Engagement Letters: New Risks Addressed, Best Practices for Firms

Engagement Letter 1

Engagement Letters: New Risks Addressed, Best Practices for Firms

That’s a conclusion you can draw from the number of CPA firm engagements that are conducted without one. It’s also supported by the number of engagements conducted in which the engagement letter does not accurately detail the scope of the engagement and key details, including the standards that the firm is going to follow, the limitations of the service, and the client responsibilities.

Engagement letters are incredibly important.

That’s the conclusion you’ll draw from analyzing data from claims filed against CPA firms or speaking with experts involved in handling claims, potential claims, and lawsuits against CPA firms. In 2018, nearly one-third of claims against CPA firms (31%) involved engagements with no engagement letter at all. I learned that when interviewing an expert on claims made against CPA firms for the Modernizing Your Practice podcast series.

There are also far too many times where the engagement letter is not doing the job of minimizing risks to the firm, and those risks include liability risk and reputation risk. While the client and firm may seem perfectly aligned during the pre-engagement meetings, things that were discussed but not recorded and included in the engagement letter become points of contention and add unnecessary risk. When there is a difference of opinion on the scope, client requirements, etc., perhaps the client will defer to the firm’s recollection and notes from those face-to-face meetings. Perhaps they won’t.

The good news is there are foundational best practices regarding engagement letters and there are risk liability experts willing to share their experiences, insights, and recommendations to help you and your firm mitigate professional liability risk. The better news is that my colleague Matt Towers captured all that in a recent interview with Stan Sterna, JD, a vice president at Aon Insurance Services, and Sarah Ference, CPA, risk control director of accountants professional liability at CNA.

There are also far too many times where the engagement letter is not doing the job of minimizing risks to the firm, and those risks include liability risk and reputation risk. While the client and firm may seem perfectly aligned during the pre-engagement meetings, things that were discussed but not recorded and included in the engagement letter become points of contention and add unnecessary risk. When there is a difference of opinion on the scope, client requirements, etc., perhaps the client will defer to the firm’s recollection and notes from those face-to-face meetings. Perhaps they won’t.

Engagement Letter 2

Key Elements to Capture

  1. Scope of Service: What you have been engaged to do, and exactly which services you are going to be delivering to the client
  2. Professional Standards: Detail the standards that the firm is going to follow when delivering the service (including the limitations of that service)
  3. Client's Responsibilities: Include what the client needs to provide (and by when), and if applicable lay out the fact that it is the client’s responsibility to make decisions and to implement or respond to any advice or recommendations provided by the firm

The three elements Sarah lays out above may seem both obvious and simple to capture but claims data and the experiences and examples she and Stan shared with Matt tell a different story. Consider an engagement letter stating the firm will prepare and file the client’s “tax return.” Does that include sales-and-use-tax calculation? Which jurisdiction? State and federal returns? A gift tax return? Months later is not when you want to be clarifying the scope, hastily doing unplanned work, or working with an attorney to defend against a claim.

In the assurance space, the risk liability can go way up. For example, Sarah brought up a common scenario where for the vast majority of services a CPA firm delivers, there may be no responsibility to detect theft or fraud at a client organization or to detect a weakness in the client’s internal controls. If that is the case for an engagement, she recommends you state it in the engagement letter or you’re taking on unnecessary risk. If fraud or another problem is later found at the client company, a claim or lawsuit against the CPA firm should not be a surprise. As Stan and Sarah shared, if the scope of the engagement is not clear and detailed, the client’s attorneys will make their own interpretation.

The claim, lawsuit, and payout data make it clear that a firm’s first line of defense when it comes to risk liability is the engagement letter. Stan, the lawyer in the discussion, also shared three key takeaways which I’ll summarize this way:

Three Takeaways/Process Recommendations for Firms

  • Engagement Letter Process: Have a process that ensures every engagement has an engagement letter capturing key elements of the work anticipated for the client
  • Annual Review: Review them annually, for each and every client
  • Document and Amend All Changes: Whenever the scope of the services change, document that change and then either issue a new engagement letter or amend the existing letter accordingly

Another takeaway I’ll add is there are new tools and resources available to guide you and your staff when drafting engagement letters including, for example, OnPoint PCR and its unique engagement letter drafting tool for preparation, compilation and review engagements.

Finally, as you and your clients find ways to stay connected in this new era of remote working, and while you’re evolving the pre-engagement meetings, the engagement wrap-up meeting, and everything in-between, consider evolving your approach to engagement letters too. They’re incredibly important.

Listen to the full podcast episode: Engagement Letters: Foundational Best Practices

About the Author:

Steven A. Menges, Assurance Team and Modernizing Your Practice Lead,

A business-to-business (B2B) innovator and products executive with 20 years’ progressive experience, Steven Menges is a frequent industry author and speaker on enterprise computing, data analytics, managed service providers (MSPs), IT Security, regulatory compliance, EdTech, and buyer’s journey-based engagement.

