Managing engagement letters in an accounting firm: a practice manager's blueprint

What is an engagement letter?

Engagement letters are a crucial component of most service-based professional businesses, particularly accountants and tax practitioners. When properly executed, engagement letters establish the terms and expectations of your client relationships and also serve as a safeguard against claims, disputes, and legal actions.

Engagement letters are more than just a legal formality—when used properly they can become the most important tool accounting firms have to manage scope creep.

Scope creep refers to when accountants provide services for clients outside the scope of what's contained in their engagement, resulting in overservicing the client and undercharging them.

For more information, read our article: Understanding Scope Creep in Accounting Firms: A Partner's Starter Guide.

For practice managers, engagement letters are a critical yet often overlooked tool that can significantly impact operations, client satisfaction, and risk management.

Whether you’re establishing new client relationships, navigating changing regulations, or protecting your firm against disputes, having a robust system for creating, maintaining, and reviewing engagement letters is essential.

This blueprint will guide you through best practices and processes for how to use engagement letters to manage scope creep in your accounting firm.

Why your acccounting firm needs engagement letters for every client

Engagement letters are the cornerstone of a successful client relationship and the foundation of a well-run accounting firm. They formalize the terms of your services, protect your business from potential disputes, and set clear expectations for both parties. Without an engagement letter, you risk misunderstandings, scope creep, and even legal complications.

For your clients, engagement letters demonstrate professionalism and transparency, reinforcing their confidence in your firm. For your team, they serve as a guiding document that ensures consistency, compliance, and accountability. By making engagement letters a non-negotiable part of your onboarding process, you create a strong, protective framework that allows your firm to operate efficiently and grow sustainably.

Engagement letters are a valuable tool for the modern accounting firm for many important reasons.

Engagement letters:

• help you avoid scope creep
• manage client expectations by outlining your fee structure
• define each party's responsibilities and help you set client expectations
• protect your firm in the event of legal disputes
• help reduce professional indemnity insurance premiums

Let's further breakdown some of the ways engagement letters help accounting firms:

1. Engagement letters prevent scope creep

Scope creep can derail even the most straightforward client relationships, leading to misaligned expectations, strained resources, and lost profitability. Engagement letters act as a safeguard by clearly defining the scope of services at the outset. They establish a shared understanding between you and your client, outlining what’s included—and what isn’t. This clarity ensures that any requests beyond the agreed scope can be identified early and renegotiated, preserving your time, budget, and professional boundaries.

2. Engagement letters prevent misunderstandings

Misunderstandings can damage trust and lead to disputes, even in the best-intentioned client relationships. Engagement letters set the record straight by documenting the terms of your agreement in plain language. From service details to payment terms and timelines, these letters remove ambiguity and ensure both parties are on the same page. By proactively addressing potential areas of confusion, engagement letters help create smoother, more productive working relationships.

3. Engagement letters mitigate risk

Operating without an engagement letter leaves your business exposed to unnecessary risks. Whether it’s scope disputes, unpaid invoices, or even legal claims, a lack of documentation can make it difficult to protect your firm. Engagement letters act as a first line of defense, providing a clear, written record of your agreement. In case of a dispute, they can serve as evidence that supports your position and helps resolve issues swiftly, minimising financial and reputational damage.

4. Engagement letters are a legal and regulatory requirement

For many professional services, including accounting and legal work, engagement letters are more than just good practice—they’re a legal and regulatory requirement. Compliance standards often mandate that client agreements be formalised in writing to protect both parties and uphold industry integrity. An engagement letter not only ensures you meet these requirements, it also demonstrates professionalism and diligence, reinforcing your credibility in the eyes of clients and regulators alike.

Best Practice for managing engagement letters in your accounting firm

Managing engagement letters effectively is essential for building strong client relationships and ensuring compliance. To streamline the process, establish a standardised template that can be customised for each client. Use digital tools to create, send, and track engagement letters, making it easier to keep records and follow up.

You should partner with a software solution that can easily update a client engagement to reflect new requests from your client or increased requirement for services due to their growing wealth or regulatory changes. By embedding these practices into your workflow and partnering with a smart software solution for your engagements and proposals, you can minimise scope creep, reduce misunderstandings, and build a foundation of trust with your clients.

Personalise the engagement according to the client profile

Not all clients are the same, and your engagement letters shouldn’t be either. Tailoring the engagement letter to reflect the client’s specific needs, industry, and circumstances adds a personal touch that strengthens your relationship. For instance, a startup may require more guidance on compliance, while a seasoned business might focus more on strategic tax advice. Personalisation not only shows your attention to detail, it also ensures the scope of services aligns perfectly with the client’s expectations.

Use simple terms and outline what is required in each service

Avoid jargon and technical language that might confuse clients. Instead, write engagement letters in clear, straightforward terms that anyone can understand. Break down each service you will provide and explain its purpose, deliverables, and limitations. For example, if you’re preparing financial statements, it's a good idea to specify whether it includes a review or audit. Simplicity and clarity eliminate confusion and help clients appreciate the value of your services.

Outline client responsibilities

A successful engagement relies not only on your services, it also outlines how your client fulfills their responsibilities. Use the engagement letter to explicitly define what you expect from them, such as timely provision of financial data, granting access to necessary records, or adhering to lodgement deadlines. Clearly setting these expectations upfront fosters accountability and prevents delays or complications down the line.

Sensitive data or internal controls

With data breaches and cyber risks on the rise, engagement letters must address the handling of sensitive information. Outline how client data will be collected, stored, and protected, and highlight the measures in place to maintain confidentiality. If your work involves reviewing internal controls, clarify your role in evaluating and recommending improvements without taking on management responsibilities. This transparency reassures clients their information is in safe hands. Depending on which country or jurisdiction your business operates from it may also be important to disclose if you use outsourcing or offshore labour to complete the client work.

