How to draft an Accounting Engagement Letter : A Step-by-Step guide

You're probably familiar with that one client – the type who gives you a call every few days, seemingly with a new accounting crisis. Maybe it's the folks who need updated financial statements every couple of weeks, or perhaps it's the business client who stumbles upon some intriguing investment opportunity, demanding extensive tax projections and hours of research.

While CPA firms are more than willing to assist with these requests, it's important to balance your workload, safeguard your time, and ensure you're compensated for additional services. To protect yourself from time-consuming tasks, reduce professional liability, and maintain your firm's profitability, it's essential to have a clear engagement agreement in place for each client and their respective projects.

What is an Engagement Letter for Accounting Services?

Also known as Client Onboarding letter or Professional Services Agreement for accountants serves as a formal written contract outlining the business relationship between a client and a company. Within this document, the scope of the agreement, its specific terms, and associated costs are specified. The primary objective of an engagement letter is to establish clear and mutual expectations for both parties involved in the agreement.

If the tenure of the relationship is going to be longer than a year, businesses are encouraged to renew the contract on a yearly basis ensuring security and protection to both the accountant and the client.

What are the key elements in drafting a Client Engagement Letter in Accounting?

1. Scope of services.
2. Responsibility of both parties.
3. Fees and payments terms.
4. Confidentiality and data security.
5. Termination Clauses.
6. Reporting and deliverables.
7. Deadlines and timelines.

Ensure that each of the engagement letters are tailored to suit the requirements on the potential client. The letter has to be specific to the accounting services like tax preparation, auditing, or tax advisory services.

Scope of Services:

Each of the services you provide should be clearly mentioned in the engagement letter. For example, the engagement is for extending specific services such as payroll, corporate tax, audit, bookkeeping etc. Precisely mention the scope and the limitations which have to be managed by the client themselves.

Responsibility of both parties:

Client's Responsibilities:

This typically includes:

• Providing accurate and complete information: Explain that the client must supply all necessary financial documents, records, and data needed for the accounting services. Mention that the information should be accurate and up to date.
• Communication: Highlight the importance of open and timely communication. The client should promptly respond to inquiries and provide any additional information or clarification if required.
• Compliance with deadlines: Emphasize that clients need to meet deadlines for submitting information, responding to queries, or reviewing reports.
• Review and approval: Describe the client's role in reviewing financial statements or reports and granting approval. Make it clear that the client is responsible for ensuring the accuracy and completeness of these documents.

Accountant's Responsibilities:

Explain the accountant's duties and obligations within the engagement. This typically includes:

• Providing professional services: Clarify that the accountant will perform the agreed-upon accounting services with competence, adhering to professional standards and regulations.
• Confidentiality: Stress the accountant's responsibility to keep all client information confidential and secure, maintaining client trust.
• Reporting: Detail the accountant's role in preparing reports, financial statements, or any other deliverables specified in the engagement.
• Timely communication: Mention that accountants should keep clients informed about the progress of the work and promptly address any questions or concerns.
• Compliance: State that the accountant will comply with relevant accounting and auditing standards and legal requirements.

Fees and Payment Terms :

• Fees must be an exact number.
• Mention what is included in the service package and what could be considered as an add-on.
• Be specific on the due date for each payment, if it’s going to be a one-time or pro-rated basis or a monthly retainer fee.
• Outline any late fee penalties that may be imposed on a conditional basis.
• Highlight any refund policy, if applicable.

Confidentiality and data security:

The Sarbanes-Oxley Act, otherwise known as SOX, is a United States federal law designed to further protect shareholders and the public from general accounting fraud in public and private companies by improving the accuracy of corporate disclosures. All publicly traded U.S. companies or publicly traded companies in other countries that do business in the U.S should comply with the law. These companies are required to make and maintain internal controls and audit them. Failing on this could invite heavy penalties from the IRS.

You maintain Confidentiality by providing:

• Secure Storage : Invest in a client portal that has the capability to share secure files and folders with your clients.
• Access controls: Invest trust and explain to the client all files shall be accessed by authorized personnels only.
• NDA: It’s in the best interest of both parties to sign a Non Disclosure Agreement for a legal binding.