The IRS requires reporting crypto assets this season. Do your clients even know?

How many of your clients with crypto assets are aware the IRS requires them to include crypto transactions on their 2019 taxes? If your clients are like most, the answer is probably “not enough.” Especially at this moment, when issues such as Paycheck Protection Program (PPP) loans are dominating client conversations at firms, reporting of crypto assets may not even make the top 10 list of concerns about their taxes and finances. Yet clients with crypto assets can’t afford to let other issues push crypto reporting off the agenda.

Additional Income and Adjustments to Income

Today’s challenges have created an unlikely opportunity to help your clients navigate this issue. With the tax season being extended this year, there is still an ample window of time in which you can help clients become aware of the need for reporting crypto assets and help them comply with the IRS. But you’ll need to move quickly before that window closes. Here are some of the most important steps you should take, starting today.

Reach out to clients now

Do you know which clients have engaged in crypto trading over the past few years? Because there hasn’t been explicit instruction from the IRS to report these transactions until now, this may never have come up in client conversations. You may be surprised to find out just how many own crypto assets. For 2019, there are an estimated 20 to 40 million crypto filers, and three-to-eight million are expected to refile for 2018 alone. Some of those are probably your clients.

It’s your responsibility to put crypto reporting issues on their radar, if you haven’t already done so. Clients often provide the same tax data year over year, given no major changes. If they didn’t provide crypto reporting information last year, why would they think to do it this year? To help you get the word out, we’ve highlighted some practical ways to get your clients up to speed:

  • Update Organizers: Don’t just ask if the client has traded crypto – explain the importance of properly reporting these transactions and why there is a change in reporting requirements for 2019 compared to previous years. You should also explain the implications for clients if they don’t report properly.
  • E-mail blast to your client list: This can be an educational and informational e-mail blast updating clients on the reporting requirements and the importance of properly notifying the firm if they are trading crypto currencies.
  • Client Newsletter: Many firms provide their clients monthly or quarterly newsletters that not only provide firm updates but also update clients on new tax requirements. These crypto requirements should be considered front-page news.
  • Virtual Client Conversations: Due to today’s uncertainty, what used to be face-to-face meetings have now shifted to virtual meetings. In these meetings, don’t forget to add a “crypto” line item to your agenda for tax return review discussions. It’s not too late for one final mention or reminder about crypto reporting.

The tax season extension has provided firms additional time to prepare for the shift in crypto tax reporting. But the window is closing for clients to register this as an issue worthy of their attention, gather whatever information they need for filing, and coordinate with your team in order to ensure accurate reporting this season.

Evaluate crypto-focused tax technology packages

Crypto tax reporting isn’t just difficult for clients – it can be difficult for firms, too, at least those that aren’t taking advantage of technologies developed specifically for crypto reporting tasks. The IRS isn’t offering much by way of guidance on crypto, either. Plus, there are no standards in the crypto ecosystem. The reporting of crypto trading can be particularly complex due to the thousands of unique types of crypto assets, causing a range of inconsistent data formats. Unlike traditional currencies and investments, crypto assets are held and transferred between hundreds of independent exchanges that may each call the same asset by a different ticker symbol. This makes manual calculations, establishing cost basis, and assigning fair market value (FMV) far more difficult than other transactions. It is risky to assume that traditional tax preparation software is capable of correctly handling crypto transactions.

For firms looking to help crypto clients, having the right technology in place can make all the difference. Software packages can streamline the ability to track thousands of different crypto assets, automatically standardize transaction data from hundreds of independent exchanges, and properly assign FMV to transactions that do not have U.S. dollar denominations – a task that is virtually impossible for any single firm. Crypto-focused software can also automate key processes, such as properly calculating the cost basis of digital assets when commission and fees are paid in crypto assets.

Not all crypto tax packages are the same, however –most are built by pure tech companies with little input from CPAs or other tax professionals. For example, one popular crypto tax package fails completely to adjust the cost basis for fees/commission (such as those charged when purchasing a crypto asset), resulting in higher capital gains taxes for filers. Perhaps even more important, this type of oversight can trigger an audit, particularly as the IRS cracks down on the misreporting of crypto assets and transactions.

The tools you use are a measure of your ability to look after your clients’ interests on crypto issues. Make sure you select tools that ensure you are accurately calculating crypto gains and losses. Equally important, look for a tool that is built on a tested, secure SOC 1 Type 2/SOC 2 Type 2 infrastructure.

