Ethics Executive Committee issued Ethics Interpretation 501-8. ET 501-8 states that use of

indemnification and liability limitation clauses that are prohibited by regulators of the client entity would

be considered an act discreditable in violation of this guidance, and provides that “…for example, federal

banking regulators, state insurance commissions and the Securities and Exchange Commission have

established such requirements.”

As a result, when considering the use of indemnification and liability limitation clauses in an attest engagement

letter, if the client is in a regulated industry, such as banking or insurance and/or is regulated by the Securities and

Exchange Commission, the CPA firm should review the applicable regulatory rules for prohibitions regarding the

use of these clauses as well as the AICPA ethics rules. If indemnification clauses are consistent with AICPA

ethics rulings and are not prohibited by regulation, they are permissible in engagement letters for attest services.

Firms that audit federally regulated financial institutions should review the Interagency Advisory on the

Unsafe and Unsound Use of Limitation of Liability Provisions in External Audit Engagement Letters,

Financial Institution Letter No. 13-2006. This provides specific guidance to financial institutions

regarding audit engagement letter provisions.

The Securities and Exchange Commission’s Codification of Financial Reporting Policies, provides that auditor

independence is impaired “…when an accountant and his client, directly or through an affiliate, have entered into

an agreement of indemnity which seeks to provide the accountant immunity from liability for his or her own

negligent acts, whether of omission or commission...”

Where permitted for an attest client, sample language that could be used is:

“[Client Name] agrees to hold [CPA Firm] harmless from any and all claims of [Client Name]

which arise from knowing misrepresentations to [CPA firm] by the management/employees of

[Client Name], or the intentional withholding or concealment of information from [CPA Firm] by

the management/employees of [Client Name]. [Client Name] also agrees to indemnify [CPA

Firm] for any claims made against [CPA Firm] by third parties which arise from any of these

actions by the management/employees of [Client Name]. The provisions of this paragraph shall

apply regardless of the nature of the claim, including the negligence of any party.”

Indemnification and Non-Attest Clients

For non-attest services, there are typically no restrictions on the use of indemnification and liability limitation

clauses in engagement letters. The terms in those clauses are subject to negotiation between the CPA and client.

An example of an engagement letter provision that may be used is as follows:

“[Client Name] agrees to indemnify, defend, and hold [CPA Firm] and any of its partners,

principals, shareholders, officers, directors, members, employees, agents or assigns harmless with

respect to any and all claims arising from this engagement, regardless of the nature of the claim,

and including the negligence of any party, but not to the extent caused by the gross negligence or

intentional acts by the firm.”

Enforceability

The enforceability of loss-limiting and indemnification clauses depends upon the law in the relevant jurisdiction

where the professional liability claim and fee dispute is asserted against the CPA firm. Where permissible, the

use of loss-limiting and indemnification provisions in engagement letters covering CPA services is encouraged.

No single provision or wording is appropriate in all situations. Before incorporating loss limiting or

indemnification provisions in engagement letters, consult with local legal counsel in the state where services are

being rendered for guidance on specific wording that complies with applicable law.

Designation of Venue and Jurisdiction

Many CPA firms serve clients located in or with operations in multiple states. Laws governing professional

liability lawsuits and issues such as privity and statutes of limitations differ substantially by jurisdiction and are

subject to change. Trial outcomes also vary by jurisdiction based upon the orientation of judges and juries, as

well as other factors. Accordingly, some firms have stipulated in the engagement letter the venue for resolution

of any disputes. For example, the following language could be used:

“We agree that the courts of the state of [State Name] have jurisdiction over the parties and all disputes

between us, and we agree to submit all disputes to the [Name of State of Federal Court Desired], which

is the proper and most convenient venue for resolution. We also agree that the law of the state of [State

Name] shall govern all such disputes.”

An attorney may advise on the use of such a provision and the specific wording necessary to meet local

requirements. A CPA firm’s insurance agent also can assist in providing information regarding potential

insurance coverage issues that this may raise under the accountant’s professional liability policy.

