Many sectors and services providers are formalizing. It is good for the service providers as well as clients. Why?

1. It helps bring standard/quality of service in a time-bound manner
2. It helps protect interests of both parties in fair and reasonable manner
3. It helps reduce risks and liabilities arising due to the business engagement

Sending and signing engagement letters by accounting professionals, law firms or consulting agencies is a step in that direction. It is a sign of mature process. Don’t make the mistake of thinking it as an unnecessary or tiring thing. Without engagement letter, you are more likely make your firm vulnerable to the risks and liabilities arising from the business engagement.

Engagement letters is an important artifact used by smart professional firms to protect a growing business while mitigating risks.

As we can see, accounting firms are in the forefront of issuing and signing engagement letters.

What is an engagement letter?

Engagement letter is an important legal document that defines relationship between a professional firm and its client.

The engagement letter must be provided to and signed by both parties before the commencement of any professional work as it plays an important role by detailing scope of work, who will be responsible for specific tasks, how much the work will cost, and when it needs to be completed. This will aid the company in any forthcoming disputes stemming from misinformed or incorrect assumptions made by either party to the contract. Read essential guide to the engagement letter.

Types of engagement letters for accounting firm

It varies from industry to industry. If we look at accounting industry, we will see following kinds of engagement letters (which is based on the accounting practice)

• CPA accounting engagement letter
• Bookkeeping engagement letter
• Payroll engagement letter
• Tax preparation engagement letter
• Audit engagement letter
• Virtual CFO engagement letter
• Forensic audit engagement letter

What should the engagement letter include?

There can not be one-fit-for-all engagement letter. It will be different from one firm to another or one client to another however the basic structure/principle will remain the same.

A typical engagement letter should include

1. Schedule of services or scope of work
2. Your firm’s Responsibility
3. Responsibilities of your client
4. Limitation of liability
5. Cost of services/ engagement, payment instructions
6. Confidentiality of data
7. Terms of services
8. Alternate dispute resolution
9. Signatures

You can do business with your clients just relying on the verbal communication. Verbal communication is hard to enforce in reality especially when things go in a different direction. If parties agree on certain things does not assure successful delivery or enforcement if either party decide to take a legal course.

While engagement is not just about avoiding such disputes or matters to the court; it covers larger aspects of doing business. Let’s look at those aspects and why engagement letter is important.

Importance of an engagement letter

Engagement letters serve greater purpose, looking at the larger context than merely a legal contract. Let’s look at why engagement letter is important and the purpose it serves.

• Set clear expectations
• Identify responsibilities
• Prevent scope creep
• Reduce resource & financial risks & protect from liabilities
• Communicate standard quality of service
• Present you firm as a reliable service provider with mature process

Let’s look at these important aspects and how these are helpful.

1. Set Clear Expectations

A good engagement letter clearly states

1. What will be done
2. when it will be done and
3. Who will to do it

Such specific details reduces misunderstandings, avoid confusion and clearly present the details of a professional relationship. This is not only beneficial for the client but also your own firm.

2. Identify responsibilities

While misunderstanding scope of services is one thing but there are instances wherein accountants/bookkeepers are unable to proceed because clients do not submit/share accounting / bookkeeping data on time. The rush to the last minute is painful and creates bad impression for both clients and the partners of the firm.

When you clearly specify responsibility of each party e.g.

• Who is expected to submit data, in what format
• When it is supposed to be submitted, how, where
• Who will keep keep accounting statements ready,
• Who will submit tax returns, etc and when;
• Who will sign the tax related document, etc

everyone knows all of these well ahead of the time, try to comply and won’t complain if s/he miss the deadline.

3. Get your data and process well organized

With the specific details mentioned in the engagement letter, as a service provider, you can well organize

• How to receive client data? Where it will be stored?
• How the communication with clients will work?
• How to process client data? How privacy and confidentiality of the data will be protected

In a sense, each party has a clarity in terms of the timeline, data to be furnished, the format expected, how it is to be submitted, etc.

4. Make the best first impression

You may have set the right process to receive data, but when you convey it through the engagement letter, it makes the positive impression on your client. Client can feel the confidence of working with your firm which is well oganized, has a mature process to deliver services and communicate on time.

You might have hold calls or exchanged messages with your prospects but engagement letter could be your first formal document of the services you offer and how you offer.

The best first impression has many advantages. And with the engagement letter you just set the tone of engagement on a right footing.

Accounting/ bookkeeping engagement letter can present you firm as a reliable service provider with a mature process.

5. Prevent scope creep

Scope creep is a most commonly used term in project management terminology. Scope creep is smaller/ subtle changes expected / made to the project after it is kicked-off. Scope creep impacts project timeline, resources, quality as well as the cost of the project.

Scope creep is a reality for most businesses. Most firms have to face the consequences of scope creep. Smart businesses professionals prevent scope of the engagement falling through cracks.

An engagement letter should set boundaries to the list of activities you will be performing, right before the engagement can begin, you can prevent scope creep and minimize risks associated with it.

6. Reduce resource & financial risks & protect from liabilities

A well crafted engagement letter avoids misunderstanding or assumptions. A good engagement letter provide details of the services, responsibilities, risks arising due to the delay in providing specific information. Such detailing can prevent financial risks, protect you & your client from liabilities, avoid unnecessary burning of resource.

7. Focus on quality of service & communication to present your firm as a reliable service provider with mature process

Engagement letter not only bring clarity it also helps you focus on the quality of the service.

Let me put it this way

1. Everyone knows who will do what and when
2. No confusion or misunderstanding
3. You don’t waste your time dealing with misunderstanding or assumptions, use this time to focus on your work
4. You are better off to work on the actual work, deliver quality outcome

As mentioned above, engagement letter can position you and your firm as a reliable service provider that has a mature process to deliver work and deal with clients. It earns you more credibility and in turn help you grow your business.