Which of Your Clients Has No Current Engagement Letter?

Ask your firm a simple question and see how long the answer takes: which clients do not have a current, signed engagement letter for the work we are doing for them right now?

In most firms nobody can answer it. Somebody will offer to check. What they will actually do is open a folder, or a spreadsheet somebody maintained until they left, and reconstruct the answer client by client. By the time they finish, they will have found two or three engagements running on a letter from two years ago and at least one running on nothing at all.

That is the real problem, and it is not the one the software market is selling against. Engagement letter automation for CPA firms is usually pitched as a way to send letters faster. Sending was never the expensive part. Knowing, at any moment, which clients are covered and which are not is the expensive part, and it is the part that turns into a claim.

Here is what matters most:

• Treasury Circular 230, section 10.33, sets out the standards of practice that make the terms of an engagement a professional matter, not an administrative one.
• Data from the AICPA Professional Liability Insurance Program, reported through the AICPA's own journal, found that 75% of 2023 claims involved tax services, and more than half of those claims involved no engagement letter at all.
• The tools on the market are good at producing and sending a letter. Almost none of them tell you which clients lack one.
• A signed letter that does not create the work, set the scope, or renew itself has solved the smallest part of the problem.
• Practice management platforms now generate letters and collect signatures. That closes the sending gap and leaves the coverage gap open.

The exposure nobody has quantified for you

Start with what the profession's own insurance data says, because it is unusually direct. Analysis published in the AICPA's journal, drawn from the AICPA Professional Liability Insurance Program, found that tax services accounted for 75% of claims in 2023, and that over half of those claims involved engagements with no letter in place.

Read that carefully. Not a poorly drafted letter. Not a letter with unclear scope. No letter.

In our experience that is rarely the result of negligence. It is the result of a process that depends on somebody remembering, at the moment work begins, that a letter is required, and then remembering again a year later that it has expired. The engagements most likely to be uncovered are the ones that arrived informally: a returning client who called in March, an additional entity added to an existing family, a piece of advisory work that grew out of a compliance engagement and was never scoped separately. Those are also, unhelpfully, the engagements where a disagreement is most likely.

The economics are asymmetric in a way partners understand immediately. The administrative cost of producing a letter is a few minutes. The cost of a claim where you have no letter is a deductible, a year of distraction, and a professional indemnity renewal you will not enjoy. No firm has ever regretted having the letter.

What the market sells, and what it leaves alone

Look at what is available and a pattern appears quickly. Nearly every result is a product for producing and delivering letters: templates, a signature workflow, a portal, a reminder. Some are genuinely good, and a firm with no system at all should buy one of them tomorrow rather than reading further.

Two things they consistently do not do.

The first is that they do not know your client list. A letter tool knows about the letters it created. It does not know about the client who has been with you for eleven years and whose last letter predates the tool. So the tool reports beautifully on the work it did and stays silent about the exposure that matters, which is the gap between your client list and your letter list.

The second is renewal. Annual coverage is where firms quietly fall out of compliance, because renewal has no trigger. A new engagement has an obvious start. A continuing engagement in its fourth year has nothing that announces itself. This is the sub-topic every vendor mentions and none solve properly, and it is the one that produces the uncovered engagements described above.

It is worth being current about the platforms too, because the position has changed. Practice management systems now produce branded engagement letters and collect electronic signatures, sold in credit bundles. If you assumed your practice management system could not do this, that assumption is out of date and you should go and look. What it still does not do is reconcile: it will happily produce a letter and it will not tell you which of your clients lacks one.

What a firm should actually be able to see

The useful shift is to stop thinking of this as a document process and start treating it as a coverage question, the way you already treat professional indemnity or licensing.

At any moment, a partner should be able to see: every client, the work currently in progress for each, whether a signed letter covers that specific work, and when it expires. Not a folder. A position.

Once that exists, most of the administration disappears on its own, because the system knows what is missing and can act on it rather than waiting to be asked. Concretely, the things that stop being somebody's job:

Nothing starts uncovered. When work is created for a client with no current letter, that becomes visible before the work begins rather than during a dispute. Firms usually want this as a warning rather than a hard block, because there are legitimate reasons to start, and a system that stops partners working will simply be worked around.

