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A letter to the Members and Stakeholders of Engage

March 31, 2017

A letter to the Members and Stakeholders of Engage:

This week is the third anniversary of Pine Street Cloudware.[1] This letter is a report of the company’s progress with some remarks about strategies and expectations going forward.

BackgroundThe government is necessarily dependent on the efficient collection of tax revenue, a voluntary system based on the internal revenue code. This system is growing increasingly complex. As of 2014, nearly 60% of taxpayers were relying on income tax preparers to correctly prepare and file their taxes.

Tax preparers are therefore an essential part of our tax system. These professionals apply expert tax knowledge to the taxpayer-client’s most sensitive financial information. For these reasons and others, tax professionals are heavily regulated by the federal and state governments.

A violation of the tax preparer regulations — whether willfully or accidentally — can risk the accountant’s reputation, career and professional livelihood. Consequently, there is little incentive to embrace something new because the risks far outweigh the potential gains. For example, even in 2017, professional journals regularly publish cautionary tales about the security risks, data breaches, and other problems with using third-party network servers.

New practice technologies are therefore approached cautiously until they are known to be reliable. These products must first prove compliance with the regulations, and then win the confidence of the accountant-user. The result is a predictably slow integration of new technologies.

Like many industries, however, the pace of technological change in accounting is accelerating. For tax preparers, this leap forward began in 2011 when the IRS mandated e-filing. ‘Filing’ the tax return is the central transaction in tax preparation service. The move to e-filing was a fundamental change that made other tools, like shared online folders and electronic signature services, immediately more accessible.

The gap between new technology and its assimilation in practice has therefore been growing. At the same time, the industry is undergoing an unprecedented demographic shift. The overwhelming majority of licensed CPAs are retiring and there are fewer graduates pursuing careers in accounting.[2]

This has two important consequences. First, the declining number of accounting service providers means that demand for competent professionals will increase exponentially. Secondly, the average accountant profile is trending towards younger professionals who are more willing to adopt technological change. This increases the tension between ‘the way it’s always been done’ and ‘a new way of doing things’. The risk-of-adoption analysis is changing.

There is a quiet but quickly growing sector of the tech economy that is automating the delivery of professional services like law and medicine. Similarly, the new accountant’s ability to leverage technology for effective and efficient tax practice is an unquestionable competitive advantage.

Accountants, like lawyers and doctors, need intelligent and secure online practice tools to resolutely move their practices into the digital age.

Practice Aids for CPAs.The change from paper to e-filing is more than exchanging a paper-printed return for a digital version. E-filing requires a reevaluation of the tax preparer’s entire workflow to make sure that all phases are oriented towards, and congruent with, this electronic transaction with the government’s tax agencies. PSC’s goal is to engineer technology-based practice aids that shape these electronic processes more efficiently.

Like all professional services, tax preparation is fundamentally a contract of reciprocal promises: the preparer promises to prepare the client’s taxes and the client promises to compensate the preparer with money. Tax preparers must clearly communicate the terms of this agreement with the client. Unlike lawyers, however, there is no requirement for a written agreement.

The clearest way to communicate the terms with the client is, of course, by putting it in writing. Prior to e-filing, a written contract could be an afterthought because the contract was in many ways self-evident: the client pushed a paper check across the table and the preparer gave the client a signed copy of the client’s tax return on paper.

E-filing removed this quid pro quo exchange of paper, however, reducing the professional services agreement to an abstraction unless it is recorded in writing. This is one of the ripple effects stemming from the adoption of e-filing, one that impacts the very beginning of the accountant-client legal relationship. This was an obvious place for us to start.

Engage-CPA. The company’s first project defines the legal structure for the performance of professional services. Engage creates the agreement for tax preparation, delivers the contract to the client via an email link, and allows the client to sign the contract by checking a box. An inventory of every engagement, outstanding proposal, and engagement in process is tracked on the Dashboard according to the engagement’s status.

