06 22 2021 / Document Workflow

Engagement Letter in Accounting: Dos and Don’ts That Help You Protect Your Practice

Engagement Letter in Accounting: Dos and Don’ts That Help You Protect Your Practice

If your firm wants to provide security for both your clients and yourself, it’s important to know how to write a letter of engagement. Tax professionals wondering what an engagement letter in accounting is must learn the dos and don’ts of engagement letters.

But before looking at why your firm needs an engagement letter and how to write one, let’s take a look at what these letters are.

What is an Engagement Letter for Accounting or Tax Practices?

An engagement letter is a legally binding contract between you and a client. The letter defines your relationship and includes details such as the following:

Fees

Scope of work offered

Responsibilities

Firms should require all clients to sign an engagement letter.

Why Firms Need Engagement Letters with Each Client

Every client should sign an engagement letter prior to any work because it outlines your firm’s responsibilities and the scope of the work being performed. Letters are legally binding.

When signed, your firm benefits from:

  • Fewer misunderstandings 
  • Legally binding agreement signed by all parties
  • Expectations clearly outlined

Your client can’t come back and request work outside of the scope of the engagement letter. Multiple services can be listed within the letter, but it’s often better for each service to have its own engagement letter for the sake of clarity.

Dos in Engagement Letters

Engagement letters must be written properly for you to leverage them fully. The right sections with the right wording are key. A few of the must dos inside of your letter should include the following:

Set Expectations

Expectations should be outlined as clearly and thoroughly as possible. You should set the following expectations:

  • Timeline. Be sure to include the timeline for the work to be performed once all of the documents and obligations of the client are satisfied. This can include milestones.
  • Pricing. The pricing and payment terms should be included. If multiple services are provided, be sure to provide a breakdown of pricing.
  • Deadlines. When will the work be completed? You should add in stipulations stating that the client must provide any necessary documents before a certain time and date in order for the deadline to be reached.
  • Scope. The scope of the work and the particular services that you’re offering should be included. 

When you set your expectations for the client and identify the expectations that the client should have for your service, it helps to eliminate misunderstandings.

Responsibilities

Both parties, you and the client, will have responsibilities that must be met. When engaged in a contract, the responsibilities should include pertinent information and details, such as the following:

  • Client is responsible for furnishing accurate information
  • Client is responsible for providing you with all financial documents
  • Firm is responsible for providing reports and/or documents
  • Information on prompt communication from each party
  • And more depending on individual circumstances

If you spend time outlining the responsibilities of both parties, your entire relationship with the client will be better.

Service Details

Your firm may offer a variety of services to satisfy the needs of your clients. Service details can help prevent misunderstandings and further clarify expectations. Deadlines and fee structures can be included in this section too.

TaxDome can help you itemize services in your engagement letter.

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You can easily setup and send contracts using TaxDome. By itemizing your services, you will ensure that both parties fully understand and agree to the service that is being rendered. 

Yearly Engagement Letters

Every year, you should issue new engagement letters. Your service will evolve and change throughout the year, and by sending out new letters, you can be sure that you do a few things:

  • Limit your liability for prior years
  • Add in any price increases that may have occurred

If your services changed or your client no longer needs a certain service, yearly engagement letters can make sure that you’re no longer responsible for these services.

Send Engagement Letters Rapidly

Clients need your service now, but you also need to take the time to make sure that your client is onboarded properly. 

Why not add your engagement letter into your onboarding process?

We wrote an entire article on the subject: How to Automate Client Onboarding with TaxDome. You should send an engagement letter as soon as the client has been through your onboarding process.

The faster everyone signs, the better.

You’ll be able to start providing services once the letter is signed, and the client will receive quick service.

Add in These Extras

You should consider adding some, if not all, of the following into the letter:

  • Record retention policies
  • Stop-work clause
  • Consequences and fees associated with late payments
  • Mention that the accuracy of the work depends on the facts the client provides

Don’ts in Engagement Letters:

You know what to include in your engagement letter, but now it’s time to learn what you shouldn’t do. Sometimes, the small mistakes can make a big difference in customer satisfaction and experience.

A few of the things you want to avoid when writing and sending engagement letters are as follows:

Sending in Google Docs

Google Docs is great for a lot of things, but you don’t want to rely on the service for your letters. Instead, you want to use a service like TaxDome that allows you to:

  • Fully brand your engagement letter
  • Customize your engagement letter

Your business and services are unique, and you want to use a platform like TaxDome that gives you full control over the creation and branding of your letter.

Force Physical Document Signing

Signing a physical document is not necessary or user-friendly when the client isn’t in your office. When you force clients to print and sign your letter, they’ll push it off until they have free time.

The wait period isn’t beneficial for you or your clients.

Instead, make use of e-sign and allow your clients to sign documents right after they’ve been onboarded. 

If you use TaxDome already, you can request that your clients sign their engagement letter right through the client portal.

What’s the difference in time between the signing of a physical document being and e-signing? 

  • Clients e-sign in 37 minutes versus 5 days for physical signing.
  • E-signatures also reduce signing errors drastically.

If you’re still requesting physical copies of documents from clients, be sure to switch over to e-sign.

“In Effect” Clauses

You should create an evergreen contract that keeps your liability current. If you have a contract that states that it’s in effect until one party cancels the contract, it can lead to potential liability gaps. 

Language That is Considered “All Encompassing”

The language that you include in your engagement letter needs to be concise and precise. If you’re too vague or include the scope of the work with language that is considered all encompassing, it will expand the scope of the work provided.

You want the scope of the work to be written so clearly that there can never be a dispute as to what’s required from your firm.

Adding in Jargon

Your client isn’t as well-versed in and, in most cases, won’t be as familiar with legal or accounting jargon as you are. As an accounting professional, it’s easy to forget that clients may not understand the abbreviations or complicated language that you add into your engagement letter.

Therefore, make sure to review your letter and remove (or clearly explain) the following:

  • Legal jargon 
  • Abbreviations
  • Terms only a CPA would know

Make sure that your clients can read and understand the engagement letter in its entirety, and tweak it as necessary.

Don’t Promote Your Services

Some firms use the engagement letter as a final sales push of sorts, and this is the worst time to try selling clients on additional services. Your engagement letter is a contract and should never be used for promotion or selling.

When overviewing your letter, ask yourself if each section limits your services to exactly  what the client requested or not.

Now that you know how to write a letter of engagement, it’s important to implement processes that ensure all clients sign before any services are rendered. From a business standpoint, your letter protects you and your client – it’s a win-win for everyone.

Lisa Chaud

Lisa Chaud

Lisa is a Marketer at TaxDome. With her experience in B2B and E-commerce, Lisa is passionate about doing marketing research and delivering insights to the community. In her free time, she prefers doing different kinds of sports.

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