Accountants have many responsibilities. One of these is managing their clients. This requires strong communication and time management skills to ensure work is delivered on time. Providing a great client experience increases the chance of the client staying with the accountant.
Most accountant-client relationships begin with an engagement letter. This is more than just legal jargon. It builds trust and transparency, setting the stage for the accountant’s excellent work.
This article discusses how to create an engagement letter, including a free template you can download. It also shares best practices for building a productive working relationship with clients. Finally, it explains how to use cloud tools to improve internal processes.
What is an engagement letter and, what is it for?
An engagement letter is a formal written document. It is also called a retainer agreement or service contract. It should outline the professional relationship between an accountant or accounting firm and a client.
It is a legally binding contract with the scope of services, fees, obligations of both parties, and other important related terms. Many accounting organisations recommend or even require the use of engagement letters. This is part of maintaining professional standards and ethical practice.
Signed engagement letters also strengthen your position. This is in cases of legal disputes that may arise during the agreement. The engagement letter also benefits the client with a clear understanding of the services they’ve paid for.
When is an engagement letter necessary in accounting?
Engagement letters are typically provided to clients before you provide any professional services. This ensures that you and the client have a clear understanding of the terms, facilitating a positive experience for both sides.
You may need to provide an engagement letter in the following scenarios:
- New client engagement
- Change in scope of services
- Complex or unusual engagements
Parts of an accounting engagement letter
Include the following elements in your engagement letter to establish a clear and professional relationship with your client.
Client & accountant identification
This is a formal introduction to the parties involved in the agreement. It identifies both the client and accountant or firm to avoid confusion throughout the document. When writing this section, include the following:
- Client’s legal name, including names and titles
- Client’s registered business address or principal place of business
- Accountant or firm’s legal name – If you are part of a legal accounting firm, include the firm’s name and your role within the firm.
- Accountant or firm’s registered business address or principal place of business
In some cases, you may indicate the client’s contact person.
Purpose of engagement
This section outlines the specific accounting services you’ll provide to the client. This way, both parties understand what is included and excluded in the agreement. This helps to avoid misunderstandings and potential disputes down the line.
The purpose of engagement states the specific tasks the accountant will perform. This could include:
- Bookkeeping services (e.g., accounts payable/accounts receivable, bank reconciliations)
- Tax preparation (e.g., federal and state income tax returns)
- Financial statement audits or reviews
- Consulting services (e.g., tax planning, financial performance analysis)
The level of detail required in this section depends on the complexity of the engagement. For simple tasks, a brief description may be sufficient. For more complex engagements, a bulleted list with specific deliverables may be necessary.
If the services might need to be changed during the work, include a clause. The clause should explain how the changes will be shared and approved by both sides.
Team
The Team section in an engagement letter is used when you’re working with a team within an accounting firm. It identifies the key people involved in providing services to the client. If you’re a sole proprietor accountant, you wouldn’t need a ‘team’ section because you’ll be the only provider. For smaller firms with a few staff, listing the main accountant may be enough.
To complete this section, state the names of your team members, their job titles, and their responsibilities.
Objectives and scope of work
The objectives and scope section defines the intended outcomes and tasks of the accounting services. This section should begin by outlining the client’s overall objectives for the engagement. What are they hoping to achieve by using the accountant’s services?
Once the client’s goals are established, detail the specific outcomes you will work towards. For example:
- Preparation of error-free tax returns that meet all filing deadlines
- Implementation of a streamlined bookkeeping system
- Development of a tax minimisation strategy
- Creation of a financial forecast for future planning
Within the scope of work, detail the exact services the accountant will provide to achieve the objectives. Be as comprehensive as possible, including:
- Bookkeeping tasks (e.g. accounts payable/receivable management, bank reconciliations, etc.)
- Specific tax forms to be prepared
- The level of detail within financial statements (e.g., compiled vs. audited)
- The scope of any consulting services (e.g., limited tax planning advice vs. comprehensive financial analysis)
Deliverables should be clearly defined by the actual output that the client can expect.
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Accountant’s responsibilities
This section outlines the professional obligations you agree to uphold during the engagement. It establishes the level of service the client can expect and protects everyone by defining the accountant’s commitments.
Here are some key elements that are typically included in this section:
- Maintaining confidentiality of client information
- Adherence to professional standards
- Identify financial risks within the organisation
- Meeting deliverable deadlines
- Communication protocols
- Level of availability
- Reasonable efforts, or in accordance with generally accepted accounting practices
- Limitations of services
Client’s responsibilities
The section about the client’s responsibilities explains what the client is expected to do. This means that the client must give you information and work with you. To get the best results, you need the client’s full and correct financial information and documents.
Here are other key elements typically included in this section:
- Timely communication
- Recordkeeping guidelines
- Decision-making responsibilities
- Level of availability
- Compliance with tax laws
- Payment obligations
- Material changes regarding business transactions, ownership, or upcoming litigation
Fees and billing
This section of an engagement letter outlines the financial arrangements between both parties. It communicates the costs associated with the accounting services and the payment terms. Transparency in fees and billing fosters trust and avoids any surprises during the engagement.
Include the fee structure of your services. This may be a fixed fee for the entire engagement or an hourly rate for time spent on the client’s work. Other accountants use a retainer fee that the client prepays for a set number of hours. For complex engagements, consider providing a breakdown of fees associated with each service. Specify any out-of-pocket expenses you anticipate making and how this will be billed.
Set a clear due date for invoices and your accepted payment methods. For late payment, outline penalties for invoices paid beyond the deadline.
