When a firm wants to appoint and start working with an auditor or accounting firm, it has to sign a legal document called ‘engagement letter’. Most firms that offer professional services like legal advice, consulting, accounting or audit/financial service require their client to sign the engagement letter before commencement of the service relationship.

Typically accounting firms that offers bookkeeping services, tax preparation services, accounting services, auditing services use engagement letters. Quite a few law firms, financial institutes and consulting agencies also send engagement letters to their client.

What is an engagement letter?

Definition of an engagement letter

An engagement letter is a formal written agreement that sets the terms and conditions of a professional relationship between a service provider and a client. It is a foundational document that governs the collaboration, providing a clear outline of the services to be rendered, the responsibilities of each party, the fee structure, and other pertinent details.

This legal contract serves as a critical communication tool that ensures both the service provider and the client are on the same page regarding the scope and expectations of the engagement. If you haven’t checked the essential guide to the engagement letter, do take a look.

Purpose and scope of engagement letters

An engagement letter is like the glue that holds a business relationship together. It serves a unique purpose by setting clear expectations and parameters for both parties involved. Think of it as a friendly contract that outlines the scope of work, the responsibilities of each party, payment terms, and any specific conditions or requirements.

This letter not only protects both parties but also helps to build trust and avoid misunderstandings down the line. It’s like drawing up a roadmap for a successful collaboration – everyone knows where they’re headed and what role they play in reaching the destination. So, instead of relying on vague verbal agreements or assumptions, an engagement letter fosters transparency and clarity in business dealings. It may appear formal at first glance, but its purpose is ultimately to establish open communication channels while ensuring that all parties are on the same page for a smooth collaboration ahead.

Who prepares an engagement letter?

The engagement letter is typically prepared by the service provider or the professional who will be providing the services. In most cases, the service provider’s organization, such as an accounting firm, law firm, consulting company, or any other service-oriented business, is responsible for drafting the engagement letter.

The preparation of the engagement letter involves careful consideration of the specific services to be provided, the objectives of the engagement, the client’s needs, the applicable laws and regulations, and any other relevant factors.

It’s important to note that the content and format of the engagement letter may vary depending on the industry, the nature of services provided, and any legal or regulatory requirements specific to that profession or jurisdiction. In some cases, the engagement letter may be based on standardized templates provided by professional associations or regulatory bodies, but it is still customized to suit the individual client’s needs and circumstances.

 

Is an engagement letter the same as a contract?

An engagement letter and a contract are related, but they are not the same thing. While both are legally binding agreements, they serve different purposes and have distinct characteristics:

Aspect	Engagement Letter	Contract
Purpose	Defines the scope of professional services	Creates legally binding rights and obligations
Scope	Specific to a particular service engagement	Can cover a wide range of transactions
Applicability	Primarily used in professional services	Used in various business transactions
Formality	Less formal, may not always require signatures	Generally more formal, often requires signatures
Legally Binding	Yes, but can be enforceable without a signature	Yes, typically requires a signature
Nature of Parties	Service provider and client	Two or more parties
Duration	Pertains to a specific project or engagement	Can cover an ongoing or one-time transaction
Specificity of Terms	Focuses on details of services and engagement	Can cover a wide range of terms and conditions
Dispute Resolution	May outline dispute resolution mechanisms	Often includes detailed dispute resolution terms
Industry Usage	Professional services (e.g., accounting, law)	Various industries and business sectors

Why is engagement letter so important?

Since engagement letter is a legal document signed by both parties, it makes clear to both parties about services, fees, terms of the engagement. It brings clarity to the scope of services offered, fees structure, timeline of the delivery, etc. It offers legal protection to the parties involved if other party deviates from the promise. To summarize

1. It clearly sets the expectations
2. It controls, reduces scope creep
3. By virtue of the documentation process, it instills quality & value system
4. It reduces risks and liabilities

 

Who uses engagement letters?

Industries and professionals that use engagement letters

The use of engagement letters has become increasingly important as businesses and professional service providers have shifted their focus from short-term transactions to fostering long-term engagements with their clients. Engagement letters are used by various professionals and service providers across different industries. The primary purpose of an engagement letter is to formalize and define the terms of a professional relationship between a service provider and their client. Here are some of the key professionals and industries that commonly use engagement letters:

