Any business-client relationship can be challenging. Even the slightest miscommunication can lead to conflict and potentially harm fruitful associations. An engagement letter is necessary to avoid this and facilitate smooth and stress-free business interactions.
When a bookkeeping or accounting firm conducts business with a client, the engagement letter outlines the parameters of the business association in a document. It provides the client with clear boundaries, helping them understand the firm's deliverables. Additionally, it safeguards the accounting business against misunderstandings, especially in legal matters.
Once an engagement letter is issued and signed by a client, many accountants believe they have met the basic compliance criteria and proceed with the assignment. However, modern accountants view the end-to-end review of the engagement as an opportunity to assess service efficiency, review fees, and further enhance the client relationship.
In this article, we will shed light on how engagement letters can assist firms in improving client engagement, maximizing profit margins, and expanding their business.
Keeps the Fee and Engagement Terms Under Review
Some accountants prefer not to review their client engagements and terms daily. They aim to avoid difficult conversations about client suitability and potential 'scope creep,' which could lead to additional fees or, in extreme cases, engagement termination.
Conducting an annual review of each engagement is essential for identifying areas where profit margins may be insufficient. It also helps pinpoint instances where a client's work requirements have evolved, but the accountant has not adapted. Frequent, regular reviews may be necessary, particularly when firms offer challenging services such as advisory services and specialized tax expertise.
By using engagement letters for accountants, accounting firms can clearly outline the scope of work that needs to be completed and the procedures for modifying it. An accountant may realize that extra fees are warranted due to an expanded scope of work or changing circumstances. In such cases, the accountant should issue a new letter to address these changes.
Regular reviews of engagement scopes allow accountants to identify opportunities for outsourcing routine tasks, such as bookkeeping, annual accounts preparation, and VAT return submission. For many accountants, outsourcing these functions provides better value for money within the engagement.
Requests and Queries for Extra Client Work
Ongoing discussions regarding the scope of work, fees, and new client expectations can be time-consuming and stressful. Some accountants might realize that their initial assessment of the resources required to deliver an engagement and ensure client satisfaction was inaccurate.
Accountants often find clients asking for 'quick advice' that includes services not originally covered in the initial engagement letter. This can indicate that the accountant initially underestimated the resources required, such as time, expertise, and effort, to complete the assignment.
To address this, accountants need to include appropriate clauses in the engagement letter to address the availability of ad hoc services and related fees. The engagement letter should clearly state the additional charges for any new engagement terms.
Similar to any other contractual arrangement, accountants must obtain the client's approval for any documented extra work and fees. If the accountant takes on work that goes beyond the initially agreed-upon engagement scope, the risk of legal action increases. Therefore, it is imperative to maintain the security for the accountant as specified in the engagement letter.
Mango Practice Management asserts that by using the correct engagement letter, clients can have a better idea about the scope of work. As a result, they wouldn’t demand to ask for extra work other than what has been agreed upon without adequate pay. It only suggests that both parties, through their scope of work, can promote a sense of transparency and fairness.
Monitoring Liabilities as a Result of Client Dispute
If a dispute arises, the engagement letter will specify the accountant's liability scope. The extent of liability an accountant can assume depends on factors such as the client's risk assessment, the nature of the assignment, and potential loss risks.
Ideally, there should not be a one-size-fits-all liability clause for all engagements. While some accountants may consider adjusting liability based on the fees clients pay, this approach may not be suitable for all cases.
For instance, setting a low liability limit, such as $121 for completing a personal tax return, could increase the risk of errors and may not be appropriate. The liability amount should be subject to negotiation with the client, taking into account the accountant's risk assessment and the coverage provided by their professional liability insurance.
Conclusion
In simple terms, engagement letters play an essential role in promoting profitability and business growth. They establish clear service terms, foster trust among clients, reduce legal risks, prevent misunderstandings, and enhance client relationships. As accounting firms grow and expand over time, well-documented engagement letters simplify the management of changes in fees, scope of work, and existing services.