Termination Clause :

This is extremely crucial. It outlines the conditions on which either party can bring the professional relationship to a halt.

If it is initiated by the client, it could include completing the service upon agreed terms, dissatisfaction with the accountant, or by providing written communication with an advance notice.

If it is initiated by the accountant, it could include non-payment of fees, lack of cooperation or inability to provide relevant information, or even ethical grounds.

However, it is crucial that either party provides a written notice with the intent to terminate the contract with sufficient notice period.

Reporting and Deliverables :

As an accountant, it is vital for you to inform your clients about the deliverables and their expectations.

Mention the type of financial statements that shall be provided during the contract period such as tax returns, audit reports, cash flow statements etc. Highlight the format of these reports, and method of delivery, whether on email, physically delivered to office, through a secure client portal.

The frequency of these reports needs to be mentioned whether it is monthly, quarterly, or upon completing a specific service.

How to write an effective accounting engagement letter, you ask? Here you go.

[Your Name] [Your Address] [City, State, Zip Code] [Your Email Address] [Your Phone Number] [Date]

[Client's Name] [Client's Address] [City, State, Zip Code]

Dear [Client's Name],

RE: ENGAGEMENT LETTER FOR TAX AND PAYROLL SERVICES

We are delighted to outline the terms and conditions of our engagement to provide tax and payroll services to you. This letter is designed to clarify the scope of the services we will provide, our responsibilities, the terms of payment, and other important details of our working relationship.

Scope of Services:

• We will deliver comprehensive tax services, encompassing the preparation and filing of federal and state tax returns as applicable, and payroll services designed to facilitate the effective management of your financial affairs.
• Our payroll services will include payroll processing, tax calculations, and ensuring compliance with all relevant federal and state regulations.

Responsibilities:

• As our client, your responsibilities encompass providing all necessary financial information, documents, and records required for the accurate preparation of tax returns and payroll processing.
• You are responsible for promptly responding to inquiries and requests for information.
• Timely payment of all outstanding fees, as agreed upon, is also your responsibility.

Our Responsibilities:

• We commit to providing diligent and professional tax and payroll services, in compliance with all applicable laws and regulations.
• Our team will maintain the confidentiality and data security of your financial information, ensuring that it is handled in accordance with professional standards and relevant regulations.
• We will make every effort to meet agreed-upon deadlines for the completion of tax filings and payroll processing.

Fees and Payment Terms:

• Our fees for tax and payroll services are as follows: [Specify the fees or fee structure, e.g., hourly rates or flat fees].
• Payment for our services is due within [Specify payment terms, e.g., 15 days] from the date of the invoice.
• Late payments may be subject to [Specify any late payment penalties or interest charges, if applicable].

Confidentiality and Data Security:

• Rest assured that we will maintain the confidentiality and security of your sensitive financial information, complying with all relevant laws and regulations governing data privacy.
• We will not disclose your information to any third party without your explicit consent.

Terms of Engagement:

• This engagement will commence on [Start Date] and will continue until [End Date], unless terminated by either party in accordance with the terms specified in the Termination clause.

Termination:

• Either party may terminate this engagement with [Specify notice period, e.g., 30 days'] written notice to the other party.
• In the event of termination, we will complete any pending work and return your documents or data in our possession.

Dispute Resolution:

• In case of disputes arising from this engagement, both parties agree to seek resolution through mediation or arbitration in accordance with the rules of the American Arbitration Association.
• Should mediation or arbitration fail to resolve the dispute, legal action may be taken under the laws of the United States.

Governing Law:

This engagement is governed by the laws of the United States.

Client Obligations Upon Termination:

Following the termination of this engagement, it is your responsibility to ensure the continued management of your financial and tax affairs. We will provide assistance in transitioning your data, as specified in the Termination clause.

Agreement:

• Your acceptance of these terms can be confirmed by signing and returning a copy of this letter to us.
• Should you have any questions or concerns, please do not hesitate to contact us.

We are grateful for the opportunity to serve you and look forward to providing you with professional tax and payroll services. Thank you for entrusting us with your financial needs.

Sincerely,

[Your Name] [Your Title] [Your Accounting Firm's Name]