What is an engagement letter, why is it important, and how does it work?
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Are you tired of wondering if your clients fully understand your services and expectations? Enter engagement letters, a crucial tool for accountants and bookkeepers looking to grow their business, and mitigate risk. By putting your best foot forward with a well-crafted letter of engagement, you can start setting client expectations, and building trust and loyalty.
Here, we’ll take a deep dive into engagement letters, focusing on how you can save time and stay compliant by using accounting engagement letter templates. We’ll also discuss:
1. What is a client engagement letter and its importance for client onboarding?
An engagement letter is a legally binding document that outlines the details of the professional relationship between you and your client. Also known as your contract terms, or in some contexts as an accounting engagement letter, it establishes clear boundaries, expectations, and deliverables for the client engagement that can help prevent misunderstandings down the line. This is pivotal in the client engagement process and essential for effective client communication.
An engagement letter typically includes details such as the scope of work, fees, timelines, responsibilities, and any other relevant information that relates to the services you’re providing. In essence, it acts as a contract and cornerstone of the client engagement process, creating a level of security and transparency for both parties during the client onboarding process and throughout the entire relationship.
With software like Ignition, your engagement letter or contract terms form part of your accounting proposal to save you time. Once a client signs and accepts your proposal, the platform automatically converts it to an engagement letter so you’re always covered. It also keeps a history of legally binding e-signatures for your records to help you stay compliant.
2. Why are letters of engagement important in client communication and onboarding?
Engagement letters are critical to the success of any professional service provider, including accountants and bookkeepers.
“In my 15 or so years of working in public practice, I’ve found one thing to be true: in all circumstances, the best practice is to have a documented letter of engagement that’s signed by both you and your client,” says says Rebecca Mihalic, Head of Accounting (APAC) and Director at businessDEPOT. “Not only is this is an important first step in the relationship, but it’s a great way for both parties to manage expectations and responsibilities going forward,” she adds.
Considering its significance, let’s delve into the primary reasons why engagement letters play a pivotal role in client engagement processes.
- Managing client expectations: By outlining details such as the scope of work, timelines, and deliverables, an engagement letter – as Rebecca Mihalic points out – helps clients understand what they can expect from you. It also plays a pivotal role in client engagement best practices, builds trust and fosters stronger client relationships.
- Establishing clear payment terms: Including details of your payment terms in your engagement letter ensures there’s no ambiguity about when payment is due, and how the client will be billed. This aspect is crucial in managing client payments.
With Ignition, you can take this a step further by collecting payment details upfront in your proposal and automating payment collection from the moment a client signs your proposal and engagement letter. When the invoice is due, Ignition automatically takes the payment so no on lifts a finger. You can make it convenient for clients to pay automatically using credit card, debit card, or direct debit. So, there’s no more chasing clients for payment.
Safeguarding cash flow: Engagement letters are the best way to safeguard your position and cash flow without damaging client relationships, especially when combined with regular invoicing (more on this below in ‘What to include in your engagement letter’) and taking control of payments.
Mitigating risk: Engaging clients without a clear understanding of expectations can lead to disputes, which can result in legal action, lost revenue, and reputational damage. An engagement letter helps minimise these risks by setting clear expectations from the outset.
Fee arrangements: Engagement letters that outline fees and payment terms, can be used if there’s a dispute over billing and payment.
Professionalism: Using skillfully written engagement letters shows your clients that you take your business seriously and it sets the tone for a professional relationship. It also demonstrates attention to detail and a commitment to providing high-quality services.
For compliance purposes: The Accounting Professional and Ethical Standards Board (APESB) requires accounting professionals who are members of CPA Australia, Chartered Accountants Australia & NZ (CAANZ) or Institute of Public Accountants (IPA) to use engagement letters.
The APESB website says, “APES 305 Terms of Engagement requires members in public practice to document and communicate the terms of engagement with a client. The standard also includes guidance for members on general contents of an engagement letter and members responsibilities in respect of recurring engagements.”
Tax agents must comply with the Tax Agent Services Act 2009 (TASA), a part of which is the Code of Professional Conduct (Code) and along with BAS Agents are guided by the Tax Practitioners Board TPB(PN) 3/2019.
To help prevent scope creep: It’s hard to overestimate the importance of engagement letters when it comes to managing scope creep. Ignition’s State of client engagement in Australia reports that accounting and bookkeeping firms lose out on $103,778 each year, on average, in unrecovered out-of-scope work. Ninety five percent of accountants and bookkeepers said they experience awkward situations of chasing clients for late payments and clients not being billed for out of scope work.
Related article: Find out how to effectively manage scope creep by downloading the Addressing scope creep to improve profitability PDF ebook.
3. How does an engagement letter work?
Overall, an engagement letter works by providing a clear and comprehensive framework for the professional relationship between you and a client. Typically, the letter of engagement will:
Establish the relationship: It should identify both you as the service provider and the client, as well as any relevant background information about the work that must happen.
Define the scope of work: It should outline the specific services you will provide, including timelines, deliverables, and any other assumptions concerning the work. It should also include an ‘out of scope’ component so you have the ability to easily charge for additional work.
Address fees and payment terms: It should specify the fees you’ll charge for the work, as well as the payment terms and billing frequency.
Define responsibilities: It should clarify you and your client’s responsibilities, including any necessary actions or deliverables.
Establish communication protocols: It should indicate how you and your client will communicate, including the frequency and format of updates.
Provide for termination: It should include provisions for terminating the relationship, including any notice requirements or penalties.
