Engagement Letters: Everything Accountants Needs to Know

Business relationships can be tricky and even small misunderstandings can snowball into bigger problems. This can harm or even end what could have been a strong, profitable partnership. When expectations are not clear from the start, frustration and mistrust can quickly set in.

That is why a clear and detailed engagement letter is so important. Think of it as the foundation of your business relationship. It lays out the services, timelines, fees and expectations from the beginning, helping avoid confusion and set clear boundaries.

By spelling out each party’s responsibilities and commitments, the engagement letter reduces the chance of misunderstandings. It also builds transparency and trust, making sure everyone is on the same page.

This prevents disputes and sets the stage for a positive, lasting relationship. With everything clearly outlined, the process becomes smoother and more predictable for businesses and clients.

What Is An Engagement Letter?

An engagement letter is a formal agreement that sets out the terms of the business relationship. It acts as a guide, clearly stating the roles, responsibilities and expectations for both sides. For clients, it explains what they can expect from the service provider. For businesses, it helps prevent miscommunication and reduces the chance of disputes. This is especially important in accounting, where client relationships often involve sensitive issues and strict guidelines.

The Importance of Letters of Engagement for Accountants

Running a client-focused accounting firm means putting your clients and their needs first. Clear communication and managing expectations are key to building strong client relationships. Clients who understand what to expect are more likely to have a positive experience. Starting with an engagement letter and ending with a closing letter means everyone is on the same page from start to finish.

Having a written record of the client relationship and the scope of your services also protects your firm. It can lower the risk of misunderstandings and safeguard you from liability or malpractice claims.

How Do Engagement Letters Work?

Engagement letters outline the details of the relationship between your firm and your clients. While less formal than a traditional contract, they are still legally binding agreements. A clear and well-written engagement letter benefits you and your clients.

The letters are usually prepared and signed at the start of a client relationship. For long-term clients, they are often reviewed, updated and signed annually. If the scope of work changes for an existing client, a new engagement letter can be created to reflect those updates.

Fee Agreements & Engagement Letters

For accountants, having written agreements for contingency fee arrangements is important. Be sure to review the professional conduct rules in your area to understand the certain requirements for engagement letters.

Engagement letters are also important for addressing confidentiality, privacy and security matters between firms and clients. They can include details about special protocols to follow during the engagement and establish the start date for client confidentiality by formalising the accountant-client relationship in writing.

Creating an Accounting Engagement Letter

When drafting an engagement letter for accountants, start by focusing on its main purpose: clearly outlining the terms of your business relationship with the client. Here are some common elements to include.

Engagement Details

Identify who the client is and who will be providing the services. Include key details such as names, addresses, and contact information. This is especially important if you are working with a client within a larger organisation.

Staffing Details

List the team members, such as accountants or support staff, who will be involved in the work. Be sure to mention their roles and hourly rates, if applicable.

Scope of Services

Clearly define your services, such as consultations, transactional support, or other accounting tasks, and specify the practice area. Also, outline any limitations or tasks that fall outside the agreed scope of work.

Setting clear expectations about what the client can and cannot expect reduces the chances of misunderstandings or disputes. For instance, if a client later expects additional work not covered in the agreement, you can point to the outlined scope to avoid conflict.

Changes to Scope of Services

Explain how the scope of services might change, such as when new developments require additional work not included in the original agreement. Clearly state that any changes will be discussed with the client beforehand, and their approval will be required before proceeding.

Payment Terms & Fee Structure

Provide all payment-related details, including fees (e.g., hourly rates), any additional expenses the client may need to cover, and how billing will be handled (e.g., billing frequency, payment methods, and due dates).

Also, include what will happen if payments are late or missed and the steps to follow if the working relationship ends. This helps set clear expectations and avoids confusion later.

Communication Details

Accountants are responsible for keeping clients informed about their work progress. Engagement letters can help set clear expectations for communication. Outline how often you will update clients, what those updates will include, and the preferred methods of communication (such as email or phone).

Also, confidentiality, proprietary information, privacy and security guidelines should be included. For instance, specify which communication channels should be used when sharing sensitive or confidential information.

Dates, Service Terms & Period of Engagement

Clearly state the start and end dates of the engagement, whether it is a specific date range or open until the agreed-upon service is completed. Also, include any conditions under which the agreement may be terminated, such as non-payment or a breach of terms.