Statute of Limitations Clauses

A statute of limitations clause purports to change the statute of limitations, which would apply to

litigation arising out of the engagement. Thus, a three year statute of limitations could be changed to a

one year statute of limitations. In addition, many statute of limitations laws provide that the statute begin

running when the party knew or should have known they had a claim, also known as the "discovery rule.”

Under limited circumstances, the “discovery rule” may be eliminated by agreement via the engagement

letter. For example, the engagement letter agreement could provide that:

“You agree that any claim arising out of this engagement letter shall be commenced within one

year of the delivery of the work product to you, regardless of any longer period of time for

commencing such claim as may be set by law.”

Courts may not always enforce agreements to waive the “discovery rule.” Before using such provisions,

consult with local legal counsel.

Severability Clauses

In the event of litigation, some courts may view certain engagement letter provisions as void, which could

lead the court to invalidate the entire agreement in the absence of a severability or savings clause. Sample

language for such a clause is as follows:

“If any portion of this agreement is

deemed to be invalid or unenforceable,

said finding shall not invalidate the

remainder of the terms set forth in this

engagement letter.”

Withdrawal and Termination

In some circumstances, it may be impossible for the CPA firm to complete the engagement. AICPA professional

standards governing compilations, reviews, audits and tax services discuss the following specific situations in

which the CPA may be unable to complete the engagement and issue a report. The following are examples of

situations requiring a practitioner’s consideration of withdrawal from an engagement. However, situations

requiring withdrawal consideration are not limited to the following:

 SSARS No. 19 Compilation and Review Engagements (AR Section 80.13) indicates that when an

accountant becomes aware, during the course of performing compilation procedures, of information that

is incorrect, incomplete or otherwise unsatisfactory, or that, fraud or illegal acts may have occurred that

could materially affect the financial statements that is not properly addressed by management, the

accountant should consider withdrawing from the engagement. The same requirement exists for review

engagements and can be found at AR Section 90.21.

 SSARS No. 19 Compilation and Review Engagements (AR Sections 80.29 and 90.36) states that when

the accountant determines that there is a material departure from GAAP in the financial statements that

the accountant has been engaged to compile or review, and management is not willing to make

appropriate disclosures, and modification of the accountant’s report is not sufficient, the accountant

should consider withdrawing from the engagement and provide no additional services related to this

engagement.

 SAS No. 122 Consideration of Fraud in a Financial Statement Audit (AU-C Section 240.38) notes that

an auditor should “consider whether it is appropriate to withdraw from the engagement” in the event of

identified or suspected fraud. If withdrawal is deemed appropriate, reasons for withdrawal should be

communicated to those charged with governance. AU-C Section 240.63 further addresses factors for

consideration of withdrawal as it relates to fraud and management’s response to the identified or

suspected fraud.

 SAS No. 122 Consideration of Laws and Regulations in an Audit of Financial Statements (AU-C

Section 250.A24-A25) states that when the auditor identifies instances of noncompliance with laws and

regulations and determines that management or those charged with governance has not taken appropriate

remedial actions that the auditor considers appropriate in the circumstances, no matter how material, the

auditor may consider withdrawing from the engagement. However, withdrawal may not be possible

under application law and regulation and the auditor should consider such laws and regulations when

determining whether or not to withdraw. AU-C Section 250.A27 indicates that withdrawal is possible

when management does not accept a modified report due to identified or suspected noncompliance with

laws and regulations.

 AICPA Statements on Standards for Tax Services (SSTS) No. 6 Knowledge of Error: Return

Preparation and Administrative Proceedings (TS Sections 600.05-06, and 600.08) states that if a tax

preparer is aware of an error on a prior year return and the taxpayer has not taken appropriate action to

correct the error, the tax preparer should consider whether withdrawal from the current year engagement

and the professional relationship with the client is appropriate. If the tax preparer is representing a client

in an administrative proceeding, and is aware of an error in the return being reviewed, the tax preparer

should obtain the taxpayer’s permission to disclose that error to the taxing authority. If the taxpayer

refuses to grant permission, the tax preparer should consider withdrawal from the engagement. TS

Section 600.10 cautions that a conflict of interest between the accountant and the client may arise due to

the potential adverse impact on the client by the accountant’s withdrawal from the engagement and the

professional relationship. Therefore, the accountant should consult with his or her legal counsel when

deciding whether or not to continue with the professional relationship.

