How to write an accounting engagement letter (template included)

Engagement letters. 

No one likes to write them, but they are necessary evils in accounting. 

Before we dive into what exactly an engagement letter is and why you need one, you should know that these letters should be written for any type of service engagement an accountant might have with a client. 

That's why we thought we'd share some tips with you so you can create your new engagement letter and customise it for each client and engagement.

Let’s dive in!

What is an engagement letter?

An engagement letter is a formal agreement between two parties - a business and an accountant, or in other words, a contract. 

Engagement letters are also referred to as retainer agreements, service contracts, or even just agreements.

This document will outline what you’ll do for your client, how much you will charge, how long the work will take, how/when they'll pay you, and the obligations of both parties. They are legally binding, and one of the best defensive tools an accountant can possess.

An engagement letter helps set expectations for both parties, protecting them from any legal issues or disputes that may arise during the course of their working relationship. It also ensures that both sides are on the same page with what is expected. 

This ensures no misunderstandings later on — or at least fewer misunderstandings. It's a win-win for everyone involved. Engagement letters should be used by any accountant performing client work to protect themselves and have a clear business relationship.

In fact, the guidance recommends that accountants send a new engagement letter whenever the scope of work changes, or annually at a minimum.

Disclaimer

Keep in mind that this post is for information only and does not, and is not intended to, constitute legal advice. All information regarding engagement letters are for general informational purposes only.

Why are engagement letters important?

An engagement letter ensures that both you and your client understand what work will be delivered when and how payment works.

It also protects you in case things go wrong — the contract outlines what happens if you don’t complete the work or if there is a miscommunication about the work performed. You can avoid these problems if everyone is on the same page with an engagement letter from the start.

Key benefits of implementing engagement letters for your professional services are as follows:

• Setting expectations for both you and your client and your new professional relationship.
• Reducing scope creep because it outlines what is included, what is not and how to proceed if more work is needed.
• Reinforcing quality and value because it shows you are committed to upfront communication, and meeting expectations.
• Reducing liability and risk by reducing the potential for professional liability issues. Many professional liability insurers actually require engagement letters for that reason.
• Fewer misunderstandings because the agreement offers transparency in all areas, including the fee structure, responsibilities and obligations of both the firm and the client.

What to include in your engagement letters with examples

A good accounting engagement letter should

• Clearly state what the company will provide and what they expect in return
• Include the associated fees and fee schedule for the work provided 
• Include SLA’s and service expectations on both the accountant and the client 
• Include what happens when work falls out of scope
• Be signed by the accountant and the client before work begins
• Be easy to understand

An engagement letter should be a concise summary of the agreement you have with your client. In it, you should have the following:

Name & Address of Accounting Firm

Date of Agreement

The engagement letter should be dated prior to the period of engagement and work beginning.

Name & Address of Client

Intro

Briefly identify the firm, yourself and your position as well as properly identify who will receive your services, whether that is an individual or a business. You may want to also give a quick company overview to showcase your value and explain the point of the engagement letter. Also, be sure to thank them for their business.

Example:

Dear Mr. Jones,

This letter confirms the services provided by ABC Accounting to Jones Co. and it outlines the terms, nature, and extent of the professional services we will be providing. 

ABC Accounting has been in business for over 20 years and we have always put our clients first, taking time to understand them and their businesses and offering high-quality financial services because of that. We appreciate your business and look forward to working with you.

Period & Purpose of Engagement

Outline what the engagement is and when it will begin and end as well as expected delivery dates of the work performed. This can be simply stating the date range of the engagement, or you can include a detailed link of deadlines for both you and your client to keep the project on track.

The engagement for the audit of Jones Co financial statements starts on February 1st, 2022 and is valid until February 1st, 2023, unless terminated by either party or if services are no longer required or able to be performed.

Objective and Scope of Work

This section is very important and will clearly define what you will deliver and what work is not included. This will help reduce scope creep, which is when the deliverables of a project expand from what was originally set - without allocating additional time or money. This may stem from miscommunications or the client’s unreasonable expectations. You can also add in what will happen if the client requests extra services outside the scope of the current engagement.

Our services are applicable only for the above purposes, namely the full financial statement audit, and are expected to be completed by February 1, 2022, provided the client completes and enlists accurate information and paperwork in a timely fashion.

Not included in the scope of this engagement is the preparation of the tax returns.

Should a need arise that falls out of scope, ABC Accounting will contact you directly, assess the need, and quote an upfront price for Jones Co to either accept or decline.

Fees and Billing Arrangements

Provide details on approximately how much and how often the client will be billed. This may be a fixed rate or hourly. It is also a good idea to estimate the total cost of services between a certain range if not providing a fixed fee. You will also want to review the payment terms, the process for payment and what happens in the case of late payment, such as a late fee or interest.

