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
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, responsibilities for both parties , the scope of work, 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
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. Establishing a solid foundation for your firm’s values gives your clients confidence that you will uphold those values. A well-conceived accounting services engagement letter should make you and your client feel secure in your new business relationship.
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
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 the risk for your firm.
The formula for a functional and profitable accounting engagement letter is detailed in our elite coaching program: Create Your Dream Firm
But here’s a quick overview:
- Identification
- Introduce yourself & any relevant team members
- A short & sweet company overview. Quickly cover how you help your client and what your goals are for them.
- Scope of Services
- Professional Requirements: Outline the general purpose of the letter, your method to resolve conflicts, and anything else essential for a successful client relationship.
- Unanticipated services: Detail other services you offer. This is an essential tool for building out opportunities to expand your services.
- Service Terms: This should be the bulk of the letter, detailing out the terms of each service you provide to the client
- Period of Engagement
- This is the area to explicitly outline start and end dates to provide your services. You should also note that your firm is not responsible for anything before those dates.
- Fee Structure
- Pricing and services: A list of the services included and the price of each
- Payment terms: A simple statement of when and how you will be paid.
How to Write An Accounting Engagement Letter
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
One of the most important sections to cover in your accounting engagement letter is the period of engagement. This section should provide clear dates for both the start and end of the agreed-upon services. You can also provide an option to extend the period of engagement here, but make sure that you state it clearly as an option, not an automatic continuance.
Payment Terms
Unsurprisingly, this will be the most important part of any engagement letter for accounting services. Obviously, this is the place to designate how much you will be paid for your services. But, don’t forget to include parameters for how and when you will be paid, as well. A thorough payment terms section will ensure that you are paid accurately and on time. If you have questions about how to set your rates, read our guide to pricing accounting services in 2022.
Unanticipated Services
An accounting engagement letter clearly defines the full scope of services to be rendered. So what happens when you run into a service you didn’t cover? That is exactly what this portion of your engagement letter handles. Here, you can outline additional services to be explored and how much those services would be. This allows your clients flexibility in their commitment, and it gives you the opportunity to increase your revenue.
Dream Firms Tip: Specifically addressing what is not going to be included in the Unanticipated services portion is a proactive way to prevent potential conflicts.
Sending An Engagement Letter For Accounting Services
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 one-off email 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.
Geo-Specific Engagement Letter
Something you may not have thought about when writing your accounting engagement letter is… location. Oftentimes, accountants serve clients worldwide 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 an essential tool for retaining clients and growing your accounting, bookkeeping, or tax firm.
