An engagement letter is less formal than a contract but does the same thing by legally defining the relationship between a business and its client. It includes details about the scope of the requested work, the charge or fee, and the terms and conditions. Setting out the expectations of both the business and the client provides legal protection for both parties, but the client should read the document carefully, querying anything they don’t understand or agree with, before signing it.
An accountant’s letter of engagement or a bookkeeper’s will be quite similar. As an example, a client signed up with an accountant for a specific service: year-end accounts completion and filing. The engagement letter details this stand-alone service, and it was not part of an accounting package. The client then requests an additional service to complete and file two directors’ personal self-assessment tax returns. This is what you could call “scope creep”. The signed letter of engagement will need to be amended to include this extra service and fee.
What is an Engagement Letter?
A letter of engagement is a legally binding document signed by both the business and the client. Much like a contract, it sets out the terms of an agreement to carry out a specific job, project, or service package between an organisation and its client. The engagement defines the boundaries of the professional relationship between the service provider and the client and protects both parties.
Today’s accounting practices tend to offer a wider range of services, demonstrating their value and expertise in providing advisory services alongside traditional bookkeeping and accounting. The engagement letter gives client-centric accounting firms the opportunity to respectfully point out that out-of-scope work will incur an additional fee. Accounting firms tend to offer a selection of service “packages” and a tariff for stand-alone bookkeeping and tax and accounting services. This is provided alongside what used to be called “value-added” services, such as business advisory, tax planning, and other single service provisions. This holistic model can potentially confuse clients about where the boundary lies between one service or product and another.
Typically, accounting practices issue the letter of engagement during the client onboarding process. Primarily, the letter of engagement is there to mitigate risk for both parties and avoid disagreements. It will inform the client of the engagement’s margins or parameters to avoid “scope creep” (also known as fees leakage). For instance, once an accountant has taken over a client’s bookkeeping and accounts, the client can request, e.g., a payroll dimension or VAT return completion and filing, but the letter of engagement will need adjusting to show the extra service(s) and charge.
How an Engagement Letter Works
The business will have discussed the client’s requirements; the engagement letter then describes in detail the professional service contract between the business and the client. Before signing it, the client should check to ensure that it meets all their requirements. Until such a time a new or updated engagement letter has been signed, the legally binding parameters of the client–business relationship will be the one signed by both parties.
Depending on the industry sector (e.g., legal firm, accounting practice, or a bookkeeping business), this scope-of-work document should follow the standard format on the business letterhead. An accountant’s letter of engagement or a letter of engagement for bookkeepers typically includes the following:
- The date of the engagement letter.
- The terms of the relationship stating both the service provider’s and the client’s name and address.
- The type of work in short, for example, “accounting and bookkeeping”, and basic information about what that work entails.
- The scope of work will outline the specific services that are going to be provided. The date range of when the service begins and ends, services (such as accounting software and training; helpline), and anything else relevant to what is being provided.
- An “out of scope” paragraph should explain the terms and state that any additional work not previously agreed upon will incur a charge.
- The fees’ terms and conditions should specify the charge for the agreed-upon work and payment terms (e.g., monthly by direct debit). The document should clarify the additional charges for handling “out of scope” work.
- The two parties’ responsibilities should clarify the client’s responsibilities as well as the business’s and outline or refer the signee to the paragraph(s) detailing all the goods and services, actions, and terms of the agreement in relation to responsibilities.
- The paragraph on communication should provide the client with information about how to contact the business and include when and in what format the business will contact the client formally in relation to deadlines, etc. Office hours, and if applicable, the name of the client’s key worker, account manager, or other named individual should be provided.
- Terms of terminating the agreement should include the requirements for giving notice and stipulate any penalty clauses.
- Clauses for dispute resolution can also be included (see below).
Making it straightforward to adapt to out-of-scope work requests and transparency about fees and charges gives clients reassurance that your firm’s service scope is flexible. This helps businesses thrive confidently and compliantly in a complex, competitive environment.
What are the Advantages/Benefits of Engagement Letters?
Both the business and the client benefit from a letter of engagement. A legal document often utilised in the services industry (e.g., by legal firms and accounting practices), they are also known as contracts or letters of engagement. With the objective of safeguarding both the consumer and the business, once signed, the engagement letter becomes a legally binding contract. These agreements offer the following main benefits:
Clarity: Engagement letters provide both parties with clarity about the service agreement and complete engagement process. They specifically state the responsibilities, limitations, fees, and other details.
Legal protection: If both parties sign a legally binding document, they both have legal standing if they seek damages. They reduce the risk of either party not fulfilling its part of the agreement if the other party fails to fulfil their obligations as stated in the letter of engagement.
Expectations: Engagement letters state each party’s expectations. An accountant may state among their expectations that they expect honesty, candour, and timely submission of any documents they request, and, in exchange, their client would benefit from a guarantee of compliance and no late filing. If both parties keep to their sides of the bargain, everyone wins. This letter or a separate document may list the service or task the client is using, the limitations, and the deadlines for each task and subtask.
What to Include in your Letter of Engagement
A client engagement letter should be short and simple. Certain engagement letter templates include a separate terms-and-conditions document, referred to in the letter. Simplifying the engagement letter can help clients understand it. However, they must understand that, by signing it, they agree to the terms and conditions. A separate engagement letter should be sent to every client using your services, containing the following information:
Contact details: Accurately state the client’s name, business name, and address, and specify if this includes a group of clients within the business.