 SSTS No. 6 Knowledge of Error: Return Preparation and Administrative Proceedings (TS Section

600.12) states that an accountant may be placed in the position of preparing a return that carries forward

an error made in prior years. In this situation, the accountant should take reasonable steps to ensure that

the same error does not recur. If it is not possible to correct the error in the current year, the accountant

should consider withdrawal from the engagement.

In all circumstances in which the firm is considering withdrawal prior to completion of an engagement, consult

with legal counsel and the firm’s professional liability insurer for additional guidance.

The following paragraph is an example of how withdrawal situations may be preemptively addressed in an

engagement letter:

“We reserve the right to withdraw from this engagement without completing our services for any

reason, including, but not limited to, if you fail to comply with the terms of this engagement letter

or as we determine professional standards require.”

Staffing of the Engagement

Client misunderstandings and discontent with the performance of the CPA firm can develop when the client

learns that firm staff rather than principals or partners will complete portions of the engagement. To avoid such

problems, the following explanatory paragraph could be utilized:

“[XXX] and [YYY] will lead the teams assigned to service your account and will serve as the

primary contacts with you for this engagement. The team will include professional staff or other

members of the firm.”

If the individuals who will render the services or direct the engagement are identified in the engagement letter, be

prepared to follow through on this commitment and monitor your firm’s compliance with this plan. If

circumstances arise requiring assignment of other personnel, discuss this with the client beforehand, and

document this change in a follow-up communication to the client.

Addressing Potential and Actual Conflicts

If a potential or actual conflict of interest is identified

prior to commencing services, the CPA firm should

discuss this with the client and address the conflict in the

engagement letter. Depending on the circumstances, the

CPA firm may be prohibited from rendering the service.

Conflicts of interest arise when a CPA performs a service

for a client and the CPA has a relationship with another

person, entity, product, or service that could be perceived

by the client or third parties as compromising objectivity.

For engagements that do not require independence, if a

conflict of interest exists and the CPA believes that the

service can be performed with objectivity, ET Section

102.03 of the AICPA Professional Standards does not

prohibit the performance of the service if the conflict is

disclosed and consent is obtained from the client.

Engagement letter wording should be customized based

upon applicable facts and circumstances.

The following is an example of such wording:

“Per our discussion with (XXX) of your company, (YYY), a partner in our firm, is married to (ZZZ), the

controller of (AAA), which is a principal supplier to your firm. While we have concluded that no

conflict of interest exists, you acknowledge that you are aware of this fact and have no objection to

engaging our firm to perform these services.”

For engagements that require independence, such as audits, reviews and other attest services, disclosure and

consent by the client will not eliminate an independence impairment resulting from a conflict of interest.

Treasury Department Circular No. 230, §10.29, Conflicting Interest, prohibits representing a client before the IRS

if the representation involves a conflict of interest, except if:

 The practitioner reasonably believes that the practitioner will be able to provide competent and diligent

representation to each affected client;

 The representation is not prohibited by law; and

 Each affected client waives the conflict of interest and gives informed consent, confirmed in writing by

each affected client, at the time the existence of the conflict of interest is known by the practitioner. The

confirmation may be made within a reasonable period of time after the informed consent, but in no event

later than 30 days.

Copies of the written consents must be retained by the practitioner for at least 36 months from the date of

the conclusion of the representation of the affected clients, and the written consents must be provided to

any officer or employee of the IRS on request.

Conflict Waiver Considerations

Language considered appropriate to waive a conflict of interest and provide consent under AICPA professional

standards or Circular No. 230 may not establish a legally binding waiver of the conflict of interest. Consult with

legal counsel when drafting a conflict of interest waiver provision for inclusion in the engagement letter to ensure

that it would be considered valid in a court of law. Additionally, consult with counsel on the parties required to

sign the engagement letter to acknowledge the disclosure and consent. Do not initiate services prior to receiving

the signed engagement letter.

