HOW ENGAGEMENT LETTERS AFFECT CLIENT LOSS AND REIMBURSEMENT RISKS IN TAX PRACTICE

In a supplemental analysis, Krawczyk and Sawyers (1995) (K&S) found evidence that variations in engagement letter language affect the likelihood that taxpayers hold CPAs “responsible” for additional tax assessments, a broad measure of risk. We extend the K&S analysis by examining the effect of engagement letters on a larger set of precisely-defined tax practice risks. Our factor analysis identifies two risk constructs relating to client loss and reimbursement. MANCOVA shows that engagement letters reduce the likelihood of incurring both categories of risks. Also, some evidence suggests that higher-income participants are greater tax practice risks, and subjects with external loci of control represent higher client loss and reimbursement risks. Finally, we find that engagement letters reduce the percentage of professional fees subjects request as reimbursements following an unfavorable IRS audit and that prior legal suits, gender, age, and income level also may affect the fee reimbursement requested.