Renewal has a trigger. Expiry is a date, and dates can be acted on well in advance rather than discovered late. The letter for next season goes out while this season is still calm, which is also when clients actually read them.

Scope is carried forward, not retyped. What the letter says is what gets set up, which is the same principle that prevents the other common loss: work performed that was never in the engagement and therefore never billed. I wrote about that in more detail in the piece on setting up a new client without retyping.

The signed letter lands in the client's record. Not only in the tool that sent it. When somebody asks what was agreed with this client for this year, the answer is one place, and it is the same place your team already works.

None of this requires your firm to change how it drafts letters, and it should not. Your templates, your language and your review process are yours, and a good deal of professional judgement is embedded in them.

The questions worth pressing before you buy anything

Is this a document problem or a coverage problem? If your firm genuinely has no consistent way of producing letters, buy a tool. It is the cheaper, faster answer and it will help immediately. If you already produce letters competently and cannot answer the question at the top of this article, a tool will not fix it, because the missing piece is the reconciliation between your client list and your letter list, and no letter product owns both sides of that.

Where does the signed document live, and who can see it? A signed engagement letter is evidence. It needs to be somewhere your firm controls, retained on your schedule rather than a vendor's, and retrievable years later by somebody who has never used the tool that created it. In our experience this is the question a firm's own risk committee asks first and the one vendor material addresses last. If the honest answer is that the evidence lives in a subscription you might cancel, that is worth knowing before you rely on it.

What is the audit trail? For a document whose purpose is to establish what was agreed, you want to be able to show what was sent, to whom, when, what they signed, and that it was not altered afterwards. This is straightforward to build and easy to assume you already have.

Who owns it after the person who set it up leaves? The most common failure in firm automation is not technical. Somebody capable builds something that works, and then moves on. Decide who is responsible before anything is built.

The honest test

Do not start from the software. Start by answering the question at the top of this article for your own firm, this week, by hand. It will take somebody a few hours.

Whatever they find is your answer. If every client has a current letter covering the work in progress, your process is working and you need automation for convenience rather than for risk, which is a much smaller purchase. If they come back with a list of gaps, you now know both the size of your exposure and the fact that it accumulated quietly while everyone was doing their job properly.

That exercise is also the only honest basis for judging what fixing it is worth. Anybody quoting you a saving without knowing how many engagements you run and how many are currently uncovered is guessing, and the number that matters here was never the administrative hours anyway. It is the claim you do not have.

This work usually sits alongside the rest of a firm's tax document and preparation workflow, because both come down to the same thing: your systems each hold part of the client, and your people are currently the connection between them.

FAQ

Does our practice management system already do this?

It probably produces and sends letters, and if you assumed otherwise your information is out of date, because the major platforms added branded engagement letters and electronic signatures relatively recently. What it almost certainly does not do is compare your full client list against your letters and tell you where the gaps are. Those are different capabilities, and the second one is the one that reduces risk. Go and look before you buy anything, then ask specifically for a list of clients with no current letter and see what comes back.

How far back should we go when fixing historic gaps?

The pragmatic answer most firms settle on is that every active engagement gets a current letter before the next filing season, and dormant clients get one when they next engage. Trying to retrospectively paper the whole history is a project that never finishes and does not reduce your exposure, since the risk attaches to work you are doing now. Prioritise by exposure rather than by age: the largest engagements and anything advisory first.

Will clients object to signing a new letter every year?

Very few do when the letter arrives outside the busy period with a short explanation. Objections concentrate almost entirely among long-standing clients who have never been asked before, and they are usually about the surprise rather than the document. Firms that move renewals into a quiet month report that they became routine within one cycle. It is worth noting that this same conversation is the natural moment to reprice work that has grown since the last letter.

Is a letter still needed for a small piece of additional work?

That is a judgement for your firm and its insurer rather than for us, and the answer depends on the service and your jurisdiction. What we would observe is that the claims data points at exactly this category: informal additional work, agreed verbally, performed in good faith, with nothing written down. The administrative cost of covering it is minutes. Whatever threshold your firm chooses, the useful part is that the threshold is applied consistently rather than depending on who happened to take the call.

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