Rendering professional services when a conflict of interest exists presents elevated risk to the CPA firm,

irrespective of obtaining conflict waivers. Firms should consider this prior to agreeing to render services in such

circumstances.

Conflicts of Interest Arising Subsequent to Service Commencement

Despite stringent client screening procedures, potential or actual conflicts of interest may arise after engagements

begin. To avoid conflict of interest allegations by clients, it is helpful to explain in the engagement letter the

circumstances under which the firm may be required to suspend services or resign from an engagement due to

such conflicts:

“If we, in our sole discretion, believe a conflict has arisen affecting our ability to deliver services

to you in accordance with either the ethical standards of our firm or the ethical standards of our

profession, we may be required to suspend or terminate our services without issuing a report.”

Electronic Data Communication and Storage and Use of Third Party Service

Provider

Most CPA firms use electronic software applications and devices as well as the internet to communicate with and

exchange information with their clients, to maintain data electronically, and to assist in the delivery of

professional services. Despite efforts to improve internet and electronic security, there is always a potential risk

that information may be intercepted, used, or corrupted by unauthorized persons, which raises privacy and data

security issues. CPAs should address the resulting risks in the engagement letter.

Software applications, devices, and other tools are often provided by third-party service providers. Under AICPA

Ethics Ruling No. 112 under Rule 102, Integrity and Objectivity (ET section 191.224-.225), AICPA members are

required to inform their client, preferably in writing, that the member may use a third-party service provider to

assist the firm in providing professional services prior to disclosing confidential client information to the provider.

AICPA members are not required to inform the client when the third-party service provider is utilized to provide

administrative support services to the member, but it is considered a good practice to do so.

AICPA Ethics Ruling No. 1 under Rule 301, Responsibilities to Clients (ET section 391.001-.002) also discusses

the use of third party service organizations by AICPA members. This ruling states that client consent is not

required for a member to disclose confidential client information to a third party service provider used to assist

the member in providing professional services to clients or to perform administrative support services to the

member as long as the following occurs before using the service provider:

 The member enters into a contractual agreement with the third party service provider to maintain the

confidentiality of such information.

 The member is reasonably assured that the third party service provider has appropriate procedures in

place to prevent the unauthorized release of confidential client information to others.

If the member does not enter into a contractual confidentiality agreement with the provider and is unable to obtain

the necessary assurance, the member should obtain specific client consent before releasing confidential client data

to the third party.

The following sample language informs clients of the risks of electronic communications and the use of third-

party service providers that will have access to confidential client information, and seeks client consent to

disclose such information to these service providers:

“In the interest of facilitating our services to your company, we may send data over the Internet, store

electronic data via computer software applications hosted remotely on the Internet, or allow access to

data through third-party vendors’ secured portals or clouds. Electronic data that is confidential to your

company may be transmitted or stored using these methods. We may use third-party service providers

to store or transmit this data, such as providers of tax return preparation software. In using these data

communication and storage methods, our firm employs measures designed to maintain data security.

We use reasonable efforts to keep such communications and data access secure in accordance with our

obligations under applicable laws and professional standards. We also require all of our third-party

vendors to do the same.

You recognize and accept that we have no control over the unauthorized interception or breach of any

communications or data once it has been sent or has been subject to unauthorized access,

notwithstanding all reasonable security measures employed by us or our third-party vendors. You

consent to our use of these electronic devices and applications and submission of confidential client

information to third-party service providers during this engagement.”

Client Portals

If the firm uses a portal for communicating and exchanging files with clients and for other purposes, consult with

an attorney who is familiar with electronic privacy and security issues and applicable law. Portal providers

typically require users to acknowledge and agree to the terms and conditions of an end user license agreement

(EULA) prior to providing access to the

portal. Both the agreement between the

firm and the portal provider as well as the

EULA should be reviewed by the firm’s

legal counsel prior to entering into any

engagements that will utilize the portal.