Scope of services: The letter of engagement must state the scope of the services you are providing, or the name of the package, and what it includes. If the letter is for a specific project, such as an audit or a merger and acquisition, a plan or statement might be included to define the project’s scope and parameters.
Period of engagement: In this paragraph, you should specify the start and end dates of the engagement. For a specific service, such as “year-end accounts and CT return” or “self-assessment tax return”, you could also state dates for delivery of documents by the client, filing dates, and payment due dates.
Compensation terms: A price tariff breaking down your fees for services or packages by billing type should form part of the letter of engagement. Providing a link to the appropriate page on your business website can also be helpful for clients to review their package or service online.
Transparency is important, and the fee structure should provide clients with information about their billing date and fee (+ VAT), and how they should pay.
Out-of-scope work: It is worth mentioning in the letter of engagement what happens if your client requests additional services that are not covered by it, as well as what happens if they have been incorrectly quoted for a job.
Late payments: It is a good idea to include a clause about late payments (e.g., late penalty fee, suspension of service, and action that will be taken if the bill is not settled in full in however many days).
Confidentiality clause: Confidentiality is important. Accountants should follow their code of ethics or professional guidelines. Any business should make it a priority to keep client data secure and never disclose client names or information relating to personal or business affairs.
Dispute resolution clause: This should outline the steps you and your client will take in the event of a dispute (e.g., if there’s a disagreement about a charge).
Mediation clause: An alternative dispute resolution (ADR) clause, like mediation, lets the signees of the contract agree that, if there is a dispute, they will use an ADR before, or at least alongside, court action or binding arbitration.
When to Issue and Update an Engagement Letter
Clients have the right to know exactly what they are signing up for. Likewise, accountants have a right to ask customers to acknowledge their legal obligation in accordance with the terms and conditions of service and the letter of engagement.
Ideally, an engagement letter should be sent out to the client during onboarding. An annual update should be issued on the client’s joining anniversary. Any new stand-alone project work should have a separate engagement letter. Additional services requested by clients should be inserted into their existing letter of engagement.
Regularly auditing existing clients’ service requirements against their letter of engagement is an opportunity to check that it accurately reflects the current relationship between you and your client. For accountants and tax professionals, it also presents a chance to stay up-to-date with changes to regulations or standards in line with their clients’ needs or expectations.
Creating Engagement letters Easily and Quickly with the Automation Tool
The Outbooks Proposal automation tool makes creating, issuing, renewing, updating, and storing engagement letters a relatively straightforward task. Your proposal and/or letter of engagement template will still require your input to make sure that all necessary elements of the project or client’s services are included. However, it will make life easier without a doubt, increase efficiency, and cut down on fees leakage by helping you to establish a uniform pricing system that everyone in your practice can use.
Final Thoughts on Accounting Letters of Engagement
In some accounting practices, amending the letter of engagement before its official annual update is an administrative task that can cause delays. Hence, Outbooks have focused on automating the engagement letter amendment process.
Meeting client expectations without fuss by simply inserting out-of-scope requests into engagement letter templates speaks volumes about your business’s efficiency and flexibility. With the Outbooks Proposal automation tool, accountants and bookkeepers can make automated changes to the letter’s scope and terms and conditions, make fee adjustments, or change billing details. The Outbooks professional engagement documentation feature then automatically informs your client about the changes to the scope of work in the service agreement. This then reinstates the legal protection of a binding contract for service delivery and its fee structure in one document.
A business’s letters of engagement should protect the business and their clients. In a time of dynamic change for accountants due to changes in client expectations and technology, engagement letters are essential to avoid out-of-scope work. Modern accountants offer their clients much more than compliance services. Many provide a holistic service that includes proactive business advice, tax-planning services, advice on business growth, and practical assistance and expert advice on just about every accounting-related matter. Accountants and their team dedicate many hours of labour to accomplish all of this. Hence, ensuring profitable accounting practices and protecting clients from fee inflation or missing services are what make letters of engagement so valuable.
FAQs
Is a letter of engagement a contract?
An engagement letter, like a contract, is legally binding once signed but is usually simpler and shorter. Businesses of all types (limited liability companies, partnerships, and freelance or contractor sole traders) can access an online template to suit their type of trade.
When should an engagement letter be sent?
You should send your client an engagement letter before the project or work begins. If the engagement is long-term, you should update it annually. If the scope of services or your business prices change in the interim, the letter of engagement should be reissued.
Should the business providing the service always issue the letter of engagement?
An engagement letter is normally drafted by the company providing the service. You could search online for a template that fits your industry role to avoid requiring legal help. The letter is legally binding if you present it to your client and get a signature and then sign it yourself. On occasion, your client may ask you to sign a letter of engagement or contract. In this case, so long as you agree with the terms of the document, then you should sign that to provide yourself with legal protection.
Hinakshi, a Content Writer and Social Media Expert at Outbooks, brings her passion for writing to every project. Specializing in tax preparation, management accounts, cash flow, and VAT returns, she creates engaging, well-researched content that simplifies complex topics. Her work supports accountants in growing their practices and optimizing finances, making valuable information accessible to professionals and newcomers alike.