Fees are $600 per month recurring for the duration of the engagement. Fees are inclusive of tax. Fees are calculated based on the expected amount of time and the level of staff required to complete the services as agreed. The fee excludes miscellaneous expenses which are incurred to complete the engagement.

A late fee of $150 will be charged after payment is 30 days overdue and will accrue monthly interest of 1.5%.

Should the client need extra services not included in this engagement we bill at a rate of $150 per hour which will be discussed prior to beginning the additional work.

Client Responsibilities

It is not only the accountant that has responsibilities but the client is also responsible for providing certain information and completing certain tasks. It is important that the client understands what their responsibilities are as well as the deadlines for completion to ensure the engagement is completed on time.

Example: 

The Client is responsible for the reliability, accuracy and completeness of the accounting records, the information provided and disclosure of all material and relevant information. Clients are required to arrange for reasonable access by us to appropriate individuals and documents, and shall be responsible for both the completeness and accuracy of the information supplied to us. 

Content Snare allows for a clear client dashboard that outlines exactly what documentation the client needs to provide and when. It also allows clients to ask questions right in the system and sends automatic reminders for documents outstanding in helping with your engagements. Find out more about how it can help your accounting firm here.

Professional Standards

Refer to the professional standards which govern the engagement in your area and include in your letter. These standards will vary depending on your location and designation.

Dispute Resolution 

You may also want to include how a dispute would be handled should it arise such as by reasonable negotiations, arbitration or mediation. Legal advice on this specific section would be the best practice.

Engagement Termination

There may be a time it may be necessary for the accounting firm to withdraw from the engagement. This section should outline the conditions that might lead to this, such as conflict of interest, management ethics or integrity or the accountant’s real or apparent lack of independence, and the procedures that will be followed, such as the return of client files and final billing.

Acceptance of Terms & Signature

As a legal document, it is important that the client provides confirmation of the terms outlined in the engagement letter and both parties sign and date the agreement prior to the engagement. 

If a company has multiple directors, all should be listed as signatories on the Letter of Engagement.

We accept the terms of your service outlined in the document.

Client's signature & date:

Service provider's signature & date:

These template sections are simply ideas to get you started on creating sample engagement letters and are not to be considered advice in creating a legal agreement between you and your clients.

Other Things to Consider

• Every client and engagement will be different and you may want to have a lawyer review your engagement letters, especially any complex terms
• To keep your engagement letters short, you may want to have stand-alone terms and conditions to review with your clients including other terms such as confidentiality agreement and privacy policy.
• Be sure to always customize the terms to the client and circumstances that relate to the specific engagement
• Your professional body should supply you with an engagement letter template. We would recommend using these as a starting point, with further modification required.
  

When to use an engagement letter

Engagement letters need to be drafted and signed prior to any client work begins. It is an important part of the client onboarding process and should be completed for each client.

There may be longer-term projects for which the engagement letter is effective. It is recommended to review and update the engagement letter at least annually for any changes.

If your firm does not have engagement letters for existing client work, the most efficient way to implement would be to prioritize high-risk clients as well as each new client.

Which clients need an engagement letter

All clients should have an engagement letter, even if you feel your business relationship does not require a contract. It shows your professionalism and protects yourself and your business.

Even if you’ve worked with a client for many years or consider them a friend, you should still have an engagement letter for any work you perform. 

How to create an engagement letter

You will save a ton of time creating engagement letters for clients if you have a template that can be customized to the client and to the specific engagement.

A great tool for automating the creation of engagement letters is Ignition. You just need to enter your client details, pick your services, and the engagement letter template is created automatically. 

All you need to do is click ‘Send’. 

Your client will receive your proposal with the engagement letter attached and can e-sign right on the document. This eliminates so much administration work for your firm and makes it so easy for your clients.

How to send an engagement letter

Now that you have a template engagement letter, how will you send it to your client for a smooth onboarding process?

There are a few good options to send engagement letters that will allow you to use (and re-use) your template, customize it to your client, and have your client e-sign the document.

Once again, our personal favorite is Ignition because it's easy to use, has engagement letter templates ready to use, and automates the process.

Engagement Letter Signed - What Next?

The next step after both parties have signed the engagement letter is to finish onboarding your client which includes receiving payment and gathering documentation. Learn how to connect Ignition with Content Snare using Zapier to eliminate the manual and tedious parts of your client onboarding process.

Ignition automates the contract and payment steps, while Content Snare automates the gathering of client information and documentation. 

Zapier links the two for seamless automation.