Practical Tips for Engagement Letters

Ways to prevent costly misunderstandings

One of the most important documents valuation, forensics, and litigation support experts produce is the engagement letter. Just as you painstakingly explain what your firm plans to do, it’s also imperative to explain what the client needs to do.

One of the most important documents that we valuation, forensics, and litigation support professionals prepare is the engagement letter. It serves many purposes. It is especially helpful in preventing disappointments and costly disputes. The engagement letter should be used consistently and is most important when we are engaged by either a client or attorney we have never met.

Engagement letters commonly explain what we will do—that is, the scope of the engagement—when we expect to complete the work and how much will be paid for professional services. Consider including some of the following items:

1. You may want the right to increase your hourly rate a year after the engagement letter is issued. Some engagements unexpectedly last for years, especially if litigation is involved. Remember to address the hourly rates of your staff, as well as yourself.
2. Just as you painstakingly explain what your firm plans to do, also explain what the client needs to do. For example, they need to provide you with a considerable amount of complete and accurate information, and they need to be responsive to your requests. Your clients will give you deadlines, and it may make sense for you to give the clients some deadlines, as well. Consider stating that the clients are to provide information and documents within 14 days after you request those items. Also, ask for a certain amount of advance notice for any deposition or conference you need to attend in person.
3. Clearly state what your firm will not do. Among other things, you may want to state that your firm does not expect to provide legal advice, tax advice, or recommendations with respect to insurance or investments.
4. Clearly state that the payment of your fees is not contingent on the conclusions you draw or the results of any disputes or tax issues. Include a provision to the effect that your invoices will be issued periodically as work progresses, and you reserve the right to stop work if payment for any invoice becomes past due.
5. Some engagements can pop back up later and consume significant amounts of time at that point. Consider stating that if you are later called upon or subpoenaed by anyone to provide copies of workpapers or give testimony concerning any part of the engagement, the client agrees to pay for your time and expenses, including travel. The opposing party may attempt to subpoena you as a fact witness rather than as an expert and getting paid a per diem rate as a factual witness or litigating that issue is time-consuming and costly if there is no provision to pay the professional rate.
6. The scope of the engagement can be a difficult issue to change after a fixed fee has been quoted for a project. It is worthwhile to state that the clients will pay hourly rates if they request additional services that are beyond the scope of the project described in the letter.
7. It has become popular to include a provision saying that any disputes between the service provider and the client will be subject to mediation or arbitration. This may help avoid a lengthy and costly lawsuit. You may also want to say that any claims the client makes against your firm will be limited to the amount of fees that have been paid to your firm for that engagement.
8. State that your reports will be confidential and may be used for the intended purpose only. At NACVA’s Annual Conference, during the Federal and State Case Law Update, one panelist shared how a letter explaining blockage discounts was used by an attorney for a separate matter and that the valuation professional was subpoenaed to explain this blockage discount in an unrelated matter.

There is much debate among professionals concerning the appropriate length for engagement letters. Most of us have learned a few lessons the hard way, and these lessons tend to shape the provisions we include in our engagement letters. Some analysts prefer short and concise letters while others prefer longer contracts, which address many fine points. Although there may be no right-for-everyone length, letters should be influenced by the nature of the projects, how well you know the client(s), state laws, and your own vast experience.

Two of the most important steps with respect to the engagement letter involve your own reviews. First, review the letter carefully before you sign it. Second, review the letter again during the engagement, especially just before issuing your report. Many disappointments have been caused by professionals forgetting important points that were included in engagement letters that had been signed weeks or months earlier.

Since the engagement letter is a legal contract, it may make sense to have your attorney review a sanitized version of it. Get some advice on how to address state laws, since you and the clients may be located in different states. Your liability insurance carrier may also be willing to review your letter and provide valuable insights.

Stephen D. Kirkland, CPA, CMC, CFC, CFF, is a compensation consultant with Atlantic Executive Consulting Group, LLC. He serves as an expert witness in U.S. Tax Court and other courts with issues involving potentially unreasonable compensation. He can be reached at (803) 477-5973 or through www.reasonablecomp.biz.