By John Raspante, CPA, CDFA  

Many of the risk management calls I receive deal with the practical considerations of establishing multiple accounting services in one engagement letter. These calls are occurring at increased rates, and more CPA firms and sales agents are raising the question.

While the benefit of combining multiple services on one letter as opposed to many appears obvious, there are important considerations that must be weighed beforehand:

• Are all the appropriate caveats and disclaimers for each of the multiple services clearly contained in the one letter?
• Are the fees for each individual service separately itemized?
• Have potential paid preparer penalties been considered?
• Does the firm use a limit-of-liability clause in the letter?

I’ve reviewed CPA engagement forms for the past 25 years, and too many times I’ve read a really strong letter that contains virtually all the recommended clauses for one service, but when it gets to another or multiple services it becomes quite brief. This can cause difficulty if a claim arises. For example, I recently reviewed a superb review service letter, but when it came to an additional service (in this case business tax work) it simply stated, “And we will prepare the appropriate tax filings for ABC Corp.” There were no clauses for the tax service dealing with nexus, e-filing, foreign bank accounts, etc.

The general recommendation is to use one letter for each service, and not to combine services in one letter. But I do understand the practical benefits of one letter, so long as all the appropriate clauses are included.

The importance of itemizing the fees is essential. There could be issues that arise which cause a claim unrelated to the primary service in the engagement letter. For instance, one possible concern could be the return of fees charged for a service. If each service has been itemized, it’s easily dealt with. In addition, paid-preparer and limit-of-liability issues can arise. Both paid-preparer and limit-of-liability are usually tagged to the fee being charged. If tax and nontax services are being provided, it could be construed that the paid-preparer charge is a function of the total fee. Clearly, itemizing the fee for each service in the combined letter offers a tremendous benefit with paid preparer sanctions. Limit-of-liability is similar in that the limit of liability is generally a multiple of the fees. If the fees are itemized at $10,000 for tax and $20,000 for audit and there is a tax claim, the limit of liability would be 3x the $10,000 tax fee, or $30,000. If the fees for the different services are not itemized, then the limit-of-liability would be $90,000 at 3x fees. Itemizing the various fees for each service could save your practice a lot of money.

Again, and let me emphasize, the preferred recommendation is to use separate letters for each service. If crafted carefully and properly, however, and if fees are separately itemized, there may be times when using one letter for multiple services could be within acceptable risk levels.

John Raspante, CPA, CDFA, is director of risk management at McGowan Pro in the New York metropolitan area. He can be reached at jraspante@mcgowanprofessional.com.

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