Use of e-signatures for engagement documentation

This article originally appeared in the January 2022 issue of the Journal of Accountancy.

Is a client's electronic signature on engagement letters, management representation letters, and other documents acceptable? This is a question many practitioners pose to the AICPA Professional Liability Insurance Program. Generally speaking, e-signatures are binding and thus comparable to a "wet" signature on a hard copy document for purposes of proving their validity, enforceability, and admissibility in the event of litigation. However, there are caveats that need to be considered and understood. This column explores those considerations in order to help refute an assertion that an e-signature is not authentic.
 

THE LAW

On June 30, 2000, the Electronic Signatures in Global and National Commerce Act (E-Sign Act), P.L. 106-229, was signed into law, providing a general rule for the validity of electronic records and signatures pertaining to transactions in or affecting interstate or foreign commerce. For a signature to be valid under the E-Sign Act, information relating to a transaction affecting interstate or foreign commerce must be provided or made available to the consumer in writing. The use of an electronic record to provide or make available such information is satisfied if it meets several basic requirements related to consent, withdrawal, and notification.
 
The E-Sign Act is mirrored, in some form of legislation, by all states and permits most documents to be signed electronically. However, enforcement of e-signed documents can be more involved. Applicable case law challenging e-signatures demonstrates that they are most likely to be upheld, which has precedential value with respect to the successful use of e-signatures. Below we outline several common questions regarding the validity of e-signatures, summarize cases that help address these questions, and provide takeaways for CPA firms to consider.
 

Did the e-signature actually come from the individual whose signature is affixed?

The case: In Julie Ann Zulkiewski v. American General Life Insurance Co., No. 299025 2012 WL 2126068 (Mich. Ct. App. 2012), someone changed the beneficiary of a life insurance policy using an e-signature. Subsequent to the insured's death, both the new beneficiary and the prior beneficiary questioned the validity of the e-signature. The court held that, absent some proof to the contrary, the individual who changed the beneficiary had the correct login information to create the change. As a result, the court upheld the record change made via the e-signature.
 
Takeaway: The greater the amount of personal information required to create and use an e-signature, the more likely that the signature's validity will be upheld. According to the Zulkiewski court, some of this information may include, but is not limited to:

• Account numbers;

• Tax identification numbers; and

• Mother's maiden name.

Will multiple documents with a single e-signature be upheld?

The cases: In Mitchell, et al. v. Craftworks Restaurants & Breweries, Inc., No. 18-879 (RC) (D.D.C. 2018), a restaurant worker claimed not to have e-signed an employment agreement. In its opinion, the court reasoned that because documents were signed individually by the employee, there was little chance of confusion about what was being signed.
 
Similarly, but with a different decision, in Ruiz v. Moss Bros. Auto Group, Inc., 232 Cal. App. 4th 836, 181 Cal. Rptr. 3d 781 (4th Dist. 2014), the alleged e-signature of an employee on an employment agreement was not upheld. The court sided with the employee who did not specifically remember signing employment documents. There was no detailed record of when or how the documents had been signed. Therefore, the court concluded that the employer lacked a security procedure to support its assertion that the employee had signed the documents.
 
Takeaway: If multiple documents require a signature, ensure that an e-signature is affixed to each document to help reduce confusion regarding which documents were signed.
 

Are documents signed on mobile devices valid?

The case: In Berkson, et al. v. GOGO LLC, et al., 97 F. Supp. 3d 359 (E.D.N.Y. 2015), a plaintiff asserted that the e-signature should not be upheld because the mobile device screen was small and the terms were lengthy. The court used the term "browsewrap" to describe a lengthy set of contractual terms presented within a browser, including additional terms available via hyperlink. The court also explored studies on reading behavior as well as prior court decisions before upholding the terms agreed to by the signer. Typically, the e-signature will be enforceable under this decision if:

1. The presentation gave a reasonably prudent user, on inquiry, a notice of the terms;

2. The user was encouraged to examine the terms via a hyperlink; and

3. The hyperlink was placed in a prominent location where the user was likely to see it.

 
Takeaway: Signatories should be encouraged to review all applicable terms prior to signing an agreement, including when presented through a mobile device. For example, when a CPA firm incorporates standard terms and conditions into an engagement letter by hyperlink, the user should be encouraged to read and agree to the hyperlinked standard terms and conditions, as well as the engagement letter. In addition, testing and documenting a user's experience on different devices prior to a firm's deployment of a mobile device signature process may assist in the enforcement of an e-signature affixed to a document via a mobile device.
 

Is there an audit trail to support the delivery and receipt of documents?

The case: In IO Moonwalkers, Inc. v. Banc of America, 814 S.E.2d 583 (N.C. Ct. App. 2018), a customer entered into an agreement with a bank for credit card processing services. The agreement was e-signed using a third-party signature verification company. The customer e-signed the documents but later asserted it never signed them and, thus, was not bound to them. The court held that the e-signature was binding, based upon the records maintained by the third-party signature verification company. Documentation evidencing the email delivery record and return of the e-signed documents, the audit trail, was critical, proving that the documents were delivered to and returned from the customer's email account.
 
Takeaway: Documentation retained by third-party signature verification companies supports the enforcement of e-signatures. If a third-party solution is not used, consider retaining documentation of office time records for meetings and emails, detailing transmission and receipt of the e-signed documents. Creating this audit trail is one of the advantages of using an e-signature process.
 

Was there a prior understanding that supersedes the e-signed document?

The case: In Harpham v. Big Moose Inspection, 2015 WL 5945842 (Mich. App. Ct. 2015), a client e-signed a home inspection agreement while in the process of making an appointment. Specific terms were included in the document presented to the client prior to the scheduled inspection. The client asserted that an oral agreement for services existed before a written agreement was e-signed. Testimony supporting the e-signature stated that the client was emailed a copy of the agreement and had opened the document. Moreover, the client had clicked on an agreement button affirming the terms of the contract. Although the client asserted that the document had not been received or signed, the weight of the evidence supported a court ruling upholding the e-signature and the document to which it was affixed.
 
Takeaway: CPA firms generally discuss services to be provided with the client prior to formalizing the engagement with a written document. E-signing an engagement letter close to client and engagement acceptance discussions but before rendering services may reduce the likelihood of a client assertion that there was an oral agreement related to services.
 

FINAL THOUGHTS

The appropriate use of e-signatures can provide an expeditious means of executing documents relative to the delivery of professional services by CPA firms. By considering the takeaways outlined in this column, strategies may be developed to ensure that digital technology represents an efficient process and also helps to mitigate risk exposure.
 

Signing on the digital line

754 million: The number of global e-signature transactions in 2017, an increase from 89 million in 2012.
 
Source: Statistica.com.