Accounting engagement letters are the backbone of the client-accountant relationship. They outline the roles, responsibilities, and expectations of both parties. These letters are legal document that protects both clients and accountants in case of any misunderstandings or disputes. To ensure that an accounting engagement letter is effective, there are certain terms that must be included.

Most people are familiar with contracts to some extent, but they may not always be aware of the peculiarities related to accounting engagements. It is important to understand these details and the specifications for accounting engagement terms if you are planning to create an engagement letter for your accounting services.

This article will cover a list of required and recommended accounting engagement terms that must be included in the engagement letter.

What are engagement terms?

Engagement terms are a crucial component of any engagement letter. It refers to the set of conditions that govern a working relationship between two parties, whether it is an employer-employee or client-service provider setup. They define the scope and expectations of the services that will be provided by an accountant or other professional advisor to a client. 

Although engagement terms can vary depending on the nature of the services that will be provided, they typically include key information about deadlines, fees, deliverables, confidentiality requirements, and other important details.

When entering into an engagement, it is important for both parties to negotiate and agree on these terms to avoid any misunderstandings or disputes down the line. Clear communication is key in establishing a successful engagement, so it’s vital for all parties involved to have a clear understanding of what’s expected of them.

Engagement letter clauses can be customized according to the specific needs of each party involved in the agreement. It can also be modified over time as circumstances change or new issues arise.

What terms of engagement should be included in your accounting engagement letter?

The American Institute of Certified Public Accountants (AICPA) requires that all accounting engagements are governed by their terms of engagement. These rules apply to all public accountants who are members of the AICPA and must be strictly followed in order to maintain professional standards. This means that accountants must have clear and concise written agreements with their clients outlining the scope of services, fees, timelines, and any other relevant details.

The purpose of this requirement is to ensure that both parties have a mutual understanding of what is expected during the accounting engagement. It also serves as a safeguard for both the accountant and the client in case any disputes arise. By having set terms of engagement, accountants can avoid miscommunication and confusion with clients, which could lead to potential legal issues in the future.

Below is a list of must-have terms that should be included in your accounting engagement letter.

Objective and scope of engagement

One of the most critical is the Objective and Scope of Engagement. This term not only outlines what services you’ll be providing to your client but also sets clear expectations for what they can expect from working with you.

By including this language in your engagement letter, you’re able to establish a clear understanding of the project’s goals and objectives before work begins. This helps ensure that both parties are on the same page and working towards a common goal, reducing misunderstandings or miscommunications along the way. 

Additionally, outlining the scope of work in advance helps prevent scope creep – a situation where additional tasks or responsibilities get added onto the project without proper communication or compensation.

The responsibilities of the accountant

One term that is crucial to include in your accounting engagement letters is the responsibilities of the service accountant.

As the service accountant, it’s important to clearly define what tasks and duties are expected from you. This includes everything from preparing financial statements to ensuring compliance with tax laws. Additionally, outlining your responsibilities can help manage client expectations and avoid misunderstandings down the line.

When drafting this section of your engagement letter, it’s important to be thorough and specific. Make sure you cover all relevant tasks and deadlines as well as any limits on liability or scope of work. By including a clear outline of your responsibilities in your accounting engagement letter, you can establish trust with clients and set yourself up for successful engagements.

Disclaimer about AICPA standards

It’s important to ensure that your engagement letter includes specific language regarding attestation standards established by the American Institute of Certified Public Accountants (AICPA).

Attestation standards are guidelines that dictate how professionals should conduct their work when providing assurance on financial statements, internal controls, and other areas. The AICPA is one of several organizations that establish these standards in the United States. By including a statement in your engagement letter indicating that the work will be conducted in accordance with AICPA attestation standards, you can help ensure that the services provided meet certain quality benchmarks.

Responsibilities of the responsible party

One important aspect that must always be included in your accounting engagement letter is the responsibilities of the responsible party. The responsible party refers to the company or individual who engages an accountant to carry out financial services on their behalf.

The responsibilities of the responsible party usually include providing accurate and complete information about their finances, ensuring compliance with all relevant laws and regulations, maintaining adequate records for audit purposes, reviewing financial statements for accuracy before they are released to stakeholders and promptly informing accountants of any changes in their financial situation or business operations. 

These obligations are critical because they help ensure that both parties have a clear understanding of what is expected from them throughout the engagement.

Statement about the inherent limitations of engagement

Another important element that must be included in an accounting engagement letter is a statement about the inherent limitations of an examination engagement.

The statement about inherent limitations clarifies to clients that while accountants are responsible for performing reviews, they cannot guarantee complete accuracy or error-free reports. Accountants are not responsible for detecting every material misstatement or fraud, nor do they provide assurance on future events or business viability. 

The inclusion of this statement protects both parties from any misunderstandings or unrealistic expectations regarding what can and cannot be achieved through examination engagements.

Penalties and fees for late payments

This clause in your agreement serves as a protective measure against clients who may delay payment or not pay at all. By outlining the consequences of missed payments, you can avoid misunderstandings and maintain healthy relationships with your clients.

Including penalties and fees for late payments also helps to incentivize clients to make timely payments. When they are aware of the potential consequences, clients are more likely to prioritize their financial obligations to your business. This ensures that you receive the funds necessary to maintain operations and continue providing quality services.

Retaining and accessing records policy

This policy will help ensure you are in compliance with tax laws and other regulatory requirements.

The retaining and accessing records policy should detail how long financial records will be retained, who has access to them, and under what circumstances they can be shared or accessed. It would also outline any penalties for noncompliance with record-keeping requirements. 

Additionally, it should specify the format in which records need to be maintained, such as paper or electronic form.

Limitation of liability

By including this term in your accounting letter, you are setting clear expectations and limits on the scope of your services.

The limitation of liability clause essentially states that while you will perform your services with utmost care and professionalism, you cannot be held responsible for any damages or losses incurred by the client as a result of your work. This means that if a client were to sue you for any reason, they would not be able to claim unlimited damages. Instead, their ability to recover damages would be limited based on the terms outlined in your agreement.

Confidentiality Commitment

As an accountant, you are responsible for handling sensitive financial information belonging to your clients. To protect the privacy of these individuals and their businesses, it is crucial that you include a confidentiality agreement in all accounting letters.

The confidentiality commitment outlines the terms of privacy between you and your client. It establishes the expectation that any information shared between both parties will remain confidential and not be disclosed to third parties without prior consent. This helps to build trust between you and your client while also protecting their valuable data from being compromised.

By including a confidentiality agreement in your accounting engagement letter, you show that you take data privacy seriously. This can be particularly important for clients who handle confidential or proprietary information such as trade secrets or financial records.

Dispute resolution

This term outlines how any disputes or disagreements regarding the financial information presented in the letter will be resolved. 

By including a dispute resolution term in your accounting letter, you can protect yourself and your business from potential legal issues down the line. It provides guidelines for resolving conflicts that may arise regarding financial data, ensuring that both parties involved understand their rights and obligations.

It’s important to note that not all accounting letters need a dispute resolution term, but if you’re dealing with sensitive financial information or clients who may have differing opinions on certain aspects of your work, it’s always better to err on the side of caution and include one anyway.

Conclusion

In conclusion, it is important to understand the legal implications of engagement letters and the importance of including key terms. The engaged parties in a business relationship should have a clear understanding of their responsibilities, rights, and obligations. A carefully drafted engagement letter can help protect both the client and service provider by clearly outlining expectations, compensation, and more. Taking the time to review each agreement thoroughly is essential to ensure that both parties are fully informed about their legal commitments.