Last evening I was talking to one of my regular readers who received an updated client engagement letter. Many of these are being sent out at present. The conversation was in the context of his having received his annual fee account which continues to rise despite the fact his revenues have fallen dramatically over the last few years. And so you get the full picture, this reader has been with the same firm for 27 years. He said:
It’s a sore point. The letter basically seems to disclaim responsibility for anything and tries to limit liability. Reads like a resignation letter to me.
This is typical of firms I describe as operating out of entitlement culture thinking. They’re fat, dumb and happy. I know the UK is becoming more litigious, that firms are being forced to handle more bureaucratic nonsense. I also know that firms want to see clients being more accountable. But there are ways of going about this. Sending engagement letters that give the impression of taking no responsibility is plain stupid. So what’s the answer? How about something like this:
Dear Client:
We are governed by operating standards handed down to us from our governing body. These require us to inform you of the responsibilities we take on and those that we don’t when you become a client.[Text for client who keep books]
When we prepare your accounts, we use the records you supply. When these include a balanced set of books then we sample the entries you have made to test for book-keeping mistakes. Our tests help us work out whether the books are a fair reflection of your trading activities and ultimately form the basis for your tax assessment. We do not actively look for mistakes but if we find some, then we will discuss with you the nature of those mistakes in the hope you will better understand why things have gone wrong. We will also correct those mistakes. We will also suggest ways in which we can provide you with a better service that will help prevent mistakes before they become problematic.
[end text]
[Text for clients who don't keep books]
We have to construct a set of accounts from the various records you supply. This work is done using a variety of techniques and represent our best efforts to classify income and expenditure. During preparation, we expect to come across items we don’t understand and we will discuss these with you to ensure the final accounts are a fair reflection of your trading activities. We will also explain alternative ways of record keeping which allow you to take responsibility. We believe these can serve as the foundation for our providing you with a better service, based on periodic monitoring of your records.
[end text]
One of the problems we face is that we don’t have a day to day understanding of your business though we endeavour to gain a picture of how you trade. While we do our best, it does mean we cannot be 100% certain the final accounts are correct. Since you entrust us with this work, we assume that you rely on our judgment. However, it is important to understand that in law, while we may prepare the accounts, they are in fact your books and records, not ours. That means you are responsible for what they contain.It also means that in the event of a tax investigation for example, it is your accounts that are under scrutiny. If it turns out there are material mistakes, then we will need to jointly assess where responsibility lays. This is not an attempt by us to avoid our responsibilities but an attempt to find out what has gone wrong and why.
If we make mistakes that could have been avoided, we will indemnify you against the costs of resolving those mistakes, including interest and penalties HMRC chooses to apply. We cannot indemnify you against additional tax that should have been paid as this would be due in any event.
In the event there are problems with your accounts, we can ask an independent accountant to review the papers to help both of us reach agreement about any required apportionment of responsibility.
We hope this makes sense to you. If not then we are more than happy to spend time to explain in more detail. There will be no charge for this service.
Does that work for you? Is it sufficiently formal without resorting to a ton of legalese?
UPDATE: Bob Harper pinged me a sample letter he produced. Very similar to the above though much better crafted. I’ve posted it to Writely.
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