In addition, a portal agreement should be

drafted by the firm’s legal counsel. As part

of the portal registration process integrated

to the firm’s website, the agreement should

require the client’s acknowledgement and

agreement with its terms and conditions

prior to providing the client with access to

the portal. Portal agreements should, at a

minimum, address service availability,

portal security and information protection,

user password and security, and

termination of logon accounts.

Sample language regarding portals to include in an engagement letter is as follows:

“To enhance our services to you, we will use [Portal Name], a collaborative, virtual workspace in a

protected, online environment. [Portal Name] allows for real-time collaboration across geographic

boundaries and time zones and allows [CPA Firm] and you to share data, engagement information,

knowledge, and deliverables in a protected environment. In order to use [Portal Name], you will be

required to execute a client portal agreement and agree to be bound by the terms, conditions and

limitations of such agreement. You agree that [CPA Firm] has no responsibility for the activities of

[Portal Provider] and agree to indemnify and hold [CPA Firm] harmless with respect to any and all

claims arising from or related to the operation of [Portal Name]. While [Portal Provider Name] backs

up your files to a third party server, we recommend that you also maintain your own backup files of

these records.”

Other Third-Party Service Providers

If a CPA firm engages a specialist or other service provider to assist the firm in the delivery of professional

services, sample engagement letter wording to inform the client and obtain consent is as follows:

“In the interest of enhancing our availability to meet your professional service needs while maintaining

service quality and timeliness, we may use a third-party service provider to assist us in the preparation of

your [insert applicable service, work product, etc. here]. This provider has established procedures and

controls designed to protect client confidentiality and maintain data security. As the paid provider of

professional services, our firm remains responsible for exercising reasonable care in providing such

service(s), and our work product will be subjected to our firm's normal quality control procedures. If you

have any questions or concerns about this arrangement, please contact our office.”

Considerations for Tax Engagements

Practitioners preparing U.S. income tax returns should be familiar with IRC § 7216, Disclosure or Use of

Information by Preparers of Returns, and related IRS pronouncements and guidance. This provision specifies

the content, format, transmission and signature requirements for required paper or electronic forms providing

taxpayer consent to disclose or consent to use tax return information. In engagements which do not consist solely

of tax return preparation or auxiliary services (as defined in applicable guidance), taxpayers must complete and

return the consent form before tax return information can be disclosed to third parties.

Before preparing client consent forms, including related engagement letter language, practitioners should consult

the Section 7216 Information Center (available at www.irs.gov) for current guidance.

Other Privacy and Security Considerations

Firms should remain cognizant of applicable state and federal privacy and security laws that may stipulate

methods by which client information can be transmitted. Some states require that all transmissions of client data

be encrypted, and most states have laws containing specific notification requirements in the event of a breach of

confidential data maintained by the firm.

A number of states and other regulators have either enacted laws or are considering legislation and regulations

imposing specific privacy obligations on businesses that outsource services or disclose information to third-party

service providers. These measures contemplate a required signed acknowledgment from the client concerning

the firm’s use of third parties prior to the start of the engagement. Check with your state CPA society and

applicable state boards of accountancy for current guidance. Although substantial equivalency rules under the

Uniform Accountancy Act have been adopted by many states allowing CPAs to practice in jurisdictions other

than their home state, state board of accountancy regulations and state privacy laws for that jurisdiction apply, and

may differ from those of their home state.

Records – Retention, Requests, and Ownership

Designing, implementing, and monitoring the consistent application of a record retention policy and responding

to requests for records are an important risk control procedures for all CPA firms. Improperly documented,

incomplete, disorganized, or tampered work papers, whether paper or electronic, can be detrimental to the

defense of a CPA firm in a professional liability claim. For additional information on record retention and

responding to requests for records, see CNA’s publications located at www.cpai.com.

Record Retention Policies

Records retention policies vary widely among CPA firms based upon many factors, including legal jurisdiction,

type of client, services performed, government regulations, and the firm’s practice. Clients need to understand

and agree to be bound by the CPA firm’s policy regarding retention of firm work papers and copies of client

records.

