The Ultimate Accounting Engagement Letter

The Ultimate Accounting Engagement Letter

How to Create An Accounting Engagement Letter, Templates & Sample

Some may think of accounting engagement letters as a waste of time. In reality, they are an incredibly important tool that is essential for growing your firm. If your accounting, tax, or bookkeeping practice isn’t using an engagement letter when onboarding new clients, you should start. An engagement letter establishes a clear scope of services, a payment schedule, and provides a path forward with your client relationship. Here’s everything you should know about an accounting engagement letter and how to write one so that you can start establishing meaningful & profitable client relationships.

A preview of what to expect:

  • What is an Accounting Engagement Letter?
  • Why Do You Need An Engagement Letter
  • Elements of An Accounting Engagement Letter
  • How To Write An Engagement Letter
  • How to Send An Engagement Letter
  • Engagement Letter Template
  • Engagement Letter Samples
sample engagement letter for accounting services

What Is An Engagement Letter In Accounting?

Before we go any further, it’s important to explicitly define what we are talking about. An engagement letter for accountants is a very different document than an engagement letter for contractors or lawyers. In this case, we define an engagement letter for accountants as an agreement sent to your clients that describes the overall business relationship with your client, clearly defining:

  • The services included & a timeline of services
  • Both parties’ responsibilities
  • A clearly-defined scope of your work
  • Price and payment terms

Why You Need an Engagement Letter for Your Accounting Firm

An accounting engagement letter serves the obvious purpose of providing a documented agreement of services between you and your client. But, having one is important for many other reasons, and they protect against more than just potential legal issues.

Prevent Scope Creep

Scope creep, or continuous and uncontrolled growth or changes in a service’s scope, at any point after the service begins. A client you may initially have signed on for just end-of-the-year tax return preparation could suddenly start demanding your time for financial planning or advisory services at the same rate. However, if you have a solid accounting engagement letter in place, you can protect yourself from this.

If you comprehensively and accurately define the scope of your services, not only can you prevent scope creep, but you can also set yourself up to increase your profits by charging them appropriately for additional services rendered.

Establish Your Values & Standards

engagement letter for accountants

Once you’ve secured a commitment from a potential client, you may think that your work is all done. But, without an engagement letter, you’re open to risks and scope creep.   An engagement letter also provides another opportunity for you to re-establish your values and set quality standards.

An engagement letter for accounting services shows that you’re committed to upholding your values and sets the tone for upfront communication with your client. An engagement letter also provides your client peace of mind, by reiterating what’s expected from you. Driving home the values of your firm creates confidence in your new client, especially when it’s in the context of delivering results for the customer. A well-done engagement letter sets the tone for the relationship and starts all parties off on an equal playing ground.

Reduce Risk

We can all agree that the “terms & conditions” are helpful to mitigate legal risk, but what about the other risks of doing business? We often discuss the importance of dream client identification, but even with a clearly defined dream client, some duds can slip through the cracks. 

Whether they are simply not accepting of the value you provide or are just trying to get more out of your services without paying, these types of low-value clients are hard to deal with. An engagement letter for accounting services provides a definitive line for when to charge more and when to simply cut the client. It’s also useful for weeding out prospective clients that would cause the same issues.

If you comprehensively and accurately define the scope of your services, not only can you prevent scope creep, but you can also set yourself up to increase your profits by charging them appropriately for additional services rendered.

The Elements of An Accounting Engagement Letter

elements of an accounting engagement letter

We’ve covered why an accounting engagement letter is important. By now, you should realize that it does much more than just establish the scope of services, for both you and your new client. It sets the tone for a healthy professional relationship, provides guidance about the scope of services, and reduces risk for your firm. 

Everything that goes into an accounting engagement letter is covered, at length, in our elite coaching program: Create Your Dream Firm

But here’s the brief version:

  1. Identification
    1. Introduce yourself & any relevant team members 
    2. A short & sweet company overview. Quickly cover how you help your client and what your goals are for them.
  2. Scope of Services
    1. Professional Requirements: Outline the general purpose of the letter, how you’ll handle disputes and other key items of your client relationship
    2. Unanticipated services: Detail other services you offer. This is an essential tool for building out opportunities to expand your services. 
    3. Service Terms: This should be the bulk of the letter, detailing out the terms of each service you provide to the client
  3. Period of Engagement
    1. Establish a timeline for when your firm begins the contractual relationship. This is also a good space to reiterate that your firm wasn’t responsible for financials before the established timeline.
  4. Fee Structure
    1. Pricing and services: A list of the services included and the price of each 
    2. Payment terms: A simple statement of when and how you will be paid.

