By Sarah Beckett Ference
Every sport has boundaries. Whether it’s a football field, basketball court or baseball diamond, players know where the lines are. In accounting, these boundaries can be harder to recognize, especially when client expectations begin to expand beyond the original engagement.
Consider these situations:
- A large accounting firm had to resign from an audit engagement because a permissible nonaudit service was found to have deviated from its intended scope, causing the auditor’s independence to be impaired. The client then brought a claim against the CPA firm to recover fees previously paid to the CPA firm and additional fees incurred to select and hire a new auditor.
- Every year, a small CPA firm made adjusting journal entries, reconciled bank accounts, and performed other bookkeeping activities to “clean up” a client’s financial records to prepare the tax return. When the client discovered that one of its employees had embezzled funds, the client sued the CPA firm, alleging the CPA should have detected the theft because of its involvement with the client’s books and records.
- A wealthy individual tax client of a midsize CPA firm sold his business, which resulted in negative tax consequences. The client alleged that the firm failed to give him proper tax advice regarding the sale and brought a claim against the firm. The CPA firm indicated the engagement was for tax return preparation services only, as documented in the engagement letter. However, it acknowledged discussing the sale as a courtesy to the client.
Whether you call it scope creep or engagement creep, staying within the boundaries of an agreed-upon engagement can be challenging, particularly when trying to provide exceptional client service.
Professional Liability Concerns
A significant number of claims asserted against CPA firms in the AICPA Professional Liability Insurance Program involve disputes over engagement scope. Even when scope is not the primary issue, defending a claim becomes more difficult if the firm’s work extends beyond what was documented in the engagement letter, or if no engagement letter exists.
Scope often expands unintentionally. A client asks the CPA to “quickly look into something,” “bounce something off” them or handle an additional task that arises during the engagement. While these requests may seem like good client service, they can create new responsibilities that extend beyond the original engagement. If a dispute or professional liability claim arises later, those informal conversations and extra tasks may be used to argue that the firm assumed a broader duty than originally agreed upon.
Financial Concerns
Many CPAs have completed an engagement, reviewed the client’s unbilled balance and wondered how the total climbed so high. In many cases, the answer is simple: the scope expanded along the way.
The CPA profession is built on exceptional client service, but that commitment can become costly when additional work falls outside the agreed-upon engagement. If expectations are not managed, supplemental services may go uncompensated, leading to write-offs or billing disputes when clients refuse to pay for work outside the original scope. Scope creep not only increases professional liability risk, it can also reduce the profitability of an engagement.
Risk Management Tips
To help keep engagements in bounds, consider the following tips:
- Be mindful of whom you let play in your league. Perform thorough client acceptance procedures and take on only clients who are a good fit for the firm. Evaluate every prospective client, including those who seek out the firm directly or join through a merger or acquisition.
- Have a game plan. Use an engagement letter for all services. The scope section of an engagement letter is critical when a professional liability claim arises. Clearly define the scope of work and its boundaries. Clarify any limitations of the services. Identify aspects that will not be included, if appropriate. State that any additional services require written client approval and may result in additional fees.
- Ensure everyone understands the rules. Communicate the engagement scope to every member of the client service team, especially those working on-site at the client’s location. Refresh expectations on long-term engagements and confirm the client understands what is and is not included. Clear communication helps reduce unintended scope creep.
- Stick to the game plan. Deliver services in accordance with the scope outlined in the engagement letter, and document work performed in engagement workpapers. Thorough documentation provides evidence of the services delivered and can strengthen the firm’s defense if a scope dispute arises. In addition, billing records, particularly the narrative included on client invoices, should align with the services described in the engagement letter. Consider attaching a copy of the engagement letter to invoices.
- Adjust the game plan, if needed. Engagements evolve. When circumstances change or new service opportunities arise, pause before proceeding. Work with the client to revise the engagement scope. Document any revised scope and related fees. Depending on the changes, this may be as simple as an email or may require an amended or new engagement letter.
- Know when to make cuts. A client who consistently asks for “quick favors,” balks at engagement letters or additional fees, or repeatedly pushes the boundaries of the engagement may be taking advantage of the firm’s commitment to client service. These clients increase professional liability risk and often reduce engagement profitability. In some cases, the best risk management decision is to end the relationship.
About the Author
Sarah Ference, CPA, is a risk control director at CNA, which is the underwriter of the AICPA’s Professional Liability Insurance Program.
