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Give Your Accounting and Tax Clients Effective Engagement Letters

An engagement letter is a document defining the relationship between a professional firm, such as your accounting firm, and a client. Engagement letters are a powerful tool in fighting an accounting malpractice case, but despite this, many accountants don’t bother to distribute them. Should you send engagement letters as part of your professional accounting practice? The answer is absolutely yes.

What Do You Include in an Engagement Letter?

Ideally, your engagement letter should reflect the business contract you have with your client. If you don’t have a contract, the letter should outline the main elements you’d include in a business contract, such as the parties involved and services you plan to provide. You can refer to the client as either an individual or a business entity in your letter’s introduction. Place your name or your firm’s name in the header of the engagement letter, along with your company’s address.

Avoid Scope Creep

Scope creep occurs when a project in a risky industry becomes larger than you expect. Imagine you provided a quote to a company to handle their tax prep, but you figured the quote amount thinking the company had clear, well-organized records. When you start the job, you realize that the records aren’t organized, and you have to sort through piles of receipts. This causes the scope of your project to increase significantly. At this point, you either have to suffer the loss or renegotiate your rates. To avoid this type of scenario, it’s best to lay out clear expectations in your engagement letter.

Setting Expectations in Your Engagement Letter

It’s critical to use your engagement letter to set clear expectations about your services. In the above instance, if you’re willing to sort through hundreds or even thousands of receipts by hand, let the letter’s recipient know this information, and charge accordingly. If you’re not willing to perform this task and require properly organized receipts, your letter should make this clear. Let recipients know if you don’t accept receipts at all and require a list of expenses on a spreadsheet or in accounting software.

Reduce Risk

Engagement letters help you avoid issues down the road with your client in terms of payment and expectations. These letters also reduce your personal risk. For instance, if your client conducts business in multiple provinces, you must note this information on their federal return. If they have corporate activities in one of the provinces that requires a standalone corporate return, such as Alberta or Ontario, you must complete these returns separately.

If you don’t know exactly where your client conducts business, you may miss one of those reporting obligations. To protect yourself and your firm in such instances, it’s a good idea to include disclaimers in your engagement letter. A basic disclaimer can state: “This firm’s services only include filing returns in tax jurisdictions where you inform us that you earn money or conduct business. We do not determine if you must report in other jurisdictions unless specified in your contract.”

Your Engagement Letter

To make writing engagement letters easier, consider reviewing a few samples online. You may also want to have a liability attorney look over your engagement letter to ensure it covers the elements necessary to avoid professional malpractice suits.

An engagement letter can be an effective and easy way to protect your firm. It also helps pin down client expectations and ensure your relationship gets off on the right foot, without costly misunderstandings. QuickBook Online Accountant helps you manage projects, tasks and clients together. Sign up for free.

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