Fee disputes and negligence where letters of engagement have failed
What happens when inadequate letters of engagement affect accountants' and their professional indemnity insurers' ability to defend claims?
In our previous article we addressed the importance of having a properly scoped letter of engagement; in this article we will look at a couple of examples where inadequate letters of engagement have affected accountants' and their professional indemnity insurers' ability to defend claims.
Exclude advice provided by a third party
One of the most costly areas of loss to professional indemnity insurers, in recent years, has related to accountants introducing their clients to firms specialising in tax mitigation schemes. Often it was just that, an introduction, but in many cases the accountancy firm themselves benefited from a commission or introducer fee, meaning they were intrinsically linked to the transaction.
All too regularly these schemes failed, often with the firm providing the advice failing at the same time. The client then sought to recover their losses and sued their accountant for negligence in recommending them to the tax scheme provider. Where the accountants' letter of engagement remained silent on the tenet of that introduction and failed to specifically exclude any responsibility for the advice given by the third party provider, the claim against the accountant was successful.
In some cases the losses were substantial, with clients having taken out loans to invest in the scheme that still required to be repaid. At very least many clients incurred interest and penalties on unpaid tax and had to find the money to pay a large, unexpected bill. In any circumstances where you are introducing a client to a third party provider, we recommend that you exclude liability for advice given by them and ensure, where possible, the client enters into a separate agreement with the third party.
Ensure the letter of engagement evolves with your services
The services you originally contract to undertake can often evolve with a client over time. Do you always make sure your letter of engagement evolves at the same time? In one situation, the accountant’s client passed the VAT threshold and became liable to pay VAT on sales; however, the client failed to take the accountant’s verbal advice and register with HMRC.
Unfortunately this verbal advice was not recorded by the accountant nor was their letter of engagement updated. The accountant continued to carry out his contracted services and eventually HMRC caught up with the client and demanded payment of the outstanding VAT. The client’s defence was that the accountant should have advised him appropriately. At a subsequent hearing, the decision went against the accountant as there was no paperwork on file to support the accountant’s position that their advice to register for VAT was properly given.
As the professional, the accountant was duty bound to evidence the advice was given and should at very least have recorded the call but even better followed up this advice with his client in writing. To add insult to injury, although the accountant had a limitation of liability clause within their letter of engagement, the clause failed as it only applied to those services listed in the appointment document and did not apply to the VAT advice. The accountant’s professional indemnity insurer became liable for the full amount of the claim which exceeded £150,000.
Avoid unnecessary fee disputes
Fee disputes are all too common and while most are unlikely to involve your professional indemnity insurers, these can take time to resolve and may result not only in a financial loss of income to your practice, but worse, a lost client. Such disputes all too regularly lead to counterclaims where the client makes allegations of poor service or negligence to avoid paying a fee. You can reduce the chance of a fee dispute or even eliminate it completely with a carefully worded clause in your letter of engagement.
Tips:
clearly state whether you are charging a fixed fee or hourly rate. If a hourly rate, what time units do you charge in: six minutes, 10 minutes? Can you estimate the total fees? If not, say so
what level of experience will the individual(s) carrying out the work have and what is their charge out rate? Is the client happy with this?
do you warn that fees could increase if a matter becomes more complex than originally anticipated or is taking longer to conclude through no fault of your own?
outline details of possible outlays that will be incurred and charged.
revisit at regular intervals to avoid surprises!
It’s so much easier to speak to a client about fees if it is clearly set out in writing for both parties, eliminating as far as possible any room for confusion or disagreement.
Time taken drafting and agreeing any letter of engagement is time well spent and will help significantly if you find yourself on the wrong end of a dispute.
Catherine Davis – ACCA relationship manager, Lockton companies
If you have any questions please contact your Lockton Account Manager for further advice or email ACCAaccountants@uk.lockton.com
Lockton is ACCA’s recommended broker for professional indemnity insurance
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Rest assured that ACCA will always have free engagement letters for members to use. You can download our free factsheets from our website:
Each factsheet contains a main client covering letter with a privacy notice, a terms and conditions document and the most commonly used schedules of services.