Engagement letters should separately address access to and responsibility for both firm work papers and client-

provided records. Client-provided records should be returned to the client no later than at the conclusion of each

engagement to avoid assuming a continuing responsibility for maintaining them. Whenever possible, CPA firms

should avoid taking possession of original records. Whatever the firm’s record retention policy, it should be

clearly stated. Here is an example providing such disclosure:

“Our records retention policy requires us to return all original records and documents that you

have given us to you at the conclusion of the engagement. Your records are the primary records

for your operations and comprise the backup and support for your financial reports and tax

returns. Our records and files are our property and are not a substitute for your own records. A

copy of our record retention policy

is attached for your reference (or, is available upon request).

Our firm destroys our engagement files and workpapers after a period of X years. Catastrophic

events or physical deterioration may result in our firm’s records being unavailable before the

expiration of the above retention period.”

For an individual or a corporate tax client, additional wording regarding records is as follows:

“You should retain all documents that provide evidence and support for reported income,

expenses, credits, and deductions on your returns as required under tax law. You are responsible

for the adequacy of all such documents. You represent that you have such documentation and

can produce it if needed to respond to any audit or inquiry by taxing authorities.”

Responding to Subpoenas and Requests for Records

Due to client business disputes, divorces, regulatory investigations and other similar matters, CPA firms receive

court orders, subpoenas, summonses, and informal requests from a variety of sources to produce documents, give

depositions, or testify in court.

It is advisable to promptly report the receipt of court orders, subpoenas, summonses and requests to produce

documents to the firm’s professional liability carrier and consult with legal counsel prior to either contacting the

client regarding the inquiry or responding to it.

While the duty to respond to such inquiries varies depending upon the situation and legal jurisdiction, the client

should be advised of the CPA firm’s position on this issue in the engagement letter. The following is an example

of wording that could be used to inform a client about the firm’s policy on responding to a subpoena or

summons:

“All information you provide to us in connection with this engagement will be maintained by us

on a strictly confidential basis. If we receive a summons or subpoena requesting that we produce

documents from this engagement or testify about this engagement and we are not prohibited from

doing so by law or regulation, we agree to inform you of such requests as soon as practicable.

You may, within the time permitted for our firm to respond to any request, initiate such legal

action as you deem appropriate to protect information from discovery. If you take no action

within the time permitted for us to respond, or if your action does not result in a judicial order

protecting us from supplying requested information, we may construe your inaction or failure as

consent to comply with the request. As long as we are not a party to the proceeding in which the

information is sought, you agree to reimburse us for our professional time and expenses, as well

as the fees and expenses of our counsel, incurred in responding to such requests.”

Requests for records may also come from a regulator, successor accountant or other party. Sample engagement

letter language addressing such requests is as follows.

“We may be requested to make certain work papers available to [state, federal and foreign

regulators] pursuant to authority provided by law or regulation. If requested, access to such work

papers will be provided under the supervision of firm personnel. Furthermore, upon request, we

may provide photocopies of selected work papers to [state, federal and foreign regulators]. Such

regulators may intend, or decide, to distribute the photocopies or information contained therein to

others, including other government agencies.”

AICPA Professional Standards, ET Sections 501.02 and 591.377-.378 defines several types of records utilized or

created in the delivery of services by a AICPA member and describe the member’s responsibilities related to

responding to requests for records. Treasury Department Circular No. 230, §10.28, describes a tax practitioner’s

responsibilities in responding to requests for return of client records. State boards of accountancy regulations also

govern responses to such requests. CPAs should familiarize themselves with these standards and regulations

when responding to requests for records.

Ownership of Records

Ownership of CPA firm working papers and the handling of client-provided records may be addressed in the

engagement letter as follows:

“At the completion of our engagement, the original source documents will be returned to you.

Workpapers and other documents created by us are our property. Such original workpapers will

remain in our control, and copies are not to be distributed without our prior written consent.”

Client Signature and Date

A well-drafted engagement letter that memorializes the service agreement between the CPA firm and its client

may be of limited use in avoiding or defending professional liability claims if it is unsigned. Engagement letters

should be signed and dated by firm and client representatives prior to commencing any services. For a discussion

on the issuance of unilateral or unsigned engagement letters, please refer to the section of this guide titled When

Should I Issue an Engagement Letter.