Shift your mindset

Crypto reporting is here to stay. If anything, it’s only going to grow in importance as cryptocurrency use becomes more widespread. So don’t allow your own team or your clients to fall into the trap of treating this as a one-off issue – even in the midst of this unprecedented environment, which has introduced new challenges and issues to clients and firms alike. Clients still need to embrace the idea that accurate crypto reporting is important now – and for many, that requires a shift in mindset. Enabling that shift will require constant, clear communication on your part, in client conversations, in document reviews, and (of course) in tax preparation itself. The time for that shift is not sometime in the near future. It’s right now.

Does this feel overwhelming? It shouldn’t – especially since the tax season extension has given firms and clients precious time to get on top of crypto issues. Just as important, there are plenty of tools and technologies that can help. For starters, if you or anyone in your firm needs more education on crypto-related issues, here are some helpful resources:

There are plenty of powerful, proven cloud technology solutions available to you as a trusted advisor that can enhance your relationships with clients, extend your capabilities, and make it easier to tackle new issues. We work with the leading providers of cloud-based crypto tax software and can help connect you with the resources you need to help clients navigate this important new dimension of tax reporting.

Sales & Use Tax (SUT) compliance will loom large for businesses post-crisis. Here’s what it means for you and your clients right now.

If your firm is like most today, it’s being inundated with emails and phone calls from anxious small business clients who are trying to successfully navigate today’s uncertain times. Understandably, many of these clients are focused on the challenges immediately before them, not on longer-term planning. And because many of these clients are likely experiencing a significant downturn in sales currently, SUT feels pretty irrelevant to them at the moment.

Again, this is understandable. Right now, your small business clients are focused on their health and well-being first, and the sustainability of their business, second i.e., meeting payroll, tracking expenditures, adequate cash flow, etc. But eventually we will work our way through this and SUT issues will come back around, and very likely, in a big way.

State and local jurisdictions are facing unprecedented budget pressures brought on by the government shutdown and the overall response to the pandemic. Today, businesses, and accounting and tax departments, are doing their best with diminished resources and capacity. However, the most experienced among us know states will soon move to aggressively fill budget gaps, and the sales and use tax lever will be among the first they look to pull. As a result, clients will need help with planning and compliance, and firms must start thinking about this now. By planning well today, you can ensure your clients are prepared the moment SUT issues come back into focus. In this blog, we take a closer look at the state of things.

The SUT environment today:

  • Jurisdictions are losing revenue. You already know that this is happening, and you know the reasons why. When business is at a standstill, so are state and municipal revenues. Sales taxes play a large role in this dynamic.
  • eCommerce is booming – AND introducing new SUT issues. As retail locations have been shuttered, eCommerce clients have experienced an equally dramatic shift in demand and business models. They could be experiencing an increase in business in individual jurisdictions that are putting them over thresholds, or finding themselves in new jurisdictions where they’re not registered. These new opportunities introduce new tax complexity.
  • Jurisdictions are playing nice on SUT – for now. Jurisdictions understand the tremendous pressures on businesses today, so are taking a light touch when it comes to SUT compliance during these times. But sales taxes are also the fastest way for them to find money, and the budget picture for these jurisdictions is growing more dire each day. Eventually, the pendulum will swing in the other direction, with SUT enforcement becoming more aggressive.

What it means for your firm:

  • More SUT work is coming. As clients refocus on their core business, running as lean as possible with no extra bandwidth, many will look to outsource SUT compliance tasks. Be ready for the moment when clients ask, “can you just take this over for me?"
  • CFOs are looking for cash. Client CFOs are already looking under every rock they can find to free up cash, and there’s no reason to think they’ll stop anytime soon. SUT can be an important tool for helping these CFOs. For example, SUT advisory services such as Reverse Sales Tax Audits can help find previously overlooked sources of liquidity.
  • This is the time to help clients get their SUT houses in order. Your clients should expect to face more aggressive SUT enforcement as jurisdictions move to shore up their own budgets in the future. Now is the time to advise your clients for the coming wave of SUT activity.

Given all the current pressures vying for your clients’ attention, it should come as no surprise that you may need to convince them that SUT is an issue warranting their time and attention. It’s a sensitive discussion, and you know them best, so you decide when it’s an appropriate time to raise it.

But remember not to wait too long. The issue can compound itself and SUT is an important opportunity to demonstrate your firm’s strategic value to clients. In the end, they will appreciate your helping them anticipate and plan for this below-the-radar issue, before it comes roaring back in a larger than life way.

Lastly, if we’ve learned nothing else during these challenging times, it’s that there are leading cloud technology solutions available to you as a trusted advisor. These tools can greatly enhance the value you can deliver to clients. SUT is no different!

Looking for additional SUT guidance? View the recording of our LinkedIn interview - Two Years Post-Wayfair: A Look Back & A Look Ahead Sales & Use Tax. We discuss the implications of the Supreme Court decision as well as the current and unique circumstances facing businesses and accounting firms today.