4. What’s an automated engagement letter?
Until relatively recently, the writing, sending, signing, and storing of engagement letters was a time-consuming, paper-based process for accountants and tax professionals. It typically involved writing an engagement letter in Microsoft Word, then couriering, mailing, or emailing it to the client. The client would then sign and date it and send it back.
Ignition has digitised this process, eliminating the need for manual engagement letter processes that would take hours. You can get a head start using legally vetted, industry standard terms, or upload your own. You can even access engagement letter templates from selected accounting industry bodies (more on this in ‘Sample engagement letters’ below). Less errors, less admin, while keeping you compliant.
Creating, sending, and storing engagement letters is nearly effortless, saving you valuable time and money.
5. Advantages of using automated engagement letters
Automated engagement letters offer a range of benefits that can help you streamline your business processes, improve communication with clients, and reduce the risk of errors and omissions. By adopting automated engagement letters, you can enjoy greater efficiency and productivity while also enhancing the security and sustainability of your practice.
Some of the key benefits include:
Time savings: You can create and send automated engagement letters in a matter of minutes. Ignition customers save on average over 6 hours per week creating proposals and issuing engagement letters.
Increased accuracy: You can easily customise automated engagement letters to suit the specific needs of each client, reducing the risk of errors and omissions.
Improved communication: Automated engagement letters can be shared and signed electronically, making it easy for both parties to review and approve the agreement.
Enhanced security: You can securely store automated engagement letters in the cloud, protecting them from loss or damage and providing a complete audit trail of all activities that relate to the agreement.
Simplified billing: You can integrate automated engagement letters with your billing systems, allowing for automatic client billing and payment collection.
6. What to include in your engagement letter
When you’re crafting your client engagement letter, three words of advice: keep it simple. The most effective engagement letters we have on the Ignition platform use a separate terms-and-conditions document that’s referenced within the engagement letter. This shortens the engagement letter, making it more approachable for clients. Then, when clients agree to the engagement letter, they also agree to the terms and conditions.
With the terms and conditions residing elsewhere, here are the key elements that most engagement letters bear in mind:
- Who to engage: Broadly speaking, you should aim to engage all of your clients. While not a legal requirement for all professional service providers, tax of BAS agents are offered clear guidance by the TPB(PN) 3/2109: “Separate engagement letters should be issued for each client in receipt of your services, unless it is agreed otherwise.”
- Identification: Make sure you correctly identify the client or entity that will receive your services. This may include individual or group clients, and it's important to specify this information. Include the client’s name (and preferred name, if different) and address.
- Project scope: Defining project scope is one of the most critical components of your proposal and engagement letter. Creating a scope management plan, or project scope statement, is the best way to establish clear project boundaries and effectively define project scope. This roadmap defines the necessary work and ensures that it stays within the defined boundaries. By outlining the project scope, you can manage scope creep when it arises and protect yourself against unreasonable client expectations.
- Period of engagement: Specify the start and end dates of the engagement. If there’s a specific deliverable, such as an audit report, you can also include expected delivery dates.
- Transparent fee structure: Detail how much and how often you will bill the client. The more often you invoice and take payments the better, which is why monthly recurring billing arrangements are becoming more popular. If your clients are on a monthly fixed fee arrangement, you’re only ever at risk for that one month’s work.
As mentioned earlier, it’s a good idea to outline what will happen in cases where the client requests additional services not covered in the engagement letter or where you have under-quoted for a job.
You may also include a clause that specifies what happens in the case of late payment, such as a late fee or suspension of service. Include a price summary that breaks down your services by billing type.
Responsibilities: In most engagements, the client has specific responsibilities, such as providing particular information or records. Clearly specify the client's responsibilities and state what information you need from the client to fulfil the services.
Professional standards: Refer to the professional standards that govern the engagement. For instance, in Australia, check the Professional Standards Scheme.
Confirmation of terms: At the bottom of the engagement letter, include a confirmation of terms that verifies the client understands the business contract. Include a line for the client's signature and one for your own signature.
7. When to send an engagement letter and how often to update it
According to Joshua Lance, Head of Accounting at Ignition and founder of Lance CPA Group, it's important to send engagement letters at the start of any new engagement or project. That way, clients know exactly what to expect and can provide informed consent.
Sending engagement letters is not a one-and-done task. It's important to review and update these regularly to ensure the terms accurately reflect the current situation between you and your client. By updating engagement letters at least annually, accountants and tax professionals can stay up to date with any changes in regulations or standards, as well as any changes in their clients' needs or expectations. It's also an opportunity to revisit the scope of services you provide and make sure they align with your clients’ goals and objectives.
To find out more information about how often to engage your clients, the role engagements play in pricing reviews and cash flow, exactly who you need to engage, and much more, read Client engagement letters: How to get started & how to access our free templates.
8. Sample engagement letters
Regardless of your location or the specific services you provide, there are lots of engagement letter templates readily available. We have put together a sampling of offerings for your reference:
Over to you: Automate your manual processes and free up admin time
If you’re a busy accountant or bookkeeper, Ignition removes the pain of time-consuming and repetitive admin to free up your valuable time. You can create and send proposals and engagement letters in minutes with custom templates you can use time and again.
You can also automate billing and payment collection based on your billing and fee schedule, and ‘set and forget’ once a client signs your proposal.
Ignition can save you hours of admin time by connecting it to your business apps to automate workflows from the moment your client signs the proposal. Automate invoice creation and reconciliation by integrating Ignition with Quickbooks Online or Xero, so everything happens seamlessly behind the scenes.
To learn more about how Ignition can not only make the engagement process smoother for your firm – but also streamline many other aspects of your business – watch our online demo.