• Certified Public Accountants (CPAs) and Accounting Firms: CPAs and accounting firms use engagement letters to define the scope of accounting services to be provided to their clients. These letters set out the responsibilities of both parties, fee structures, confidentiality provisions, and other essential terms related to accounting services.
• Legal Professionals and Law Firms: Lawyers and law firms utilize engagement letters to establish a formal attorney-client relationship. The letter outlines the legal services to be rendered, the expected fees, billing arrangements, and other pertinent information.
• Consultants: Consultants in various fields, such as management consulting, IT consulting, marketing consulting, and more, rely on engagement letters to specify the scope of consulting services, project timelines, compensation, and any confidentiality or intellectual property considerations.
• Financial Advisors and Wealth Management Firms: Financial advisors and wealth management firms use engagement letters to detail the financial planning services they will provide to their clients, including investment management, retirement planning, estate planning, and more.
• Information Technology (IT) Service Providers: IT companies and service providers use engagement letters to define the scope of IT services, such as software development, system implementation, maintenance, and technical support.
• Architecture and Engineering Firms: Architects and engineering firms use engagement letters to establish the terms and conditions of their services related to building design, construction, project management, and other architectural and engineering tasks.
• Real Estate Professionals: Real estate agents and brokers use engagement letters, often in the form of buyer agency agreements or listing agreements, to formalize their representation of clients in real estate transactions.
• Human Resources and Recruiting Agencies: Human resources consulting firms and recruiting agencies use engagement letters to outline their services for sourcing and hiring employees on behalf of their clients.
• Event Planners: Event planning companies use engagement letters to specify the services they will provide for organizing events, including weddings, conferences, and corporate functions.

When is the engagement letter sent & signed?

Short answer: The engagement letter should be drafted and signed before any client related work can begin.

Normally engagement letter is sent when both parties are ready to start the professional engagement. In most cases, the discussion regarding kind of services offered, charges, timeline are discussed prior to sending the engagement letter. So the prior communication may happen over a phone call, zoom meeting, in-person meeting using a proposal document or just an email.

Quite a few firms send accounting services proposal, taxation proposal or audit service proposal, lawyer services proposal or payroll service proposal to convince clients. These proposals include details about the firm, its practices, expertise, teams, case studies, etc.

Once prospective client gives green signal to the proposal, engagement letter is the document wherein the schedule of services being offered are defined, scope is identified, fees/charges are specified, responsibilities are identified.

Essentially, engagement letter is sent and signed by both parties before actual commencement of the service. Or put it simply, it is sent before the actual service engagement can begin.

How to manage engagement letters effectively?

Managing engagement letters effectively is crucial for maintaining clear communication, ensuring legal compliance, and fostering strong client relationships. Here are some tips on how to manage engagement letters effectively:

• Standardize templates: Use standardized engagement letter templates that include essential elements required for your industry or profession. These templates can serve as a foundation for drafting engagement letters quickly and consistently.
• Personalize each letter: While using templates, customize each engagement letter to address the specific needs and requirements of the individual client. Tailor the scope of services, fees, and other details accordingly.
• Implement automation: Utilise automation tools like engagement letter software to streamline the process of creating, tracking, and managing engagement letters. Automation can improve efficiency and reduce manual errors. According to accounting statistics, more than 56% of accountants admit that technology is increasing their productivity.

Get the letter e-signed: Instead of going through the hassle of printing it out, sending it over via snail mail or scanning it back into your computer take advantage of technology and use an eSignature. Not only does this save time, but it also eliminates any potential errors or delays that may occur with traditional methods.

What does engagement letter include at a high level?

An engagement letter includes

• Parties Involved: The engagement letter begins by identifying the parties entering into the agreement. This includes the name and contact details of the accounting firm (or individual CPA) and the client (individual or business entity).
• Scope of Services: One of the most critical elements of the engagement letter is defining the scope of accounting services that the CPA or accounting firm will provide. This typically includes a detailed list of the specific accounting tasks and services, such as tax preparation, bookkeeping, audit services, financial statement preparation, consulting, and any other agreed-upon services.
• Responsibilities of Both Parties: The engagement letter outlines the responsibilities and obligations of both the CPA or accounting firm and the client. This ensures that each party understands their roles in the engagement, fostering clear communication and effective collaboration.
• Duration: The letter should specify the start date of the engagement and, if applicable, the expected completion date or any milestones.
• Fee Structure and Payment Terms: This section provides a breakdown of the fees to be charged by the CPA or accounting firm for their services. It includes details on the billing method (e.g., hourly rates, fixed fees, or a combination), the payment schedule, and any additional expenses that the client may incur during the engagement.
• Confidentiality and Privacy: Given the sensitive financial information involved in accounting services, engagement letters often include confidentiality clauses to protect client data and ensure that it remains confidential.
• Termination Clause: The engagement letter should outline the circumstances under which either party can terminate the agreement and the procedures to be followed in case of termination.
• Limitations of Services: It is essential to clarify any limitations or exclusions related to the services provided. This helps manage client expectations and prevents misunderstandings regarding the extent of the CPA or accounting firm’s responsibilities.
• Legal Disclosures: Legal disclosures and regulatory compliance are crucial aspects of an engagement letter, especially in industries that are subject to specific laws, regulations, and professional standards. Including appropriate legal disclosures and ensuring regulatory compliance is essential to protect both the service provider and the client, mitigate risks, and uphold professional integrity. Some engagement letters include legal disclosures required by regulatory bodies or specific jurisdictions

Put simply, an engagement letter has information about the schedule of service, a timeline of activities, billing rates, and any other relevant information about your accounting firm’s engagement with its client. The agreement must necessarily be mutually agreed upon by all involved prior to beginning any work.

