How engagement letters help accounting practices set client expectations

What’s an accounting engagement letter?

An accounting engagement letter looks a lot like a normal letter, with a date, sender, recipient, etc, and it acts as a written agreement between you and your client that outlines:

• The scope of your services: tax planning, tax prep, bookkeeping, accounting, advisory, auditing, etc. This defines the services you will — and will not — provide, and allows you to charge more for services that are out-of-scope.
• The client’s responsibilities: providing requested documents, paying your fees on time, authorizing you to collect their tax info from the IRS (using Form 8821), giving you power of attorney (using Form 2848), etc.
• Key terms: define key terms like your fees, deadlines, termination clauses, etc.

An engagement letter is like a legally-binding handshake in written form. It’s designed to keep everyone on the same page and offer clarity about what’s included (and what’s not), legal protection if a client claims you missed something, and professionalism by showing that you run a structured, trustworthy accounting practice.

Why is it important for accounting firms to use engagement letters

Simply put, engagement letters are one of those things where you either use them – or risk learning the hard way that you should’ve used them. For example, imagine a new client assumes that your tax prep fee also includes bookkeeping services for their business. When you don’t perform bookkeeping services, the client complains and the relationship sours.

Sending the client an engagement letter at the beginning of your professional relationship could prevent this issue and many others. Let’s define why they’re essential to your business:

When to use an accounting engagement letter

Engagement letters are an important tool for all professional accountants working with clients, but they are not always necessary. Let’s break down when you need one and when you don’t below.

Scenarios where they are a “must-have” for most practices

• New clients: every new professional relationship should start with a signed agreement.
• High-risk clients: if a client has a history of late payments or disputes, it’s even more important to protect yourself up front with an engagement letter.
• Complex or long-lasting services: if your services are more complex or cover a longer timeline for a certain client, then an engagement letter becomes even more important. Without clear standards, rates, service lists, timelines, etc, it can be easy to forget which services are in-scope and which aren’t.

Scenarios where it’s likely unnecessary

• One-time consultations: a short, one hour or less call doesn’t require a full engagement letter, but it’s still important to confirm your fees in writing (usually over email).
• Long-standing, trustworthy clients: some long-standing clients might be a bit old-fashioned, preferring the trust of a handshake deal over the legality of an engagement letter. If you trust them, then you might skip the engagement letter – but we’d still recommend using one all the same.

What to include in an accounting engagement letter

Now that we understand what an engagement letter is, let’s break down what’s included in one and why.

Services you are providing

List the services you’re agreeing to provide for your client. It’s important to be specific as to avoid misunderstandings or potential issues:

• List individual services: bookkeeping, tax planning, tax preparation, running payroll, bookkeeping, accounting, financial statement preparation, auditing, advisory services, etc.
• List any in-depth client advisory: helping set up health insurance, applying for tax credits, managing IRS tax payment plans, representing the client in audit or IRS disputes, acting with power of attorney, etc.

Be sure to specify the scope of your services. State that you are only responsible for performing the services listed in your engagement letter, and that any additional services will be billed an additional amount.

Engagement period and termination clause

State the engagement period (such as one year) and the date on which the engagement will start (or already started). Also, be sure to indicate if the engagement will automatically renew if not terminated by either you or the client.

Additionally, include a termination clause that describes the situations when you or the client can terminate the agreement and stop working together if desired. This can include timing, fees due on termination, a cancellation fee, etc.

Fee structure and payment terms

List your fees, how they will be billed, and late payment terms. Include…

• Your fee structure – flat fee hourly rate
• When payments are due – on receipt, by a specific date, within 30,60, or 90 days, etc. etc)
• Accepted payment methods – ACH, credit card, debit card, check, etc.
• Late payment penalties – include any percentage or dollar value penalties and when they will be charged
• How you’ll charge for out-of-scope services – the hourly rate or flat fee for additional services

What the client is responsible for

List what you expect the client to do which typically includes:

• Providing necessary documentation, such as W-2s, 1099s, brokerage statements, receipts, past tax returns, etc.
• Filling out and signing designee forms such as Form 8821 (Tax Information Authorization) or Form 2848 (Power of Attorney).
• Doing their best to respond to your inquiries promptly.
• Notifying you of any changes that affect their tax or financial situation promptly.
• And of course, they need to sign and return the engagement letter to you promptly.

Professional standards

Make note of your firm’s code of conduct and indicate how you’ll guarantee the quality of your work. States the professional standards you’ll adhere to, such as US GAAP, AICPA standards, and IRS standards. If applicable, mention that a designee form (Form 8821 or 2848) may be needed for IRS communications. Additionally, include your paid tax preparer identification number (PTIN) so clients can look up your firm and ensure that your accounting certifications are up to date.

What does an accounting engagement letter look like?

This might sound silly, but an accounting engagement letter looks a lot like any other professional letter. It includes your firm’s letterhead, you and the client’s info, the date, and the body of the letter. Let’s break it down into specifics:

• At the top: your firm’s letterhead (your logo, firm name, etc.).
• The date of the letter.
• The client’s info: name, business name (if applicable), phone number, email address, and physical address.
• The subject of the letter: “Engagement Letter for Accounting Services” (or something similar)
• The body of the letter: “Dear client, […]”. The body should be broken down into concise, logical sections using terms that the client can understand.
• Your info: “Sincerely, your name, your title, and your firm’s name” and potentiall your address.
• Your client’s signature and the date.