When the job is finished, the app creates and sends a closing letter that legally terminates the engagement and removes the engagement from the Dashboard.

Any engagement is therefore bookended by written documents at the beginning and at the end of the accountant’s performance. These letters minimize the related compliance risk, credit risk, and the risk of liability.

Compliance Risk. Unlike lawyers, there is no requirement for a written contract with the client. However, the federal regulations require that the tax advisor must

“communicate clearly with the client regarding the terms of the engagement. For example, the advisor should determine the client’s expected purpose for and the use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered.”[3]

Engage uses a simple, plain English letter that specifically describes the limits of the accountant’s services. This letter is the basis of the contract.

Additionally, the accountant’s policies, procedures and practices addendum is incorporated into the letter by reference and forms part of the contract. The addendum explains the rights and obligations of both the accountant and the client. All necessary disclosures, like the confidentiality required of third party service providers, are included here, as well.

Credit Risk. Traditionally, the agreement for tax services requires the tax preparer to prepare, sign, and e-file the taxpayer’s income tax returns. The accountant’s agreed performance then triggers the taxpayer-client’s reciprocal obligation to pay for services.

This is an unnecessary credit risk. The accountant must surrender their work product (by filing it with the government on the client’s behalf) in order to complete the contract and trigger the client’s reciprocal obligation to pay. Even with a legally enforceable written contract, the tax preparer risks a late payment or no payment, with further risk of exposure to a frivolous malpractice claim in retaliation for the accountant’s efforts to collect.

The Engage app therefore requires the client to submit and pay an initial fee deposit as a prerequisite to an enforceable contract. Although the accountant can set this amount at zero, a minimum fee deposit of at least one hour’s fees is strongly recommended. Alternatively, the accountant can collect their fee in advance by requiring the client to pay the estimated hourly fee or the accountant’s fixed fee for services.

Practice Liability. Engage clearly communicates the agreement to the client in writing, and the advance fee deposit arguably strengthens the accountant-client relationship by using the first payment as an affirmation of the contract. These two characteristics can significantly decrease the risk of practice liability.

First, clearly describing the agreed services and, more importantly, expressly listing excluded services, will clarify expectations and reduce misunderstanding. Moreover, it protects the accountant from assuming additional responsibilities (and perhaps additional liability) without compensation, avoiding the consequences of ‘engagement creep’.

Secondly, it is an unfortunate fact that non-paying clients will resort to allegations of malpractice to avoid paying a legitimate invoice. If used correctly, the advance fee deposit significantly reduces the risk of non-payment and the further risk of frivolous accusations.

Unfair allegations of malpractice can also be eliminated by choosing an option to require alternative dispute resolution instead of litigation. The client is asked to specifically acknowledge this in the addendum to the engagement letter:

“California law entitles you to a jury trial if there is a dispute that cannot be resolved informally. An Agreement to use Arbitration waives this right. To make sure You understand that you are waiving a legal right, You are asked to specifically agree to this part of the Agreement by entering your initials at the end of this section.”

Many disputes can, and arguably should be, resolved without resorting to a lawsuit. The terms of the contract, including this provision, have been analyzed under various hypothetical fact patterns commonly found in malpractice suits. As expected, the terms of the contract, the ease of signing the contract, and the payment feature integrated into the app operate to eliminate the accountant’s avoidable practice risks.

What we’ve accomplished.The company began market research, feasibility studies, focus groups and other deep market analysis in 2014. We produced a basic alpha product for demonstration to potential target users. By the end of 2015, we had proof of concept and had completed preliminary market and product testing.

A beta version of the app was published in early 2016. Enrollment in the first public release was limited to invited users or users who had requested trial accounts through the website. Once stability was affirmed, we contracted for large-scale commercial tests and asked the testers to try to break the app. The app remained stable, however, and after making some changes based on this feedback, we conducted two more large scale usability tests, including surveys about visual appeal.