Who Should Sign?

For engagements provided to a married couple, both parties should sign. With respect to business entities, only

those individuals who are authorized under the entity’s by-laws, resolutions, operating agreements, or other

governance records should sign the engagement letter. This authority is affected by the form the entity takes,

such as a corporation, partnership, trust, limited liability company, or joint venture. To the extent the engagement

letter is signed by an individual whose authority to enter into a binding business agreement on behalf of the client

business entity cannot be verified, consult with an attorney prior to accepting the engagement letter, and do not

commence services until this issue has been resolved.

Whenever possible, the engagement letter should be delivered to the individual(s) authorized to sign it. A request

for the client’s signature may be addressed as follows:

“We appreciate the opportunity to be of service to you. Please date and sign the enclosed copy of

this engagement letter and return it to us to acknowledge your agreement with the terms of this

engagement. It is our policy to initiate services only after we receive the executed engagement

letter.”

When Should it be Signed?

Over the years, numerous CPA firms have experienced claims involving scope disputes. Such claims have

alleged the CPA firm’s failure to render certain services, or a failure to detect and communicate regarding

weaknesses in internal controls, fraud, and theft. In many cases, these claims pertained to services related to a

continuing client relationship rather than a new client, and the firm initiated services before obtaining a signed

engagement letter. The client later disputed the timing and the scope of the services rendered. To mitigate

liability exposures, CPA firms should not initiate any services until the signed engagement letter has been

received from the client.

Closure Letters

When the services as memorialized in an engagement letter are concluded, issuing a closure letter to the client

may help to limit a CPA firm’s liability exposure, even if there is a continuing client relationship and an

expectation that the client will engage the CPA firm to perform additional services at a later date. Issuing a

closure letter helps to establish proof of the date services were completed and helps to define the statute of

limitations period. The letter may be used to direct the client to follow-up on any activity required by

governmental authorities (e.g., complying with tax filing deadlines) or suggested by the firm during the course of

the engagement (e.g. taking action on recommendations noted in a consulting engagement). Closure letters

should be used at the end of an engagement where completion may be difficult to determine, including most

consulting engagements. A sample closure letter is available in the Policyholder Resource Center at

www.cpai.com.

Summary

While engagement letters are not a “magic shield” to protect CPA firms from professional liability claims, the

consistent use of engagement letters helps provide clients with accurate information regarding the services the

CPA firm will perform, the limitations of those services, and the responsibilities of both the CPA firm and the

client arising from the engagement. By clearly defining these terms prior to the start of the engagement, the CPA

firm promotes open communication with clients. This protocol also provides the client with the opportunity to

request and receive clarification of any specific issues referenced in or omitted from the letter which helps to

minimize the risk of fee and scope disputes. Establishing and reinforcing this type of up-front communication

with clients is a critical element in avoiding “expectation gap” problems that can lead to professional liability

claims.

If a CPA firm does not fulfill its own obligations as agreed to in the engagement letter and offers advice or

performs services beyond the defined engagement scope of services, such practice or patterns may destroy the

protections offered by engagement letters.

Appendix

Selected AICPA Professional Standards

 Statement on Auditing Standards No. 122, Terms of Engagement (AU-C Section 210.09-.10)

provides that “The auditor should agree upon the terms of the audit engagement with

management or those charged with governance,” and “The agreed-upon terms of the

engagement should be documented in an audit engagement letter or other suitable form of

written agreement…” Statement on Standards for Attestation Engagements No. 10 (AT Section

101.46) provides that “the practitioner should establish an understanding with the client

regarding the services to be performed for each engagement,” and that “the practitioner should

document the understanding in the workpapers, preferably through a written communication

with the client.”

 Statement on Auditing Standards 122, Interim Financial Information (AU-C Section 930.10),

which applies to reviews of interim financial information and states, “The auditor should agree

upon the terms of the engagement with management or those charged with governance, as

appropriate. The agreed-upon terms of the engagement should be recorded in an engagement

letter or other suitable form or written agreement…” This statement also sets forth items to

include in the engagement letter.

