Accounting Engagement Letter: Templates, Samples & How to Create One

Does your firm use an accounting engagement letter when signing on a new client? This post is a deep dive into why you should.

In this article, you’re going to learn about:

• What an accounting engagement letter for your firm is
• The purpose and need of a quality engagement letter
• Items to put in yours
• What to use to send this valuable document
• Sample sections and template letters
• How a future-ready firm can seamlessly share the engagement letter

Let’s get started.

 

 

Accounting Engagement Letter: What Is It?

Engagement letters for your accounting or CPA firm is a legal document agreement sent to your clients that describes the overall business relationship with your client, clearly defining:

• Services included and how they’ll play out
• Each other’s responsibilities
• The clearly-defined scope of your work
• Price and payment terms

A structured business relationship is not possible without a proper one in place.

Why You Need an Engagement Letter for Your Firm

There are a few reasons why your firm needs an engagement letter in place:

Prevent Scope Creep

One of the biggest reasons why we want good engagement letters in place is to protect your scope of work and to prevent scope creep.

Here, we’re going to adequately define how an engagement letter works so that there’s no misunderstanding about the work to be performed.

This will help avoid disagreements with your client but it will also help protect your margins.

Think of your new engagement letter as a way to clearly define the terms, fee structure, and services inside your proposal.

Mitigate Your Firm’s Risk

Sure, terms and conditions are great to mitigate risk in a legal sense. It’s also good in the “health of your firm” sense, too. 

No matter how you put together your discovery process, how well you limit their choices, and how clear your services are defined in the proposal—sometimes clients aren’t a fit. 

Or, they didn’t absorb that information and tried to get more without increasing your pricing.

Most engagement letters are a two-edged sword, communicating your terms to clients while simultaneously giving your firm a way to quickly identify clients who aren’t the best for your business.

Reinforce Values (and Quality Standards)

When a client signs up for professional services, that’s great, but the relationship is still fragile.

This legally binding agreement is an interaction, and a chance to reinforce to your client that they’ve made a great decision. It shows you’re committed to:

• Clear standards (for yourself and deliverables)
• Upfront communication
• Meeting the expectations set inside the document

Driving home the values of your firm to create confidence in your new client is never a bad idea, 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 everyone off on level ground.

Things that Go in a Quality Engagement Letter

Ok, if you’re reading this far, you likely understand the benefit. Now it’s time to talk about the contents of your engagement letters.

Everything that goes into an accounting engagement letter is covered, at length, in my online coaching membership, Future Firm Accelerate®. (You’ll also find my favorite template engagement letter in there.) 

But here’s the brief version:

• Brief introduction: Self-explanatory
• Company overview: Keep it simple by saying how you help and who you serve
• Professional body requirements: This is where you begin to get into details, including the overall purpose of the letter, how you’ll handle disputes, and other key items of your engagement
• Pricing and services: A list of the services included in agreed terms, and the price of each (can vary a bit, to better protect scope)
• Period of engagement: When your firm begins the contractual relationship, and potentially highlight that your firm wasn’t responsible for financials before that period (risk mitigation)
• Payment terms: A simple statement of when you collect (e.g. upfront, quarterly)
• Unanticipated services: A great tool to explain what happens when work exceeds agreed-upon terms
• Service Terms: This is the bulk of the letter, detailing out the terms of each service you provide to the client
• Confirmation of terms: This is where the client’s signature is placed, acknowledging they’ve read and understood the contents of your letter

NOTE: Some of these components are flexible, others aren’t. For example, every letter should have the confirmation of terms, while others may exclude the company overview.

How to Send Your Engagement Letters

Before we get to sample engagement letter template sections and how to create your own, there’s the subject of actually sending your letter.

If you’re going for a high-quality client and you’re building a cloud-based accounting firm, a Word doc isn’t going to cut it. Some modern era options include most proposal software products on the market. 

There are several invoice and proposal platforms and a few that include built-in engagement letter features. A ready-made tool allows you to:

• Create your own reusable templates
• Import certain sections (like individual service terms, based on the client)
• And get clients to e-sign the document

Note: My personal favorite is Practice Ignition. It’s easy to use, has the most automation capabilities, and helps with 3-tiered pricing models.

If you’re already using a proposal tool, see if it also has the ability to generate an engagement letter to send with the proposal.

Sample Sections and Engagement Letter Templates

Important: These example and template sections are simply ideas to get you started and are not to be considered advice in creating an agreement or a legal document between you and your clients.

We’ll begin with an example “Service Terms” section of the engagement letter, with a bit of explanation, followed by a few extra template examples.

Service Terms Template/Example

Here is an example section for an Accrual Bookkeeping Service. It’s taken directly from a service terms library that I include for my Future Firm Accelerate® members. 

Bookkeeping Services (Accrual)

What’s included:

• Enter all expenses into the accounting system based on their invoice date.
• Match business bank & credit card transactions to the respective sales & purchase invoices.
• Reconcile the agreed amount of transactions by the agreed timeframe.

What’s not included unless otherwise specified:

• Pay suppliers.
• Enter sales invoices and/or collecting receivables.
• Prepare employee expense reports.Project/class tracking.
• Reclassifying transactions from previously closed periods.

Important: It’s critical to include both what’s included in the service (in easy-to-read terms), as well as what’s not included. Again, this goes back to providing clear expectations, failsafes to mitigate scope creep, and cutting down on risk. These definitions are crucial to success in starting a bookkeeping business. 

Period of Engagement Template/Example

Example: Alpha and Beta Accounting is to take responsibility for the bookkeeping and tax preparation of ABC, Inc. for the entirety of fiscal year, 2021. This engagement does not include bookkeeping and/or amending tax filings for fiscal year 2020. Although, Alpha and Beta will prepare a separate quote for fiscal 2020, if desired by ABC 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 Template/Example

Example: In exchange for services described in this engagement letter, ABC 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/Example

Note: This one is a bit self explanatory, and the only inputs are your firm’s name and the name of your client. So, you’re spared the duplicate text and only left with the template.

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 ABC Inc. to either accept or decline.

Additional Note: Unanticipated services reinforce the need for clearly defined service terms. When you and your clients can go back to your engagement letter and see specific services listed in the “what’s not included” section, it goes a long way toward dispute resolution.

 

 

Geo-Specific Engagement Letter Templates

Accounting is a global service, and each geographic area has its own regulations, specific structures, and other differences. There are also a number of fantastic resources available, showing nuances in their engagement letter templates. Below, I’ve included a couple of examples for several countries.

Here are a few, with their corresponding area:

• Here’s one for Canadian accounting firms, and is short and to the point. You’ll likely want to add some of the sections mentioned in this article (especially service terms). 
• And another for Australia and New Zealand. Again, not extensive, but handles a lot of the necessary information that you’ll want to add to, in your letter.
• In the United Kingdom? Here’s a great example to use and make your own.
• And then we have the States (U.S.A). There is some quality language in this one, but it doesn’t have clear sections to it. So take what you can and make sure to add everything you need.
• My preferred engagement letter, including the template and detailed explanations of each element are available for members of Future Firm Accelerate®. 

Ready to Create Your Engagement Letter?

Creating your accounting engagement letter can take a bit of work. But the benefits you’ll receive make that work worthwhile, many times over.

That written agreement will set the expectation for your client, give you a resource to point them back to whenever anything is unclear, and provide a clear look into the type of client you want to attract in your business.

Will it change over time? Yep.

Are there still going to be issues with some clients? Absolutely.

But this is exactly the kind of big step forward that moves you toward a scalable accounting firm.