Accountants: Why You Need to Use Engagement Letters?

As an accountant, you are constantly bombarded with tasks, responsibilities, and deadlines. It can be challenging to keep track of everything, let alone find the time to issue engagement letters to clients. However, engagement letters are an essential part of the accounting process and key to protecting yourself and your client. This blog will discuss what an engagement letter is, what it should contain, and when you need to issue one. We will also provide tips for ensuring your engagement letters effectively protect you and your clients.

What is an engagement letter, and why is it necessary?

An engagement letter is a formal document outlining the scope of work performed by an accountant or accounting firm. The APES 110 Code of Ethics for Professional Accountants stipulates that “A practitioner should not accept an engagement without first agreeing with the client on the terms of the engagement.” The tax practitioners board also requires tax (financial) advisers to have a written agreement with their clients that sets out the terms of the engagement.
The purpose of an engagement letter is to:

• Establish the accountant-client relationship,
• Document the services to be provided,
• Define the roles and responsibilities of both parties,
• Explain the fee arrangements, and
• Set expectations for communication and reporting.

This document is necessary for several reasons. It helps to protect both the accountant and the client. It establishes the terms of the relationship and defines the services that will be provided can help to prevent misunderstandings and disputes down the track.

What should an engagement letter contain?

The contents of an engagement letter will vary depending on the specific situation, but some key elements should always be included. APES 305 Terms of Engagement for Professional Services provides guidance on what should be included in an engagement letter.

• The identity of the client and the name of the contact person.
• The scope of work to be performed which should be sufficiently detailed to allow the client to understand what services will be provided and how they will be delivered.
• Any limitations on the scope of work. For example, if you are only performing an audit of the financial statements, this should be made clear.
• The fee arrangements, this should include a discussion of how the fees will be calculated and any other expenses that the client may be responsible for.
• The expected timetable for delivery of services.
• The communication and reporting requirements. This should include a discussion of how often the client can expect to receive updates on the performed work.
• The confidentiality of information. This should include discussing how you will safeguard the client’s information and what restrictions you will place on its use and disclosure.

When do you need to issue an engagement letter?

Engagement letters should be issued at the beginning of the client-accountant relationship. The APES 110 guidance requires that an engagement letter be issued before the commencement of any work, and this ensures that both parties are clear on the engagement terms and helps avoid misunderstandings later on.

If you have commenced working with a client without an engagement letter, it is vital to do so as soon as possible. Issuing an engagement letter retroactively is not ideal, but it is better than not having one at all.
In some cases, engagement letters may also need to be issued for specific projects. For example, if an accountant is hired to perform a review or audit, an engagement letter should be issued outlining the specific scope of work to be performed.

Engagement letters should be reviewed and updated regularly, ensuring that they remain relevant and reflect any changes in the scope of work or fee arrangements.

Tips for effective engagement letters

Here are some tips to help you create effective engagement letters:

• Keep it simple. An engagement letter does not need to belong or be complicated, and the important thing is that it is clear and concise.
• Be specific. The scope of work and the fee arrangements should be stated clearly and in as much detail as possible, and this will help avoid misunderstandings later on.
• Use plain language. Avoid using legal or accounting jargon in your engagement letter. The goal is to make sure that the client understands what they agree to.
• Get it in writing. An engagement letter should always be in writing, even if you are working with a client who is also a friend or family member, and this will help avoid any confusion later on.

Conclusion

An engagement letter is a critical document for accountants and accounting firms. It helps to establish the terms of the engagement, define the scope of work, and set expectations for communication and reporting. Issuing an engagement letter before commencing any work is essential to avoid misunderstandings down the track.