Zarna P. Chandwani - Chartered Accountant, LL.B., B.Com
Let us ask ourselves, are Engagement Letters important? Well, do we have one for all our assignments/ clients? Do we really need one for all the assignments? Let us ponder…
While the importance of Engagement Letters (EL) is not unknown, it is observed that many firms still do not prepare EL for all the work they handle for various reasons including lack of time or clarity of the assignment when it is starts. However, it is for the same reasons, it is always better to have an EL for all assignments. Let us look at the key aspects that can make us have “the Best Practice” of having EL for each assignment/ client:
• Ensures clarity and transparency
An EL clearly defines the mutual understanding, primarily regarding: - The scope of services and scope limitations - The way the services will be rendered - Deliverables - Timelines - Fee and the manner of payment along with the milestones - Responsibilities of each party - Engagement team and key people
• Aids in Risk Management
While professional liability claims are increasing in the Western World, it is time that we gear up to manage and mitigate the risk, both liability as well as reputational risk.
The firms do not face risk only from the clients but from the third parties too!
A well drafted EL; signed and acknowledged by both the parties, being a legally binding agreement; can be a wonderful tool to manage and mitigate most of the risk arising out of such tasks as it lends a sense of security to both – the professional firm as well as to the clients!
Moreover, in case of disputes/ misunderstandings (hopefully rare), an EL can be a go-to document and we will be left with more time for billable services and spend less time resolving misunderstandings, in particular, related to the scope of services and fee. Thus, a win-win for both – the professional firm and its clients!
While the importance of EL can hardly be questioned, often the firms do not have a practice of EL for low-risk assignments for varied reasons. Following are some of the most common reasons along with its justifications:
• Never felt the need of a formal EL
While a formal EL may not be a must for certain assignments, the clarity and transparency that an EL brings and in case if the Firm cannot send the formal EL with all the details and signature of both the parties, it is always advisable to have Terms and Conditions sent to client via email and get their confirmation on the same before start of the work.
• Fee does not justify additional time for drafting EL
We can have simple standard templates which can be modified as per assignments/ clients. Once the standard drafts are in place, we spend a little extra time for modifications and review. Worth considering for the time it will save in future which we may spend in resolving misunderstandings arising out of guesswork in the absence of a written EL. Also, clearly mentioned milestones will help in efficient invoicing.
Not to mention, as professional liability insurance market is not matured in India, this small document can be a wonderful tool to manage and mitigate the risk.
• Clients may not be comfortable
Clients may not be comfortable with a long and self-protective document with too many terms and conditions.
Well, in this case, it would be a good practice to keep it short and simple. Where need be, standard terms and conditions may be appended to the EL.
In select assignments, one can consider a quasi–EL in the form a unilateral document/ email to the client. In such cases, as there is no scope for client’s signature, it is important to mention in the letter that the client shall bring forth any condition that he doesn’t agree to!
Accordingly, while drafting the EL, following points shall be taken into consideration: • Keep it short and simple • One size does not fit all – it shall be tailored • Regular review and revision • Signatures
Implementing the practice of EL Howsoever appealing it may sound to have EL for all clients/ assignments, it can be a daunting task to implement the practice at one go!
One of the answers can be - phased implementation…
Once a firm policy, it will not take much time later and will help in getting the client comfort… even better when all the firms have one!