Engagement letters are an essential tool used by CPA firms to improve communication with clients, document engagements more effectively, and protect themselves from potential litigation. These letters outline the terms of the engagement and help establish a clear understanding between the client and the firm. They also provide a valuable opportunity for both parties to clarify their expectations. 

It also helps avoid any potential liability issues that might arise if an engagement goes wrong. With these letters in place, CPA firms can demonstrate that they acted ethically and professionally throughout the course of their work.

In the service industry, letters should be as detailed as possible in describing the nature and extent of the services provided, as well as any services that are outside the scope of the agreement. A detailed letter ensures that both parties are on the same page and have a clear understanding of what is expected.

Similarly, engagement letters should also include detailed information regarding the client’s responsibilities and obligations. For example, providing necessary documents and accurate information in a timely manner.

You can use the following guidance on what to do and what not to do while writing engagement letters. In short, do’s and don’ts of engagement letters.

Engagement letters should….

State the purpose of engagement 

The purpose of an engagement letter is to provide clarity on what services will be provided by the professional service provider. It also helps to establish clear expectations for both parties from the outset. The purpose statement should outline why you have been engaged and what specific outcomes or deliverables are expected as a result of your work.

Define the scope and limits of the engagement

One key aspect of defining the scope and limits of an engagement is identifying what the firm will do. This may include specific tasks such as conducting an audit or providing tax advice or more general services like consulting on business strategy. Whatever the case may be, it’s important to clearly articulate what services will be provided so that clients can make informed decisions about whether or not to engage your firm. Equally important is defining what your firm won’t do.

Specify any known unfavorable conditions or problematic circumstances

It is crucial for engagement letters to specify known negative conditions or adverse situations before entering into any contractual agreement. This ensures that both parties are aware of potential risks and liabilities, and helps to avoid any misunderstandings during the course of the project. Neglecting to mention such conditions can lead to disputes, and delays, and ultimately affect the outcome of the engagement.

Note client’s instructions, duties, deadlines, and deliverables

While it may be tempting to focus solely on what you as a service provider will do during this engagement, it’s crucial not to neglect the role your client must play in ensuring its success. Clearly articulating these obligations upfront can help prevent delays, missed deadlines, or other issues arising during your work together.

Describe the regulations for accepting payments and what happens if you pay late

When drafting an engagement letter, it is essential to clearly define how fees will be collected. This includes specifying the amount of the fee when payments are due, and what forms of payment will be accepted. It is also important to include information about any additional charges or fees that may apply if payments are not made on time.

Late payments can have a significant impact on your business’s cash flow and can even strain your relationship with clients. Therefore, it is crucial to outline specific consequences for late payment in your engagement letter.

Include a stop-work clause

A stop-work clause is a provision that allows either party to terminate the engagement if certain conditions are not met. For example, if the client fails to make timely payments or breaches any of the agreed-upon terms, then the service provider may suspend work until the issue is resolved. Similarly, if the service provider encounters unforeseen circumstances or events beyond their control that prevent them from completing the work, they may invoke this clause to halt operations temporarily.

Read to know more about how to professionally terminate the engagement with a client

Indicate the firm’s record-retention policy

The record-retention policy of a firm should be clearly stated in every engagement letter so that clients understand how long their information will be kept on file. This is particularly important in industries where data privacy regulations require firms to retain certain records for specific periods or dispose of them in particular ways.

Mention third-party service providers, if applicable

The inclusion of third-party service provider language in engagement letters ensures clarity, accountability, and compliance with legal requirements. Third-party service providers can range from consultants to vendors or contractors who are hired by a service provider to carry out specific tasks. Clarity about the roles and responsibilities of these providers is essential for both clients and service providers.

Request the client’s signature and confirm that they have read and understood the conditions of the contract.

This acknowledgment confirms that they understand and agree to all terms outlined in the agreement. Without this confirmation, there could be confusion or disagreement later on, which may result in time-consuming negotiations or even legal battles.

It’s equally important for an engagement letter to request the client’s signature. A signature signifies formal acceptance of all terms and conditions outlined within the agreement. The signature could either be a physical or electronic signature but must be authentic in all cases.

Engagement letters should not include….

Marketing information

Some companies make the mistake of including marketing information in their engagement letters. This is not only unnecessary but can also be counterproductive.

Firstly, including marketing information in an engagement letter can dilute its purpose. The letter should focus solely on the project at hand and clearly outline what is expected from both parties. Adding promotional content to it can distract from these crucial details and lead to misunderstandings later on.

Secondly, adding marketing information to an engagement letter may give off a sense of insincerity or self-promotion.

All-encompassing language

One common issue with engagement letters is the use of all-encompassing language. This can include phrases such as “all possible services” or “any and all issues.” While these may seem like harmless additions to ensure comprehensive coverage, they can actually leave clients vulnerable to unexpected charges and misunderstandings about what services are included in the agreed-upon fee.

Additionally, broad language in engagement letters may lead to misalignment between expectations and deliverables.

Legal jargon and uncertainty

Legal jargon is a language that ordinary people find difficult to understand. When an engagement letter is full of legalese, it can make clients feel like they’re signing a contract without understanding what they’re agreeing to. This confusion can lead to misunderstandings down the line if the client isn’t entirely clear about what they’ve signed up for.

Ambiguity in an engagement letter can also be problematic. If there’s room for interpretation in the agreement, it leaves open the possibility of disagreement further down the line.

General engagement letter tips

• Every engagement letter should include the full name of the client, entity type (whether your client is a sole proprietorship, LLC, corporation, or something else), state name, and tax year if you are providing tax preparation services.
• Review and have a detailed conversation with your client regarding the terms and conditions of the project before starting any work. 
• If an engagement changes, update the engagement letter.