An engagement letter is a legal agreement that describes a business relationship to be entered into by a client and a company. It is a contract for the performance of services by the auditor or accountant and the payment of those services by the client. The letter defines the terms and conditions of the engagement, the obligations of both parties, services to be rendered, the duration of the engagement, and the fee structure, etc.
The letter limits the duties and responsibilities of the company, directly or by inference. A well-formatted engagement letter establishes the framework in which the client relationship is managed.
Most general practitioners limit their liability for work done by an appropriately drafted clause in the letter. The liability clause should be discussed and agreed upon with the client at the start of the assignment. A properly drafted engagement letter makes the legalities of entering into a business relationship less intimidating, especially when working with small businesses.
Benefits of Using an Engagement Letter
Having an engagement letter is a matter of good business practice. The letter offers an opportunity to limit and define the nature of the specific services being rendered in unusual and out-of-the-ordinary engagements. The letter is, however, not a panacea for all disputes and disagreements, and they do not offer the practitioner immunization from litigation.
Some of the benefits of using an engagement letter include:
- It helps prevent any misunderstanding between the client and the auditor/accountant by describing in writing the mutual understanding of the terms and conditions of the agreement.
- It also eliminates any misunderstanding between the auditor or accountant and the client by describing the mutual understanding of the terms and conditions of the engagement in writing.
- It helps you mitigate risks: by using an engagement letter, you reduce professional liability insurance premiums, and many insurers require it.
How an Engagement Letter Works
The letter functions as an agreement between two parties. The format of the letter is less formal compared to that of an agreement and generally avoids any legal jargon. It is a legal document that is binding in a business deal.
The letter also limits the scope of the company’s services. For instance, when an individual or an organization secures the services of an attorney, the letter might describe the specific purpose or area of expertise in which their services can be used.
EXAMPLE
A service provider who hires an attorney to draw up a business purchase cannot call the attorney for advice about his divorce. The letter will clearly state the facts, but the meaning will be clear.
Advantages of an Engagement Letter
Making it clear what you expect out of a contract is important. The letter offers the client the reassurance of knowing what, when, and how a service will be completed. It also informs the client of the total cost of the service and any other costs not included in the agreement that might be incurred.
The letter also defines the set boundaries for the work that is expected to be performed by a business. This is meant to prevent “scope creep,” a situation that every tax accountant and attorney dreads. The letter also lists any services that may be needed in the future but are not in the current agreement.
The letter may also include a clause on the subject of mediation or any binding arbitration for the relationship. The provision provides guidance for managing any disputes arising between the parties.
When and How Often Should You Use an Engagement Letter?
It is recommended to use engagement letters for all engagements. One letter can be used for different types of services to be rendered, or you can use separate engagement letters for each type of service to be rendered. You can download the template from here to make your work easier.
Typically, you don’t need to obtain an engagement letter more often than annually. Nevertheless, as a practical matter, if the services rendered are recurring, the accountant or the auditor might consider drafting a letter that will extend beyond one year. Since it is a legal agreement, in cases where it is protracted to cover more than one fiscal period, it should contain a clause that either party has the right to terminate the agreement upon written notice to the other party.
Regardless of the duration of the agreement, the content of the letter should be reviewed annually to determine if there are any changes in the service to be rendered. If there are changes to be made in the initial agreement, then a new letter or a supplement letter should be obtained.
Contents of an Engagement Letter
There are standard services that are usually included in an engagement letter, including but not limited to:
- Write-up services
- A review of financial data related to the acquisition of a business; and
- All tax services, including tax return reviews, proposed tax transactions, and tax review preparation
- The letter should be addressed to the person retaining the firm and approving the engagement
- An expression of gratitude for the opportunity to offer professional services to the client
- Identification of the entity (its name and fiscal year-end) concerning the financial statement to be audited and reviewed
- A detailed description of the scope of services to be rendered
- A clause limiting the auditor’s responsibility for the discovery of fraud and any other irregularities
- The amount to be paid for the services and how the amount shall be paid
After drafting your engagement letter, make sure to go through it to ensure that it has covered all the things that must be included in the letter. Generally, the engagement letter must cover the following topics:
- The objective of the engagement
- The duties and responsibilities of management
- Responsibilities of the auditor
- Limitations of the auditor
- Hiring restrictions
Sample Engagement Letter
Dear Ms. Doe,
Subject: Engagement Letter for Marketing Strategy Development
We are pleased to have the opportunity to provide marketing strategy development services to XYZ Corporation. This letter confirms our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide.