Fee Structure and payment terms

A transparent fee structure is critical to avoiding disputes and ensuring timely payments. Clearly outline your billing model—whether it’s hourly, project-based, or retainer—and provide an estimate of total costs. Specify payment terms, including due dates, late fees, and accepted payment methods. For ongoing services, describe how adjustments to fees will be communicated. This clarity ensures both parties have a shared understanding, promoting trust and financial stability.

Which software solution is right for you?

More people are waking up to the important role engagement letters play in managing client relationships and minimising scope creep. As a result, lots of accounting software providers are developing their own engagement letter soltutions, everyone from practice management software project management tool providers to accounting software solutions. For too many SaaS companies, proposal tools feel like a feature added as an afterthought.

Accounting firms need more than a simple document management tool that can also facilitate payments.

Partnering with someone who understands the experience tax professionals go through when trying to manage the engagement process with their clients is critical. Implementing an effective engagement letter process is about more than just good practice management, it's essential to protect your firm from unnecessary client disputes that give rise to leaking profits resulting from scope creep.

If you want to learn more about how our software saves accounting firms hundreds of thousands of dollars of lost revenue a year, reach out to us today.

Try ScopeKeeper today: a virtual Chief Revenue Officer for your firm

We are accounting professionals first and foremost, and we understand the biggest problem accountants face is a lack of time. That's why we built ScopeKeeper. So you can see which partners have clients that are requesting work outside the scope of the project's budget.

FAQ

Is a CPA firm legally obligated to have an engagement letter?

CPA Australia requires members in public practice to document and communicate the terms of engagement to clients, however engagement letters are not required under the Tax Agent Services Act 2009.

What's best practice example of an engagement letter?

Engagement letter templates can be found at CPA Australia's website here.

How often should engagement letters be updated?

Different professional associations may have different recommendations as to how frequently engagement letters should be updated with clients. However, as a rule engagement letters should be updated annually, with further updates when clients request work or services that fall outside the scope of the engagement letter. See the Tax Practicioners Board for more information on engagement letters.

Why should we review our engagement letters annually?

Ensuring that clients understand the terms of an engagement at all times is essential. Reviewing and reconfirming these terms annually allows you to address any changes in the business relationship and serves as a reminder to clients about the scope of your engagement.

Does a client need to sign the engagement letter for it to be valid?

APES 305: Terms of Engagement is an Accounting Professional and Ethical Standard (APES) in Australia that offers guidance to public practitioners on drafting the contents of a Terms of Engagement. While it does not mandate obtaining a signed copy, CPA Australia recommends, as a best practice, keeping a signed copy on file for your records.

Do I need to update the engagement letter if the scope of work changes or would a verbal agreement suffice?

It is best practice to update the engagement letter if additional work is requested. The following situations would trigger an update to the engagement letter:

• Any substantial modifications to the Terms of Engagement, including changes to professional standards, relevant accounting or assurance standards, or legal and regulatory obligations.
• Any signs that the client has misunderstood the purpose or scope of the engagement.
• Any major adjustments to the professional services being provided to the client.
• Changes in ownership or management for a corporate client, or any significant shifts in the client's circumstances.
• Instances where the engagement is being performed inconsistently or irregularly.

Do I need an engagement letter for simple Individual Tax Returns?

It is not legally required, but it is best practice to have an engagement letter even for simple clients like individual tax returns.

Do I still need an engagement letter for a ‘one off’ job, such as an income tax return?

Yes, we recommend using engagement letters even for ‘one-off’ income tax returns. However, for straightforward tax affairs, the letter can remain simple and concise. Even in these cases, an engagement letter helps establish clear expectations between you and your client, ensuring there is no misunderstanding about the services being provided. It also covers you legally.

What are the basics I should include in my engagement letter?

At a minimum, your engagement letters should include the following:

• Your name and registration number to confirm your registered status.
• A detailed description of the work to be performed.
• The cost of the work to be undertaken.
• An explanation of how you will handle your client’s information to ensure confidentiality.
• The arrangements for securely storing your client’s documents or providing copies as needed.
• A commitment to deliver services competently and within the agreed time frames.
• Your approach to managing tax refunds received on behalf of your client.

If I have served a client for a long time without an engagement letter, is it necessary to have one now?

We highly recommend using engagement letters to minimise uncertainty and prevent misunderstandings, though the specifics may vary depending on individual circumstances. It’s also advisable to confirm with the client whether their circumstances have changed over time and to reflect any updates in a revised engagement letter.

We send our engagement letters to clients via email, and they confirm acceptance by replying to the email. Is this acceptable, or does the engagement letter need to be physically signed?

Yes, it is acceptable as long as the client acknowledges receipt and agrees to the terms outlined in the engagement letter, however, as best practice, we do not recommend you use email for updating client agreements, proposal management software is a much better tool.

Do all parties need to sign the engagement letter? For example a husband and wife that we prepare tax returns for?

A separate engagement letter should be issued for each client receiving your services unless otherwise agreed. Each client should sign their individual letter to confirm acceptance of the engagement terms.

For instance, separate letters should be prepared when providing tax services to:

• A husband and wife.
• A partnership and its individual partners.
• A company and its shareholders.
• A company and its directors (when services are provided to the directors separately from the company).
• The trustees of a trust and its beneficiaries.

Do we need to obtain client signatures on engagement letters every year for existing clients?

Yes, it’s recommended to have your client sign or provide written consent whenever changes are made to the engagement letter.

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