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Affirmative Conduct Engagement Letters

Accountants Professional Liability Insurance Adviser

Affirmative Conduct Engagement Letters

It is an axiom of good accounting business practice that an engagement letter should be obtained before commencing an assignment. Engagement letters are fundamental in the defense of a malpractice lawsuit

However, in this world of profitability constraints and increasing workload it is tough to track and enforce engagement letters, especially for small fee assignments like preparation of personal tax returns. Often clients avoid or forget to sign an engagement letter and it is costly to pursue.

An option to pushing for a signed engagement letter for simple assignments may be the use of an Affirmative Conduct Engagement Letter. This letter is an attachment to the Tax organizer, does not require a signature and creates a clear contract with the client including all of the important terms of the engagement.

Ralph Picardi, Esq, risk management consultant to CPAGoldTM gives the following insight on Affirmative Conduct Engagement Letter.

A signed engagement letter is by far the best course of action in any engagement. By obtaining the client’s signature on an engagement letter, the firm creates a clear contract with the client including all of the important terms of the engagement. Most firms, however, have a very difficult time receiving back completed organizers and sufficient source documentation, let alone signed engagement letters in 1040 engagements. Every state recognizes that contracts can be formed by something other than a signed writing. Oral contracts and those formed by actions are examples. In the absence of a state law requiring a signed writing (and you should check this with local counsel), the reasonableness of the communication will probably control the matter if litigation ultimately ensues.

Picardi further recommends the following approach. The firm should continue to style its engagement letter to be signed by the client, but should also include language that purports to make the terms of the letter binding even in the absence of a client signature. Example language would be as follows:

If you agree to authorize this firm to prepare your 201_ personal income tax returns pursuant to the terms set forth above, please execute this letter on the line below designated for your signature, and return the original of this executed letter to this office along with a completed copy of the enclosed tax organizer and the supporting documentation requested therein. You should keep a copy of this fully executed letter for your records. If this firm does not receive from you the original of this letter, in fully executed form, but receives from you a completed copy of the enclosed tax organizer and/or supporting documentation requested therein, then such receipt by this office shall be deemed to evidence your acceptance of all of the terms set forth above. If, however, this office receives from you no response to this letter, then this office will not proceed to provide you with any professional services, and will not prepare your 201_ income tax returns.

An Affirmative Conduct Engagement Letter may not be the best solution to avoid malpractice claims, but it is useful and is certainly recommended over no engagement letter at all.

Ralph may be contacted at: (866) 668 7475.

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