1. Scope of Services:
Bright Future Consulting Ltd. will develop a comprehensive marketing strategy for XYZ Corporation, including market analysis, branding guidelines, digital marketing tactics, and a measurable action plan for the fiscal year 20XX-20XX.
2. Responsibilities:
Bright Future Consulting Ltd. will conduct research, develop strategy documents, and present findings and recommendations. XYZ Corporation will provide access to relevant internal data, ensure the availability of key personnel for meetings, and provide timely feedback.
3. Term of Engagement:
This engagement will commence upon the signing of this letter and will continue until December 31, 20XX, unless terminated earlier by either party in accordance with the terms set out below.
4. Fees and Payment Terms:
Our fee for these services will be $50,000, payable in monthly installments of $4,166.67. Invoices will be issued on the first of each month, starting February 1, 20XX, with payment due within 30 days of the invoice date.
5. Confidentiality:
Both parties agree to maintain the confidentiality of the information shared during the course of this engagement, subject to applicable law.
6. Independent Contractor:
Bright Future Consulting Ltd. is engaged as an independent contractor. This engagement does not constitute a partnership, joint venture, or employee-employer relationship between Bright Future Consulting Ltd. and XYZ Corporation.
7. Termination:
This agreement may be terminated by either party with 30 days’ written notice. Upon termination, Bright Future Consulting Ltd. will be entitled to fees for services performed up to the date of termination.
8. Governing Law:
This agreement shall be governed by and construed by the laws of Silicon State.
Please confirm your understanding of and agreement with these terms by signing and returning a copy of this letter.
We look forward to working with you and are committed to providing the highest quality of service.
Sincerely,
John Smith
Chief Strategy Consultant
Bright Future Consulting Ltd.
[Signature Line for Client]
Accepted and Agreed:
Jane Doe
Chief Marketing Officer
XYZ Corporation
[Date of Agreement]
Details
File Format
- MS Word
More Samples & Templates
Key Points
Here’s an analysis of the standout features of this sample letter and what makes it an effective letter:
- The subject line (“Engagement Letter for Marketing Strategy Development”) immediately clarifies the purpose of the letter, which is essential for clear communication.
- The opening paragraph sets a positive tone and clearly states the purpose of the letter – to confirm the terms and objectives of the engagement for marketing strategy development.
- The scope of services section is particularly well done. It breaks down the services to be provided (like market analysis, branding guidelines, etc.) in detail, which helps in setting clear expectations and avoiding misunderstandings.
- Outlining the responsibilities of both parties is crucial. This letter does it effectively, ensuring that both the consulting firm and the client are aware of their roles and commitments.
- The letter states the commencement and potential end dates of the engagement. This temporal boundary is essential for project planning and management.
- It clearly lays out the fees, payment schedule, and terms. This transparency helps in building trust and avoiding future disputes over finances.
- This is a key element in business agreements, ensuring that sensitive information exchanged during the project remains protected.
- Stating that Bright Future Consulting Ltd. is an independent contractor clarifies the legal and tax implications of the relationship.
- Including termination terms provides a clear exit strategy for both parties if the engagement needs to be ended prematurely.
- Specifying the jurisdiction that governs the agreement is important for legal clarity, especially in cases of dispute.
- The letter ends by requesting a signature to confirm the agreement, which is a clear call to action, and reiterates the commitment to quality service.
- The letter is closed professionally with the name, title, and company of the sender, along with a space for the client’s acceptance and agreement.
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