How to get client terms right
Failing to set clear terms of engagement with clients can be risky for accountants. Here’s how to avoid complaints and disputes.
- Terms of engagement spell out the scope of professional services you will provide, timelines, fees and dispute processes.
- Failing to set terms of engagement may be dealt with by the Professional Conduct Committee.
- Disclosure and informed consent are vital when there could be a conflict of interest.
Failing to provide clear terms of engagement can result in serious problems later on, according to Rebecca Stickney, who leads Professional Conduct and Complaints in New Zealand for Chartered Accountants ANZ and Kate Dixon, Conduct and Discipline Manager in Australia.
Terms of engagement spell out the scope of the professional services you will provide, the timelines, the amount and timing of fees, and what will happen to client files at the end of the engagement or if there is a dispute. “Without terms of engagement ... an accountant won’t have any document which sets out what he or she said they would do,” says Dixon. “So suddenly there’s no basis on which to resolve a dispute by negotiation.”
In New Zealand, a significant portion of our complaints are client-related complaints about public practitioners.
“This is not a good position for an accountant to be in. It’s not a good position for a client to be in. The lack of certainty can significantly exacerbate disputes between clients and accountants.”
Setting clear terms of engagement may also help you avoid complaints. “In New Zealand, a significant portion of our complaints are client-related complaints about public practitioners,” says Stickney. “Lack of clarity or mismatch of the expectations is a regular feature of these complaints.”
Know your industry standards
In Australia, accountants must document and communicate their terms of engagement according to the requirements of Australian Professional and Standards Board APES 305: Terms of Engagement, which governs members. Australia also has requirements regarding terms of engagement which are contained in various area specific standards, for example APES 215: Forensic Accounting Services.
In New Zealand, the requirement to document terms of engagement is specified in the relevant engagement standards, such as the compilation, valuation or assurance standards. While the requirement is not expressly stated in the Code of Ethics, a failure to have an appropriate engagement letter and ensure clients are aware of the scope and terms of the engagement, can result in a failure to comply with the principle of due care and competence. “It’s certainly the expectation of the disciplinary bodies that there are terms of engagement,” Stickney says.
Avoid these common oversights
Some members steer clear of liens because of their complexity, according to Stickney. “Basically, it’s a contractual or common law right to hold documents or information owned by the client pending payment of the fees,” she says. Members will need to seek advice about their common law rights but they should also consider that if the right to claim a lien is spelt out in the terms of the engagement, there may be less argument about the terms of a lien. “We get a lot of complaints in this area as it’s not very well understood” says Stickney.
Conflict of interest
Disclosure and informed consent are vital when there could be a conflict of interest, Stickney says. “Make sure that the safeguards are being advised to the client in writing. When you know those types of relationships right at the outset, that’s the type of thing that could be tailored into the engagement letter,” she advises.
Accountants should be wary of the intersection of their professional and personal lives. A potential mistake is not to consider whether there is a professional engagement, even when you may think it is a personal matter. If the accountant does the books for a friend, for example, it’s likely to be a professional engagement that requires terms of engagement, according to Dixon.
Know when to update your terms: it is good professional practice to review your terms of engagement on a regular basis. Dixon says: “Just because you have terms of engagement doesn’t mean it’s set and forget.” In Stickney’s view, this means doing more than sending clients an annual questionnaire or checklist that includes an engagement acceptance. “That might be good enough as far as just confirming, ‘Yes, I want you to do this year’s compilation work.’ But it doesn’t cover sufficiently all the rights and obligations... that would be expected in a specific, properly scoped engagement letter” she says.
Whether you need to renew the terms for a recurring engagement or amend them depends on “several factors, including whether the work is identical, or whether there’s been a change in ownership or management of the client, or a change in standards”, says Dixon. “Any indication that the client misunderstands the scope of the engagement should also be addressed with amendments.”
If the work you do for a client evolves, Stickney cautions against relying on old terms of engagement. She noted a frequent allegation in complaints is the member trying to rely on an initial engagement letter agreed for one purpose that does not cover the scope of new work undertaken by the member. It may also have been written many years before and does not reflect the member’s current terms of trade.
When the ownership of a business changes, the terms of agreement need to keep pace. Stickney notes that complaints have been received where the client is not informed in a timely way of members selling their block of fees or mergers with other firms. If the engagement letter is not updated and the work is undertaken by the new firm, it can compromise the member’s ability to recover the fees. “It’s about being as transparent as possible and keeping your clients abreast of how you’re changing,” she says.
In Australia, CR3 mandates that a member must advise a client immediately if fees or billing arrangements change during or between engagements. Dixon advises that it’s preferable to put it in writing. “Even when there are terms of engagement, they may not have been updated to reflect changes,” she says. “We get a vast number of complaints dealing exactly with this issue. The client says: ‘You said you would charge me six hundred dollars for the tax return. When you issued me the bill it was a thousand dollars... what happened?’” says Dixon.
“What we find in a lot of those cases is that there are no terms of engagement or they haven’t been updated to reflect changed circumstances. It’s not our role to determine the appropriate fee for the engagement. But it is our role to determine whether you’ve complied with standards and regulations and other requirements. This includes terms of engagement.”
Facing the consequences
Failure to set terms of engagement may be dealt with by the Professional Conduct Committee, which is the first stage of the disciplinary hierarchy and is not a public forum. “That may be a lower-level sanction,” says Stickney. “But quite often the failure to have terms of engagement couples with a more serious complaint, such as bad conflict of interest, and this may end up before the Disciplinary Tribunal.”
Appearing before the Tribunal may result in a reprimand and a requirement to pay the costs of the disciplinary process, which can be significant. In the most serious cases removal or suspension from membership may be ordered. There may be public fallout, too, as the outcome of the Tribunal’s hearings are usually published.
For Stickney, the key message is that terms of engagement are about ensuring that everyone has the same expectations and knows where they stand. “It is about protecting the member’s own interest,” she says. “I think quite often accountants don’t really think about that. What happens if they need to pursue a fee down the line? How are they going to be best placed to do that?” she says.
Dixon adds: “If you end up suing the client for unpaid fees [in] the civil court system, you may not be able to recover all your fees if you don’t have a terms of engagement.” She points to helpful resources provided at charteredaccountantsanz.com including a standard terms of agreement letter. “It’s a starting point that members should tailor for their own business,” said Dixon. “I think quite often accountants don’t really think about that. What happens if they need to pursue a fee down the line? How are they going to be best placed to do that?”
Anthony O’Brien is a journalist and communications adviser based in Sydney.
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