What Is an Engagement Letter, Why Is It Important & How Does It Work?
Starting a new client relationship can feel tricky. You want to impress them, deliver great service and get paid on time. But what if things go wrong or your client doesn’t fully understand your offering?
Here’s the solution: an engagement letter. Think of it as a written handshake—it clearly defines what you’ll do, the cost and your expectations. This helps create a strong, professional foundation for a successful partnership. An engagement letter should also save you time and protect you legally.
This article explains what should go into your engagement letter, why it’s important and how automation and e-signatures can make the process even easier.
What is an Engagement Letter?
An engagement letter is a formal agreement between your company and your client. It outlines the key details of your business relationship like the services you will provide, the fees and important legal terms like liability limits and record-keeping. This document helps both parties understand what is expected—what services will be delivered, who is responsible for what and how much will be paid.
The engagement letter also acts as a clear confirmation of the agreement, helping to avoid future disputes caused by misunderstandings. It sets the stage for a transparent and professional relationship, and you and your client are on the same page about your roles and responsibilities.
With signature lines for both parties, the engagement letter means everyone agrees to thfige terms before any work begins. Once signed, you can get started confidently, knowing you are protected from concerns about payment, legal issues, or being asked to do more work without compensation.
A common problem for accountants is scope creep when clients request additional work without offering extra pay. Engagement letters guard against this by clearly defining the scope of services. If the client needs more, the letter can be updated to pay for the additional work.
Proposals vs Engagement Letters
In the accounting world, proposals and engagement letters are often confused but they serve different purposes. A proposal is a sales tool to convince a potential client to choose your firm. It highlights your services, expertise and reasons why the client should work with you.
On the other hand, an engagement letter is a legal document that outlines the terms of your agreement—things like the scope of work and other important details. While proposals help you win clients, engagement letters make sure the relationship is clear and legally binding.
Combining the engagement letter with your proposal can make the process smoother. The client will already have a better idea of what you offer, increasing the chances they will sign the agreement.
With tools like FigsFlow, you can quickly send automated engagement letters and access online proposals and templates. This saves you time, helps you sign clients easily and minimises the chance of any misunderstandings. Presenting both together makes the next steps crystal clear, leaving no room for confusion in the agreement.
Why Accountants Need an Engagement Letter
Some accountants might think engagement letters are not necessary if clients do not always read them fully. But there are plenty of reasons to use them.
An engagement letter is your first line of protection against non-payment, client fraud and liability issues. When you start working with a new client, you are legally entitled to be paid for your services, with a signature to back it up. It also shields you from liability and from being held responsible for any illegal activities your client might be involved in without your knowledge.
Without an engagement letter, there is a higher risk of misunderstandings about what services you are providing, which can spark disputes or even legal problems. The letter clearly lays out the terms, meaning you are entitled to payment and protecting you from liability.
Beyond protection, engagement letters also help build stronger client relationships by setting clear expectations from the start. They allow for transparency, which can prevent scope creep—when clients ask for more services without offering additional payment. If this happens, the engagement letter can easily be updated to compensate for the extra work.
What Should be Included in an Engagement Letter?
Many accounting firms are not sure if their engagement letter covers everything it should. FigsFlow offers industry-standard templates that include everything most accountants need. Here is a general idea of what your engagement letter should have:
- Purpose, Scope & Deliverables – Clearly explain the services you will provide and what the client can expect to avoid scope creep.
- Handling Additional Services – Define how extra services outside the original agreement will be managed.
- Billing & Payment Terms – Detail how and when you will bill your client including any retainers if applicable.
- Limitation of Liability – Include terms that limit your responsibility for issues like mistakes in client-provided information.
- Confidentiality & Disclosure – Protect client information while addressing legal requirements for disclosure to authorities like the HMRC.
- Governing Law – State that the agreement follows the laws of your state and explain how disputes will be handled.
How to Format Your Engagement Letter
The way you format your engagement letter depends on how you plan to send it. You can stick with the traditional method of printing out a PDF for clients to sign or opt for something more modern with an electronic signature system. Here are three options.
Word to PDF – You can have a lawyer draft a standard engagement letter in Word, then adjust it for each client by adding their details and any changes needed. Afterwards, convert it to PDF, print it and get the hard copy signed. The downside is you will have to update the original document each time and meet with clients in person for signatures.
Electronic Document Systems – Using software like FigsFlow makes the process quicker and more professional, allowing electronic signatures. The tool lets you save templates and personalise the design.
Integrated Digital Proposals – FigsFlow takes things further by combining proposals and engagement letters in a smooth digital format. With this option, your proposal includes everything—cover letter, brochure, service details, payment setup and e-signature capabilities—using pre-built templates. It is the fastest and most efficient option.
Try Sample Engagement Letter Templates for Free
Creating a solid and legally sound engagement letter from scratch can feel overwhelming. Luckily, FigsFlow provides ready-to-use engagement letter templates that cover all the essential elements most accounting firms need. Like our proposal templates, it can be easily customised to meet your needs.
Your client can review, accept and sign it in seconds. The template includes important sections like the scope of work, billing procedures and liability limits. Using this template means your engagement letter is both thorough and compliant with industry standards, saving you on legal costs. Using a standard template also covers all legal and regulatory details. This is useful for firms with many clients as it trims the risk of mistakes or missing important details.
Conclusion
An engagement letter is essential for accountants and bookkeepers to set clear rules, avoid legal problems and keep things running smoothly with clients. It defines what services will be provided, how much clients will pay and protects against liability issues.
Using one, whether old-school or digital, is a smart way to protect your business and save time. With templates and automation, you can simplify the process and focus on growing your business without the headache.
Frequently Asked Questions
An engagement letter is a formal document that outlines the terms of the agreement between an accountant and their client. It details the scope of services, the fees, and important legal terms such as liability limits and confidentiality clauses.
Engagement letters are essential for protecting accountants from potential legal issues, non-payment, and misunderstandings. They help define the scope of work and set clear expectations between the accountant and the client.
An engagement letter should include a clear description of services (scope and deliverables), how additional work will be handled, and payment terms. It should also outline liability limitations.
Karan
Karan Poudel is an experienced finance professional with nearly half a decade of experience in writing, editing and research in accounting and finance. He is able to simplify and clarify complex financial topics for ease of understanding.