Disputes and conflicts
The disputes and conflicts section of an engagement letter sets how disagreements are resolved during the engagement. It should promote a peaceful and efficient method for addressing issues and minimise the risk of legal action.
This section will typically include these elements depending on the engagement type:
- Negotiation: Resolve through direct communication and negotiation between the accountant and the client.
- Mediation (optional): Propose mediation as an option if negotiation fails. Mediation involves a neutral third party to help both parties reach a mutually agreeable solution.
- Arbitration (optional): This clause establishes binding arbitration as a means of dispute resolution. This involves presenting the case to a neutral arbitrator who can make legally binding decisions. The arbitration process can be faster and less expensive than litigation in court.
- Choice of Law: The engagement letter should specify the governing law that applies to the agreement in case of a dispute. This is often the law of the Australian state or territory where the accountant operates.
- Timeline for Dispute Resolution: Include a timeframe for dispute resolution to avoid delays.
- Exclusion of Certain Disputes: State certain types of disputes that are outside the resolution process. These issues may require legal action.
With this section in the engagement letter, you show initiative in managing disagreements. Consult a lawyer to make sure the dispute resolution clause is legally sound and enforceable in your jurisdiction.
Termination of engagement
This section lists situations under which anyone can end the agreement before the stated duration. It protects everyone by preventing termination that can negatively impact both parties.
Common grounds for termination by the accountant can include:
- Lack of client cooperation: The accountant may terminate the engagement if the client fails to provide necessary information or cooperate with requests on time.
- Non-payment: The accountant has the right to terminate the services if the client fails to settle their invoices according to the agreed-upon payment terms.
- Material changes: If unforeseen circumstances arise that significantly alter the scope of the engagement or the accountant’s risk profile, a termination clause may allow for ending the agreement.
- Professional conduct: The accountant can terminate the engagement if the client engages in activities that violate ethical standards or the law.
Common grounds for termination by the client:
- Performance issues: The client can terminate the engagement if they are dissatisfied with the accountant’s performance and believe the services are not being delivered following the agreed-upon terms.
- Change in needs: If the client’s accounting needs change significantly during the engagement, they may have the right to terminate the agreement.
- Accountant misconduct: The client can terminate the engagement if there’s evidence of professional misconduct by the accountant.
If the contract is ended, both parties should follow certain steps. First, there should be a notice period. This gives time for an orderly handover of the work. Accountancy fees that are still owed should be dealt with, and the client’s documents and financial records should be returned.
Acceptance of terms & signatures
Almost to the finish line! This section is the final step in formalising the agreement between you and your client. By signing, both parties acknowledge that they have read, understood, and agree to the terms of the engagement letter.
Briefly recap the specific accounting services your accountant will provide. Reference to the previous parts of the engagement letter for more complex points. Include the schedule for payment and designate spaces for both you and your client to sign and date the letter.
The acceptance of terms and signatures makes the engagement letter a legally binding document. Depending on how the letter is sent, it can be signed physically or electronically using an eSignature app.
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Tips & best practices when sending an engagement letter
Prioritise clarity and conciseness
Your engagement letter shouldn’t be a legal maze. Use plain language that your client, regardless of their financial background, can understand. Avoid using legal language and technical jargon unless necessary. Imagine you’re explaining the terms to a friend – clear and direct communication is key.
If you must use technical terms, define them within the letter itself. Don’t rely on your client to have prior accounting knowledge.
Send your engagement letter early
Don’t wait until the first meeting to share the engagement letter. Send it beforehand to show professionalism and give your client time to review it carefully. This prevents any confusion or delays at the start of the work.
Sending the letter early allows your client to come up with questions about the terms in the letter. Address these questions during your first meeting so everyone is on the same page before proceeding.
Walk your client through the highlights
During your first meeting with a client, spend time talking about the key points of the engagement letter. Go over and emphasise the services you will provide, the fee structure, and the client’s responsibilities.
Encourage the client to ask questions and clarify any parts they find confusing. Open communication from the start builds trust and reduces the chance of misunderstandings later on.
Provide the client with signed copies
Once your client has read and accepted the terms, get signed copies of the engagement letter. This signed document is a legal record of the agreed-upon services and fees. This also makes sure the client can easily access the terms of the engagement during your working relationship.
Use eSignature tools to maximise convenience
Consider using electronic signature services like Bookipi eSign. This allows for a faster and more convenient signing process for both you and your client. Electronically signed copies are easy to store and retrieve, so both parties avoid losing or damaging paper copies.
Update the engagement letter annually
Your client’s needs and your service offerings may evolve over time. Review and update your engagement letter annually for fee, service, or scope changes. An updated letter ensures all parties work under the most current terms and reduces the potential for confusion or disputes.
Review the letter with legal counsel
While not mandatory, consider consulting with a lawyer to review your engagement letter template. This can help ensure your document is legally sound and protects your interests in case of unforeseen circumstances. A lawyer can advise on specific clauses or disclaimers that may be relevant to your particular accounting practice and location.
Provide amazing accounting services with the right tools and resources
A well-written engagement letter is just one part of a successful accounting business. But it sets the foundation for a strong and professional relationship with your clients.
While the engagement letter is very important, consider how technology can make internal processes and client services more efficient. Look into accounting software that works with your current systems. If you offer payroll services, consider using a dedicated cloud payroll software. eSignature services can speed up the process of signing engagement letters and other client documents.
With a good system for sending engagement letters, you can build a thriving accounting business that provides excellent service.
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