Sarah Ference, CPA, is warning firms that a clear engagement letter is one of the strongest defenses against professional liability claims and client misunderstandings. In a recent Q&A, the author of the Journal of Accountancy’s Professional Liability Spotlight also previewed her next column, which will address what happens when a client files for bankruptcy and how that changes an accountant’s duties.
Her message lands as firms juggle complex work, fee pressure, and rising expectations. Ference’s guidance highlights why written terms matter from the start and how a client bankruptcy can reshape that agreement overnight.
Background: Why Written Terms Reduce Risk
Engagement letters set the scope, timing, fees, and responsibilities for both the firm and the client. They help prevent “scope creep,” fee disputes, and claims that services were implied but never agreed to. For small and mid-sized firms, a short, plain-language letter can prevent outsized legal exposure.
Accountants’ liability carriers have long reported that many claims trace back to unclear scope or unmet expectations. CPAs who document their services and client responsibilities tend to resolve issues faster and at lower cost. Ference’s advice aligns with that practical risk management approach.
What Strong Engagement Letters Include
Firms do not need legal jargon to be effective. They need clarity, consistency, and documentation that matches the work performed.
- Scope of services and what is excluded.
- Client responsibilities, including timely, accurate information.
- Deadlines and deliverables, including reliance on management representations.
- Fee structure, billing terms, and what triggers change orders.
- Third-party use and report distribution limits.
- Record retention and return of client documents.
- Cybersecurity, data privacy, and communication methods.
- Dispute resolution terms allowed by state law.
- Termination rights for both parties.
Annual updates allow firms to adjust for new standards, new tools, and any expanded services. Addenda work well for one-off projects, such as credit support letters or cash-flow modeling.
Bankruptcy Changes Everything
Ference’s upcoming column zeroes in on a high-risk event: a client bankruptcy. When a client enters bankruptcy, the engagement letter may no longer control the work. The bankruptcy court and trustee can change who has authority and who is the firm’s client for that matter.
Accountants may face automatic stay rules, new approval requirements for fees, and court oversight of services. Documents that once flowed freely may become part of the bankruptcy estate. Confidentiality, privilege, and ownership of workpapers can be tested by new stakeholders.
Firms also need to guard against preference actions, where fees paid shortly before the filing could be clawed back. If the firm is a creditor, conflicts must be reviewed, and separate counsel may be needed. Ference’s preview signals a practical playbook for these pressures.
Steps Firms Can Take Now
Preparation reduces surprises. Firms should identify which clients face financial stress and refresh engagement terms before year-end work begins. If warning signs appear, document them and consider narrowing the scope. If a filing seems likely, pause any nonessential services and seek legal guidance.
Train staff to escalate payment issues, unanswered requests, or signs of insolvency. Make sure the file shows what information was requested, what was received, and who approved key decisions. Clear records support the firm whether the client recovers or files.
Balancing Client Service and Protection
Ference’s guidance emphasizes that clear terms help both sides. Clients know what to expect and when. Firms keep work focused and priced to the actual service. In distress situations, that clarity can prevent costly confusion with trustees, lenders, and courts.
Industry organizations also encourage practical language that clients can understand. Shorter letters that state the scope and limits plainly are better than long templates that few read. The goal is alignment, not intimidation.
What To Watch Next
The January column promises practical advice on handling client bankruptcy, court approval processes, and fee considerations. It is likely to cover consent, conflicts, and communications with new decision-makers. Firms that plan ahead can navigate the legal rules while protecting their independence and records.
The takeaway is simple: write it down. A current engagement letter, tailored to the work and updated for risk, is one of the best tools a CPA firm has. With economic uncertainty and rising credit stress, that tool may soon be tested.
