With the world adjusting to the impact of COVID-19, many accountants have already found themselves, or will soon find themselves, hearing from current or past clients who want advice about the impact of COVID-19. Issues related to the CARES Act, the Paycheck Protection Program, or general accounting and tax advice arising out of economic pressures on individuals and small businesses are the new normal for accounting firms. Stay-at-home orders and social-distancing mandates have necessitated changes in the ways in which accountants normally conduct business. But some things shouldn’t change, including the need to obtain a retainer agreement—especially for any work related to COVID-19.
A retainer agreement is routinely obtained from a new client but might be overlooked when an existing or former client asks an accountant to perform new services. Even with an existing client, a new retainer agreement is important to ensure that both the accountant and the client are clear about the scope of any additional work that the accountant is asked to perform. And with new and emerging areas—such as the CARES Act, Paycheck Protection Program loans, and forgiveness issues—the need for a retainer agreement is even more important.
Retainer agreements provide accountants with two critical defenses in the event that they’re faced with a malpractice case: a scope-of-work defense and a statute-of-limitations defense.
Well-drafted retainer agreements will set forth the scope of the work that the accountant is to perform and thus eliminate any “he said, she said” disagreement down the road. By ensuring that the scope of the work is addressed at the outset in the retainer agreement, accountants can reduce the risk of future claims that they failed to address issues that weren’t part of the engagement at the time of hire.
Retainer agreements can also prove critical when a malpractice case involves an arguably stale claim. Generally speaking, a malpractice case must be filed within two years from the date on which the accountant “discontinues serving the [client] in a professional . . . capacity as to the matters out of which the claim for malpractice arose.” MCL 600.5838(1). Well-drafted retainer agreements will identify the circumstances that trigger the end of the accountant’s professional relationship with the client, which will ensure that there’s no question about when the two-year “clock” on a malpractice suit begins to run. Consider Old CF, Inc v Rehmann Group, LLC, where the accountant’s retainer agreement for audit services specified not only that the engagement ended upon delivery of the audit report, but also that any follow-up services would require a new and separate engagement. Since the client filed the malpractice suit more than two years after delivery of the audit report, the accountant prevailed on a statute-of-limitations defense even though he continued to do other work for the client after delivery of the audit report.
A provision in the retainer agreement that shortens the statute of limitations can be enforceable. A good example is County of Alcona v Robson Accounting, Inc, where the clients engaged the accountants to perform audits from 1998 to 2005 and then later sued the accountants because the audits failed to uncover embezzlement by the county treasurer. The parties’ retainer agreement contained the following provision:
Because there are inherent difficulties in recalling or preserving information as the period after an engagement increases, you agree that, notwithstanding the statute of limitations of the State of Michigan, any claim based on the audit engagement must be filed within (12) months after performance of our service, unless you have previously provided us with a written notice of a specific defect in our services that forms the basis of the claim.
Relying on this provision in the retainer agreement, the Court of Appeals reversed the trial court’s holding that the clients timely filed their malpractice suit. In doing so, the Court rejected the clients’ argument that the provision shortening the statute of limitations ran afoul of public policy. The Court noted that the general rule is to “uphold provisions in private contracts limiting the time to bring suit where the limitation is reasonable, even though the period specified is less than the applicable statute of limitations . . . .” The Court also rejected the clients’ argument that the provision shortening the statute of limitations applied only to their breach-of-contract claim and not to their malpractice claim. The Court reasoned that both claims arose out of the same transaction: the audit engagement.
What this Means for Accountants
In this new era of COVID-19, it’s important to not let the basics, like a retainer agreement, fall by the wayside. Accountants should make sure that their retainer agreements address the scope of the work, the termination of the accountant-client relationship, and perhaps a shortened limitations period (if the clients are agreeable). Retainer agreements not only provide clarity to clients at the outset of the engagement, but they also provide safeguards to accountants in the event of a malpractice suit.