How to Write An Accounting Engagement Letter

accounting engagement letter sample

We’ve provided a template at the end of this article, but if you want to craft your own, it’s important to make sure that all of your bases are covered. When writing an engagement letter for your accounting services you should cover all of the elements listed above, but pay special attention to the period of engagement, the payments terms, and unanticipated services sections. Here are a couple of examples to follow for each: 

Period of Engagement

Example: ABC Accounting has agreed to do the bookkeeping and tax preparation of 123 Inc. for the entirety of the fiscal year, 2021. This agreement doesn’t cover bookkeeping and/or amending tax filings for the fiscal year 2020. Although, ABC will prepare a separate quote for fiscal 2020, if desired by 123 Inc.

Template: [Firm name] is to take responsibility for [agreed upon services] of [Insert client name] for [insert time period]. This engagement does not include [insert services/terms your firm is not responsible to complete].

Payment Terms

Example: In exchange for services described in this engagement letter, 123 Inc. will pay $1500 per quarter, in advance (upfront) of services rendered.

Template: In exchange for services described in this engagement letter, [Insert client name] will pay [insert fee amount + payment period], in advance (upfront) of services rendered.

Unanticipated Services

Template: A fixed price entitles the client to a defined set of services, described in the “Service Terms” section of this letter. If a need presents itself, above and beyond what is required over this letter’s defined scope throughout the year, this need is considered “out of scope” and would need a separate agreement and price quote.

The “pricing and services” section describes what’s included in the mandate and the definition of what’s included can be found in the Service Terms section. For reference the pricing and services described are the “scope” of [Insert firm name] mandate. Should a need arise that falls out of scope, [Insert firm name] will contact [Insert client name], assess the need, and quote an upfront price for 123 Inc. to either accept or decline.

Dream Firms Tip: Unanticipated services reinforce the need for clearly defined service terms. When you and your clients can reference your engagement letter and note specific services, clearly defined listed in the “what’s not included” section, it goes a long way to solve potential conflicts. 

Sending An Engagement Letter For Accounting Services

what is an engagement letter in accounting

If you’ve gotten this far into the process, congratulations, you are well on your way to a mutually beneficial client relationship. The only thing left to do is send the engagement letter over to your prospective client, to be signed. Often overlooked, how you send the engagement letter can be just as crucial as having one in the first place. 

First, think about your client and how you want your firm to be represented. If your niche is software companies, sending a Word doc doesn’t convey the right message. Instead, opt for a more modern and tech-savvy send by using an e-sign service. In addition to appearing more professional and up-to-date, these services offer an extra level of security. You can also use a proposal software or something like Adobe Sign, to achieve the same thing. 

Choosing a secure and professional delivery method for your engagement letter is crucial.  It’s the last touchpoint with your prospective client before they sign, so make sure that your business is represented the way you want it to be. 

Engagement Letter Template & Sample

Even with all the guidance in the world, creating an accounting engagement letter can be an intimidating task. It’s such an essential document, you can’t afford to miss anything. Between payment terms, the period of engagement, and covering unanticipated services, there are many opportunities to accidentally leave something out. If you’re concerned about this, download our engagement letter template below. 

Free Engagement Letter Template Download

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Geo-Specific Engagement Letter

Something you may not have thought about is location. Accounting is a global service, and each country, state, province, etc. has its own regulations and specific structures. If your scope of services with a client brings you outside of the United States, it’s worth explicitly addressing that and any other related complications in your engagement letter as well.

An Overview of Accounting Engagement Letters

An accounting engagement letter is much more than a piece of paper. When writing an engagement letter, you want to ensure that not only are you covering basics like how and when you will be paid, but also explicitly spelling out your scope of services and anticipated responsibilities. This document will set the tone for your client relationship, so take the time to make sure that you start off on a good foot. Engagement letters are essential for retaining clients and growing your accounting, bookkeeping, or tax firm. 

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