 Statements on Standards for Attest Services No. 10, Agreed Upon Procedures (AT Section

201.10) states “The practitioner should establish an understanding with the client regarding the

services to be performed. When the practitioner documents the understanding through a written

communication with the client (an engagement letter) the communication should be addressed to

the client, and, in some circumstances, also to all specified parties.”

 Statements on Standards for Accounting and Review Services No 19, Compilation and Review

Engagements (AR Section 80.02-.05 and 90.03-.06) states that “The accountant should establish

an understanding with management regarding the services to be performed for the engagement

and should document the understanding through a written communication with management.”

Also see Appendix A of AR Section 80 and Appendix, A of AR Section 90 for sample

engagement letters.

 Statement on Quality Control Standards, A Firm’s System of Quality Control (QC Section

10.29) states that a firm’s policies and procedures should provide for obtaining an understanding

with the client regarding the nature, scope, and limitations of services to be performed. This

statement also indicates that professional standards applicable to an engagement may contain

requirements for obtaining a written understanding with the client.

 The AICPA Statements on Standards for Valuations Services establishes standards for CPAs

who perform valuations of businesses, business ownership interests, securities, or intangible

assets. Section VS Section 100.16-.17 of these standards state that “The valuation analyst

should establish an understanding with the client, preferably in writing, regarding the

engagement to be performed.”

 The AICPA Statement on Standards for Consulting Services establishes additional general

standards for all consulting services. Section CS Section 100.07 of this standard includes a

requirement to “Establish with the client a written or oral understanding about the

responsibilities of the parties and the nature, scope, and limitations of services to be performed,

and modify the understanding if circumstances require a significant change during the

engagement.”

 Section 100.21 of the AICPA Statements on Responsibilities in Personal Financial Planning

Practice states that “The CPA should document his or her understanding of the scope and nature

of the services to be provided. Such documentation could be in the form of an engagement

letter or other written communication to the client, or if there is an oral understanding, a memo

to the file.” These Statements are not currently enforceable standards under the AICPA Code of

Professional Conduct. However, the proposed AICPA Statement on Standards in Personal

Financial Planning Services would make such standards enforceable. The proposed standard

also includes a provision for the member to “document and communicate to the client the scope

and nature of services to be provided…”

Additional AICPA Reference Materials

The AICPA has sample engagement letters for various services to AICPA section members. Practice

management guides are also available to members.

* * * * *

The AICPA Professional Liability Insurance Program is underwritten by Continental Casualty

Company, one of the CNA insurance companies, and is administered by AON Insurance Services. The

Program is endorsed by the AICPA and is monitored by the AICPA Professional and Personal Liability

Insurance Committee for practicing CPAs nationwide.

For more information on the AICPA Professional Liability Insurance Program, contact AON Insurance

services at 1-800-221-3023 or go to www.cpai.com

Updated: November 2013

By: CNA Accountants Professional Liability Risk Control, 333 South Wabash Avenue, 36

floor,

Chicago, IL 60604.

This information is produced and presented by CNA, which is solely responsible for its content.

The purpose of this guide is to provide information, rather than advice or opinion. It is accurate to the best of the author’s

knowledge as of the date of the guide. Accordingly, this resource should not be viewed as a substitute for the guidance and

recommendations of a retained professional. In addition, CNA does not endorse any coverages, systems, processes or protocols

addressed herein unless they are produced or created by CNA.

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To the extent this guide contains any examples, please note that they are for illustrative purposes only and any similarity to actual

individuals, entities, places or situations is unintentional and purely coincidental. In addition, any examples, including the sample

letter, are not intended to establish any standards of care, to serve as legal advice appropriate for any particular factual situations,

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consultation with a qualified independent tax advisor who can address a taxpayer’s particular circumstances.

Continental Casualty Company, a member of the CNA group of insurance companies, is the underwriter of the AICPA

Professional Liability Insurance Program.