Signed engagement letters will soon be required for reviews and comps.
Evergreen letters are a really, really bad idea.
Disclaimer: I attended an A&A update a few months ago (yes, yes, I know – this series of posts has been on the back burner for a long while). Since I’m going to paraphrase comments from speakers who were presenting their personal opinion, I’m not going to mention their names. Just know that these aren’t my original ideas, but you can blame me if you don’t like the way I phrase things.
A presenter from the AICPA made a few points on engagement letters.
My understanding of his comments, which means maybe I missed something, is that the ARSC thought that the current rules actually required a signed engagement letter.
Unfortunately, what they thought and what is in SSARS 19 are not the same, in my considered opinion. The current rules require the understanding with the client be documented. It does not require that 1) it be in a letter sent to the client, 2) signed by them, and 3) returned to you.
Exposure drafts that are out for comment will change that. Letters signed by the accountant and client will soon be a presumptively mandatory requirement.
You gotta’ do it.
The presenter explained again that evergreen letters are a really bad idea. I heartily agree.
Just a few reason he mentioned:
- It is really important to be on the same page in terms of what is involved in the engagement and the limits of our services – hard to do that on the phone and even harder to show the client understands.
- The risk of misunderstanding is high.
- The level of client understanding fades with each year that passes.
- The statute of limitations starts when you have an annual engagement letter. If you rely on an old letter or an old understanding, the statue doesn’t start and won’t run out. I don’t understand the implications from that concept, but it ought to give serious pause to anyone who still thinks an evergreen letter is a good idea.
The presenter said the draft has strong recommendations on point. The Comp and Review Alert also has strong words.