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Most Common Mistakes Made in Accounting Engagement Letters

Carl Coe
Posted by Carl Coe on Jan 18, 2022 10:41:20 AM

The engagement letter is one of the most important documents for you and your client. It outlines the business relationship, with details around the scope of the engagement, the terms, the cost, and other important information.

The purpose of the engagement letter, whether it is an accounting engagement letter, audit engagement letter, or bookkeeping engagement letter,  is to set expectations for both parties before the work is started. Despite its importance, many accountants are not handling engagement letters correctly.

This article will cover four common mistakes that are made on engagement letters, in both the content and the workflow. Avoiding these mistakes can lead to fewer misunderstandings and increased client satisfaction.

 

1. The Letter Does Not Fully Describe Services

An engagement letter should specify in both summary and detail the services that will be performed. An example of a summary of services is something along the lines of “We will audit the financial statements for ABC Corporation for the year ended December 31st, 2021”. Then, in the next paragraphs you can describe how you will conduct the audit, the standards you will follow, and the report you will issue at the end of the audit.

Just as important as describing the services you will perform is describing the services you will NOT perform. For example, in audit engagement letters it is common to state that you will not guarantee the absence of fraud as it is outside the scope of an audit.

Even though an engagement letter is legally binding, the description of services does not need to be in ‘legalese’ like a contract. You just don’t want to leave anything open to interpretation.

2. The Letter Does Not Sufficiently Explain Client Responsibilities

Engagement letters should always lay out in clear terms what the client needs to do or provide in order for the work to be completed by you. Audits, reviews, compilations, and tax returns, for example, require the client’s cooperation in handing over relevant documents as requested (such as bank statements). Be sure to explicitly state the consequences that would result in the event the client fails to meet their responsibilities (for example, inability by you to express an audit opinion or complete a tax return).

3. The Letter Does Not Explain Fees and Terms Properly

Almost all accountants will include the fee in the engagement letter. But what about when the payment is due or accepted methods of payment? How about other important information such as estimated start and finish dates, cancellation policy, and key contacts at your firm? Engagement letters need to clearly spell out the terms of the engagement so that there can’t be any misinterpretation.

4. The Workflow for Completing the Engagement Letter is Not Automated

The problem that many accountants face is that their process for both creating the engagement letter and sharing the letter with the client is very manual. Creating a letter from scratch, saving it as a PDF, emailing it to the client to sign and send back, and then separately invoicing the client are all manual processes that take up a lot of your time.

A better method involves selecting a relevant engagement letter from a set of templates where most of the letter is pre-populated. After customizing as needed, you can click a button to automatically send the letter to your client via Secure File Sharing. This will prompt the client to read and sign. They can electronically sign the document and send it back.

There are multiple benefits to having this kind of workflow. First, it reduces emails back and forth and other inefficiencies. Secondly, it provides an opportunity to create a memorable onboarding experience for your client and sets the tone that your organization uses efficient tools that automate many time-consuming functions (invoicing, payment processing, etc.)

Conclusion

Engagement letters are one of the most important documents for your business. If you are doing them correctly and efficiently, you will avoid headaches and possible lawsuits down the line. Therefore, it is important that you avoid the mistakes listed above by describing your services, the client’s responsibilities, and the terms of each project fully and clearly. Additionally, having the right Accounting Practice Management Software will allow you to automate the engagement letter process so you can actually focus on the engagement itself.

Finally, using an engagement letter checklist can also help you cover all the necessary bases on an engagement letter that sufficiently protects everyone involved.

Topics: Practice Management


 

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