A Who’s Who of the Group That Brings You Digital CPA

DCPA Advisory Board 2020

The Digital CPA Conference is always the capstone to our year here at It’s perhaps the purest form of what we do to help firms thrive – great content, unmatched networking opportunities and a forward-looking vision of what’s possible for the profession. And because it comes in December, it represents a summation of our activities for the year, too.

The work to create Digital CPA starts a lot earlier, though. In fact, we held our first advisory board meeting for the 2020 conference this month and we’re proud of the brains, expertise and experience represented on the panel.

One of our new advisory board members is Gabrielle Luoma, founder and CEO of MOD Ventures, who attended Digital CPA for the first time last year.

“Digital CPA was definitely all about the growth mindset,” Luoma said, “and how to really help your people move in that direction of innovation in your firm.“

Digital CPA’s roots lie in the evolution of client accounting services and that will continue to be a strong focus. The 2020 event will also examine the audit of the future, sales and use tax advisory opportunities, and cybersecurity and data security, among other topics.

You can see Luoma talk about Digital CPA and the advisory board’s role in this LinkedIn Live session, and also hear MACPA president and CEO, Tom Hood (another advisory board member and a self-professed “Digital CPA groupie”) discuss the same topics.

A big thanks to the rest of our Digital CPA advisory board, whose varied perspectives and experience with firms of all sizes help make the conference unique:

  • Gerard Abbattista, CPA, partner, EisnerAmper LLP
  • Inga Arendt, CPA, partner, small business services, Wipfli
  • Michelle Golden, president, Fore LLC
  • Javier Goldin, managing partner, Goldin Group LLC, and this year’s chair of the Digital CPA advisory board
  • Christopher Heinfeld, CPA, partner, HeinfeldMeech
  • Natalie Hoffman, CPA, CITP, partner, Honkamp Krueger & Co, P.C.
  • Kelly Johnson, CPA, national practice leader, business services and outsourcing, BDO USA LLP
  • Mark Koziel, CPA, CGMA, executive vice president, firm services, Association of International Certified Professional Accountants
  • Karen Larsen, CPA, partner, Baker Tilly Virchow Krause LLP
  • Elinor Litwack, CPA, senior manager, outsourced accounting and advisory services, GRF CPAs & Advisors
  • Dixie McCurley, cofounder and president, Trusted CFO Solutions
  • Rebecca Pomering, partner and chief practice officer, Moss Adams LLP
  • Steve Ursillo, Jr., CPA, CITP, partner, assurance & advisory services, Cherry Bekaert LLP
  • Jennifer Lee Wilson, partner and cofounder, ConvergenceCoaching, LLC

This year’s Digital CPA will be held Dec. 6-9 in Orlando, Fla. Visit for more updates in the months ahead.

The Internet of Things Should Be on Your Radar

The Internet of Things (IoT) is about to become a major phenomenon, and there are substantial implications for accountants, finance professionals and business in general.

What is IoT? It’s any device that can connect to the Internet, be recognized by other devices and communicate data, according to David Bray, a Singularity University faculty member and one of our guest speakers at the 11th Annual AICPA/ Executive Roundtable held this January in our New York City headquarters. Think Fitbits, Apple Watches, smart TVs and the like.

A graphic artist's take on David Bray's Executive Roundtable presentation

There were 7.6 billion people in the world in 2019, and 26 billion Internet-enabled devices, Bray said. Soon enough, we will have 10 IoT devices for every person in the world. One problem: the devices aren’t evenly distributed – wealthier countries and individuals have more.

For accounting and finance, IoT can mean a more robust audit and more predictable supply chains. And there are other unexpected wrinkles: Bray said hedge funds are already using satellite imagery of retailers’ parking lots to gauge demand from shoppers before the company’s quarterly report so they can go short or long on stocks. Similarly, stores already exist that let customers “pay” simply by having their biometric data scanned when they pick up an item and carry it out of the shop.

Of course, there are concerns about privacy and security. What does it mean when virtually everything can be captured on camera, and our movements and consumer choices can be tracked and analyzed through our devices – either by corporations, hackers or, in some cases, governments?

“We’ve got to have the conversation about how this data is going to be used,” Bray said. “Not just to have better data for accounting, but better choices for the society we’re going to create.”

If you’d like to hear more, check out our LinkedIn Live conversation with Bray from the Roundtable.

A Closer Look at Our Startup Accelerator Companies

The of International Certified Professional Accountants Startup Accelerator is an annual program that finds, invests in, and guides early-stage tech companies with solutions that support accounting and finance professionals. This blog series provides a deeper look at the five companies in the 2021 cohort.