A Clear & Simple Accounting Engagement Letter [Template]

You know that client… the one who calls every couple of days with a new accounting emergency. 

It could be the serial refinancers who need updated financial statements every couple of weeks as they chase down the best rate. Or the business client who comes across some unique investment idea requiring thorough tax projections and hours of research. 

While CPA firms can help out with any of these requests, you also need to safeguard your time and get compensated for additional services.

To protect yourself from time drains, minimize your professional liability, and maintain your firm’s profitability, you need to ensure you have an engagement agreement in place for each project.

What is an Accounting Engagement Letter?

An accounting engagement letter is a contract outlining the scope of work, billing rates, and any other relevant terms of the engagement. The contract should be agreed to by all parties prior to commencing work. 

For long-term engagements, you should update the engagement letter each year to ensure the terms are still correct and the included services cover the entire scope of the client’s requests. 

An accounting engagement letter should be signed and accepted by each party to signify acceptance of the contract and understanding of the services to be rendered and at what price. In addition, it should include language for billing practices of additional services that might be outside the scope of the initial project. 

As an accountant, having an engagement letter helps you determine how much of your resources to allocate to the project and calculate the profitability of each engagement. 

There are many types of accounting projects that should have signed engagement letters in place, including tax engagements, accounting engagements, bookkeeping engagements, and consulting services. Each of these letters should be tailored to the specific projects. It’s possible you will end up having several agreements in effect for a single client.

 

Do You Really Need to Send a Letter at The Beginning of Each Engagement?

The short answer is yes, you should have an engagement letter at the beginning of every engagement and have a signed agreement prior to commencing work. 

The longer answer is it may not always be possible to draft an engagement letter prior to starting a project if the project is particularly time sensitive. However, time sensitive projects have greater potential liability due to their rushed nature. This puts greater significance on having the signed agreement ahead of time to outline your liability and responsibility for the project.

But why is the engagement later so important? 

1. It defines the scope of services

Both parties need to be on the same page as far as the scope of the project and which services are included in the pricing. Clearly outlining these items at the beginning means the discussions about the project and price have happened before you have invested any of your team’s time in the engagement. 

2. It outlines all billing terms from the outset

One of the worst phrases in business is “just invoice me what you think is fair.” This puts all the onus on you to walk the fine line between receiving proper compensation for your services and meeting the client’s (unknown) expectations. Setting the billing upfront (whether it’s a flat rate or hourly fees) forces this discussion to take place prior to the project. It drastically increases the chances you will be paid for your services.

3. It defines responsibilities

Taking the guesswork out of which responsibilities belong to your firm and which belong to the client lets you focus on the work. For example, if you are handling account receivables for a client, who is responsible for reaching out to delinquent accounts? You’ll want to have this agreed upon going into the gig. 

4. It helps protect you from liability

With any client relationship, there’s a chance the situation might go sour. If the engagement doesn’t work out or one party’s expectations are not met, it’s possible you will need liability protection. Having an engagement letter in place outlining your obligations can help protect you in the event a client tries to sue you for nonperformance, assuming you fulfilled your responsibilities. 

What Your Accounting Engagement Letter Should Include

Before we get to the template, here’s what you should consider including as part of your engagement letter:

Names of each party and their role in the engagement

You may or may not need to include every member of your team who will be working on the engagement (although some government and quasi-government clients will want this information). You should include the name of your business and the client’s name. This might seem obvious, but for the contract to be official, you can’t have the client sign a generic letter and expect it to hold up.

Scope of work

Each service you render should be included in the scope of work with as much detail as possible. For example, does your engagement include follow up calls to the IRS, audit support, or document storage? If not, you need to clearly state the engagement is limited to the preparation of a tax return and any additional support needed is outside the scope of the initial engagement.

Billing terms

Billing has been mentioned a few times already because its importance is paramount. If you have not outlined the cost of the project, it hampers your ability to go after the client in the event they refuse to pay all or part of your bill.

Each party’s responsibilities

Who is responsible for providing source documents? Who handles the accuracy of any information provided to complete the accounting engagement? Is the scope limited to a compilation service or is the client looking for a full audit? Knowing who is responsible for providing and processing information gets everyone to be on the same page and creates a smoother workflow.

Liability limitation

Accounting engagement letters should include terms which limit the firm’s liability as much as possible. Statements such as “we will rely on the information provided by the client” or “we will not audit or verify the information” are often included to show the scope of the project does not include auditing services. In addition, it’s wise to include resolution terms such as requiring use of mediation to resolve any future disputes with the client.

Termination provisions

Not all client relationships last forever. The engagement letter should include the terms for canceling the contract and provide ways for either party to end the engagement. Including standard terms such as requiring 30 days notice to end the contract allow both parties to know they won’t be abandoned in the middle of a project.

A Free Accounting Engagement Letter Template

We’ve created a sample accounting engagement letter template below, which you can use as a starting point. This example is for illustration purposes only. You should always consult a legal professional before finalizing your letter.

December 14, 2021

Onsite Construction

441 Building Street

New Land, OR 37488

Dear [Client Name]: 

We are thrilled you have chosen our firm to provide quarterly compilation services for your business and an annual review.

This letter is to confirm our mutual understanding of the terms of our engagement to provide accounting and review services for your firm.

We will provide quarterly compilation services consisting of: 

• Reconciling bank accounts.
• Reviewing the chart of accounts.
• Preparation of Profit and Loss, Balance Sheet, and Statement of Cash Flows.
• The compilations will be based on the tax basis of account.
• Up to four hours per month of consulting work related to new accounts, treatment of assets, and training for your bookkeeper.

The quarterly services will be completed by the last day of the month following the end of the quarter. 

Additionally, we will also provide an annual review consisting of:

• Verifying account balances through the review of bank and lender statements.
• Ensuring depreciation has been correctly recorded on your books. 
• Providing a statement certifying the books have been reviewed, once the review has been completed and any issues have been addressed.

The annual review will be completed within 6 weeks of receiving your financial information.

All services will be billed at our standard hourly rates:

• Administrative staff: $xx/hour
• Bookkeeping staff: $xx/hour
• CPA: $xxx/hour

This engagement will be in place until either party cancels the agreement through written communication with 30 days notice.

Our responsibility in this engagement consists of completing the quarterly compilations with care and due diligence. All communication from your firm will be answered within 48 hours. 

Your responsibility for this engagement includes providing access to your accounting system and providing the documentation and information necessary to complete the quarterly compilation services and the annual review. 

While we stand behind our professional judgment and experience, our services are governed by the professional standards of the AICPA. 

In the event of any future disagreements, both parties agree to resolve the issues through mediation. Any cost for mediation services will be split equally between both parties.

We look forward to working with you. 

Sincerely,

________________________________

Barry Books, CPA

Accepted by:

________________________________

[Client Name]

BONUS: Simplify Your Accounting Workflows with This Free Resource

If you’re looking for simple workflow templates, which includes a bookkeeping client onboarding checklist, access our collection of 32 customizable accounting workflow templates. This free resource includes a ton of the most popular accounting templates including monthly bookkeeping, weekly accounting analysis, client onboarding procedures, and common tax return forms.