It’s important for professionals to focus on these specific details and content of engagement letters.

Notable trends in the world of an engagement letter creation

Due to digital transformation, several trends are emerging in the world of engagement letter creation. Please note that these trends might have evolved or changed since then. Here are some notable trends:

• Digitalization and e-signatures: The digital transformation in various industries has also impacted the way engagement letters are created and executed. Many firms are moving towards electronic signatures and digital platforms to streamline the process of sending, receiving, and signing engagement letters, making it more efficient and environmentally friendly.
• Templates: Some industries, such as accounting and law, are adopting standardized engagement letter templates provided by professional associations or regulatory bodies. These templates ensure consistency, compliance with regulations, and adherence to best practices.
• Personalization and tailoring: While standardised templates are becoming popular, there is also an increasing emphasis on personalizing engagement letters to cater to the unique needs of each client and engagement. Tailoring engagement letters helps address specific requirements and expectations, enhancing client satisfaction.
• Remote work and virtual engagements: The COVID-19 pandemic accelerated the adoption of remote work and virtual client engagements. As a result, digital engagement letters and electronic signatures became even more prevalent, enabling professionals to serve clients efficiently without the need for in-person meetings.

 

Example of an engagement letter

[Your CPA Firm’s Letterhead] [Date]

[Client Name] [Client Address]

Dear [Client Name],

We are pleased to confirm our engagement to provide accounting services to [Client Name]. This engagement letter outlines the terms and conditions of our services and clarifies the scope of work that we will be undertaking on your behalf.

Services to be provided: 

Our firm will provide the following accounting services:

• Preparation of Annual Financial Statements: We will prepare the annual financial statements of [Client Name] for the year ending [Year].
• Bookkeeping and Recordkeeping: We will assist with bookkeeping and recordkeeping tasks, ensuring accuracy and compliance with relevant accounting standards.
• Tax Compliance: Our team will ensure that all necessary tax filings, including income tax returns, are completed accurately and submitted within the required deadlines.
• Financial Analysis: We will perform a financial analysis to provide insights into your company’s financial performance and identify opportunities for improvement.
• Consultation and Advisory: As part of our engagement, we will be available to provide accounting consultation and advisory services as needed throughout the engagement period.

Scope of Work

The scope of our engagement is limited to the services listed above. Any additional services beyond the scope outlined in this letter will require a separate agreement.

Responsibilities

Our firm will perform the agreed-upon services with due care and professional skill. To facilitate our work, you agree to provide us with all necessary documents, access to financial records, and relevant information in a timely manner.

Fees

Our fees for the services rendered will be based on the time and resources required for the engagement. A detailed fee schedule is attached to this letter.

Engagement Duration

This engagement will commence on [Start Date] and will continue until the completion of the agreed-upon services unless otherwise terminated by either party with written notice.

Confidentiality

We will maintain strict confidentiality regarding all information and records obtained during the course of the engagement, in accordance with professional and legal obligations.

Termination

Either party may terminate this engagement at any time by providing written notice to the other party. In the event of termination, our firm will bill for services rendered up to the termination date.

Please sign and return a copy of this letter to indicate your acceptance of our engagement. If you have any questions or require further clarification, do not hesitate to contact us.

We appreciate the opportunity to serve you and look forward to a productive and successful working relationship.

Sincerely,

[Your Name] [Your Title] [Your CPA Firm’s Name]

I acknowledge that I have read and understood the terms of this engagement letter and accept the services outlined above.

[Client Name]

What are the types of engagement letters CPA/ accountants use?

There are different kinds of accounting, financial services offered; each such professional service requires engagements letter, such as

• Accounting engagements letter
• Bookkeeping engagement letter
• Tax engagement letter
• Audit engagement and
• CPA engagement letter
• Payroll engagement letter
• Fractional CFO engagement letter
• Consulting engagements
• Legal services engagement
• Consulting service engagement

 

Are there specific examples within tax engagement letter?

Yes, depending on the services offered by accounting firm specialized in tax preparation can have different set of engagement letters for each of its category

e.g.

1. Engagement letter for tax preparation for individual (form 1040)
2. Engagement letter for tax preparation for Partnership firm (form 1065)
3. Engagement letter for tax preparation for Estate & Trust (form 1041)
4. Engagement letter for tax preparation for S-Corporation (form 1120)
5. Engagement letter for tax planning and advisory

 

Do you use engagement letters? What kind of engagement letter do you use? Let me know your thoughts.