Conflict Disclosure

Highlight any potential conflicts of interest that could arise during the accountant-client relationship. Run a conflict check before starting the engagement and disclose any findings to the client, encouraging them to consider these before proceeding. This helps build trust and ensures transparency.

Responsibilities

To avoid misunderstandings, the engagement letter should clearly outline the specific responsibilities of both the accountant and the client. For example, specify if the client is required to provide certain financial documents or information to proceed with the work.

Terms & Conditions

Include details for any terms, conditions, or special agreements (such as retainers or contingency agreements) that may be invoked during the engagement term.

Disputes

Explain the process for resolving any disputes that may arise, such as disagreements over charges or services. This ensures both parties understand how issues will be handled if conflicts occur.

Document & File Retention Policies

Explain how client documents and files will be managed. Specify how long your firm will retain these records, whether and when files will be returned to the client, and how long materials will be kept in accordance with your jurisdiction’s regulations.

Additionally, outline the client’s responsibilities for preserving their records, if needed, to ensure proper documentation.

Signature & Date

For an engagement letter to be valid, the accountant and the client must review and sign it.

While the abovementioned points are important, remember that this is just a starting point. The purpose of the engagement letter is to cover all relevant details, so it is crucial to tailor it to each client’s specific needs and circumstances.

Tips for Writing an Engagement Letter

A great engagement letter is professional, clear, and helpful for accountants. It ensures a smooth client experience, which can lead to more business for your firm. Here are some tips for creating the best engagement letters.

Set Clear Expectations From the Start 

Working with an accountant can feel overwhelming for many clients if they are unsure about the process or what to expect. You can help them feel more at ease by clearly outlining what they can expect. Include details like communication standards, fees, and the specific services provided during the engagement.

Keep It Simple & Clear 

Clarity is crucial when writing an engagement letter. While it is important to be thorough, avoid using complex language or accounting jargon that may confuse your client. Ensure the letter is clear and concise so clients can easily understand the details.

Personalise the Letter 

Though it is useful to have a general template for engagement letters, personalising each one for the client is essential. Make sure to include details specific to the client’s needs and ensure that the right person at your firm signs it.

Ensure There Are No Errors 

An engagement letter is the first formal step in your professional relationship with a client. It is important that it reflects your firm’s professionalism. Double-check for any errors, such as incorrect client information or typos, as these can create a negative impression.

Save Time With Templates

Accounting document templates can be a great way to save time and reduce mistakes, especially when preparing engagement letters.

However, accountants should always check their jurisdiction’s rules to remain compliant with any local regulations. Using templates gives firms a solid foundation, enabling them to quickly send out professional, customised letters while maintaining consistency and accuracy.

Letter of Engagement Template: A Time-Saving Tool for Accountants

Looking at examples of engagement letters (like the template from FigsFlow) can be a helpful starting point when creating your own. Just make sure to customise it to meet your firm’s specific needs.

An engagement letter is a great tool for starting a clear and professional relationship with clients, but it can also be useful when ending or stepping away from a client relationship.

There are two types of letters that accountants should be familiar with:

• Non-Engagement Letters – This letter informs prospective clients that your firm will not represent them.
• Disengagement Letters – This letter formally ends an existing client relationship.

Both letters help maintain professionalism and clear communication with clients, whether starting or ending a business relationship.

The Benefits of Using Automation for Engagement Letters

While it is essential to focus on the specific details and content of engagement letters, that does not mean each one has to be a time-consuming task. Using automation tools can streamline the process, saving valuable time that can be better spent serving clients.

FigsFlow: For Creating Professional Letters With Ease

FigsFlow’s automation tools can help accountants quickly generate customised engagement letters, reducing the time spent on administrative tasks. This allows you to focus more on delivering excellent service to your clients.

By automating key parts of the letter creation process, FigsFlow ensures you send out accurate, professional letters on time, without unnecessary delays or errors.

Conclusion

A great client-centred relationship is key to the success of any business, and it is especially important for accountants. One of the best ways to establish a positive client experience is by setting clear expectations.

Clients want to know exactly what their accounting services will involve. A well-written engagement letter outlines these expectations clearly from the start. By setting these boundaries, you create a smoother client experience and reduce the potential for miscommunication or disputes.

Engagement letters may seem like an extra step at the beginning of a client relationship, but taking the time to create them can lead to major benefits for both accountants and clients in the long run. By investing some time upfront and using automation tools like FigsFlow to streamline the process, accountants can quickly and effectively integrate engagement letters into their client onboarding process.