The current version is our minimum viable product. It was published with limited features for use in California only. Although integrated payment is a key feature, setting up a new payment account was a significant obstacle for trial users.[4] We therefore modified the app to allow users to register without requiring a payment processing account.

This version was quietly launched in October 2016 and advertised as free-for-use until March 31, 2017. Beginning April 1, 2017, users are offered a no-commitment 30-day trial, after which the user is charged a monthly subscription fee.

What’s next. The company is launching a widespread online, social media and direct marketing campaign within California to increase the number of registered users. From this roster, we are soliciting a small group of interested users for more extensive feedback. This will help refine assumptions about market positioning and user expectations.

This campaign will help the company determine next steps and priorities. Already known is a demand for letters covering non-tax engagements and non-attest financial statement services under AICPA SSARS 23.[5] Beginning May 1, 2017, these new regulations will require accountants to use writtenengagement letters when performing the services covered by these sections.

Engagement letters for bookkeeping and accounting services are also a high priority. These types of engagements are performed throughout the year and are therefore expected to smooth out demand beyond the cyclical tax deadlines.

Assuming there is even minimal traction within California over the next six months, the company will modify the app for other jurisdictions. Federal regulations are uniform while contracts are governed by state law. The operative terms must therefore be vetted against legal nuances between different states. The app has already been cleared for use in Illinois and Texas, with New York currently under review.[6]

Investment. The company’s seed investment raised capital for the exploratory and prototype phases. About 90% of the seed capital has been spent, mostly in line with our expectations. Actual expenses parallel the company’s startup budget with only two exceptions: legal expenses for intellectual property were less than anticipated; and the company spent more for graphic design. The remaining funds are earmarked for online media, promotional marketing, and purchased advertising.

The company is not currently soliciting additional investment. Depending on market feedback, however, the company may consider raising funds to accelerate the development of additional features.

Meanwhile, the company is actively seeking non-cash investment via strategic partnerships with established companies. The ideal partner(s) will allow us to access subscriber or user databases within our target market and will provide reliable, scalable software development, marketing and advertising assets.

In closing, I am tremendously grateful for the contributions and support of the company’s members and investors. The company — all of us, collectively — have solved a very specific, very important deficiency in the way accountants and tax preparers sell professional services to their clients. The result is a simple, sophisticated solution that is unquestionably valuable to small accounting practices nationwide.


I am therefore optimistic about the next six months. The company set four benchmarks when it was founded in 2014. The first three benchmarks have been achieved. The fourth and final benchmark is to earn revenue from California sales exceeding the cost of development.

In closing, I am tremendously grateful for the contributions and support of the company’s members and investors. The company — all of us, collectively — have solved a very specific, very important deficiency in the way accountants and tax preparers sell professional services to their clients. The result is a simple, sophisticated solution that is unquestionably valuable to small accounting practices nationwide.

I am therefore optimistic about the next six months. The company set four benchmarks when it was founded in 2014. The first three benchmarks have been achieved. The fourth and final benchmark is to earn revenue from California sales exceeding the cost of development.

In many ways, this fourth benchmark is the end of ‘startup’ and the threshold to something new. Given our accomplishments so far, I have every reason to believe that the company is well positioned for this next chapter.


[1] Pine Street Software LLC dba Pine Street Cloudware (PSC)

[2] In California, for example, the CalCPA estimates that 80% of California’s licensed CPAs will retire from public practice between 2018 and 2028.

[3] Cir. 230 § 10.32(a)(1).

[4] Users with an existing payment account prior to registering were less deterred.

[5] The AICPA’s Statement on Standards for Accounting and Review Services modifies AR-C §§ 60, 70, 80 and 90, the practice requirements for non-attest engagements, and preparation of financial statements. The change to AR-70 specifically “Clarifies the nature of an engagement letter and makes clear that an oral understanding of the terms of the engagement is insufficient.” These requirements take effect May 1, 2017.

[6] These four states account for 38% of the licensed CPAs in the United States as of 2014.