What Should You Expect in an Accounting Engagement Letter?

When business owners hire third-party accounting firms to manage their finances, they may be provided with an engagement letter. This type of document is new to many business owners, especially those that are outsourcing financial functions for the first time.

Essentially, an accounting engagement letter is an agreement to provide services to a client. The agreement describes the business relationship and sets expectations for both parties in a way that is less formal than a traditional contract. 

An engagement letter can be a summary of a longer service contract or the contract itself. It is especially beneficial in situations when one or both parties do not want to hash out detailed contractual specifics but still need an agreement in place. Once it is signed by both parties, an engagement letter is legally binding, which means it should cover the same aspects that a traditional contract would.

Scope

An engagement letter will always indicate the specific services to be provided by the accounting company. It may also outline important milestones and deadlines, where applicable.

In some cases, the agreement may list the firm’s areas of expertise as well to clearly define the scope of the agreement for the client. Specifying the exact nature of the relationship protects both parties by limiting each side’s responsibilities to avoid scope creep.

Understanding the extent of the project scope beforehand helps control service provider costs and improves client satisfaction. The result is a more sustainable long-term business relationship focused on mutual success.

Payment

Accompanying the scope of the project are the payment terms for the work being performed. Compensation and payment timing will also be elaborated in the engagement letter. If special additional payment terms have been extended, they should be included here as well.

The engagement agreement may also specify additional anticipated costs that are not included in the service, for example a software usage license or annual tax filing fees. These are occasionally provided to give clients a complete picture of what their full financial obligations will be from the beginning. By specifying both the set costs that are included and the anticipated costs that are not included in the service fees, accounting firms aim to improve transparency to further improve client satisfaction.  

Performance

Not every accounting engagement letter will establish performance criteria. However, doing so can improve understanding on both sides of the agreement by defining the parameters that will be used to evaluate the work being done and establish performance metrics.
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Understanding what an accounting firm uses to gauge their success shapes the business relationship and provides the opportunity for clients to start a conversation around the KPIs that they use. The subsequent dialogue that can occur helps to inform both parties.

Guarantees

Any applicable warranties or performance guarantees will also be included in an engagement letter. These will be included to establish goodwill and provide reassurances to less experienced clients, assuaging their concerns.

Disputes

While less common, an engagement letter may also specify mediation or arbitration directions for resolving disputes. Additionally, it can include the information regarding state courts that will rule over legal disputes or outline applicable legal protections.

Typically, dispute-related material is saved for longer documents like formal service contracts. However, accounting companies doing business across state lines may choose to include this information in the engagement letter as well to fully protect themselves.

While an engagement letter is typically part of the onboarding process, accounting companies may require long-term clients to re-sign the letter periodically or whenever terms may change. It is not unusual for clients to need to sign the engagement letter annually as part of maintaining their ongoing accounting service.

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