Engagement letters help improve communication with clients, document engagements, and protect you from litigation. By clearly defining an engagement’s scope and services, you can better avoid misunderstandings.
What you should do:
- State the purpose of the engagement
- Define the scope of the engagement (specifically what you will and won’t do)
- Specify known negative conditions or adverse situations
- Note client instructions, responsibilities, deliverables and dates
- Note reliance on facts provided by client
- Outline terms of fee collections and the consequences of late payment
- Include a stop-work clause
- Indicate your record retention policy
- Include third-party service provider language, if applicable
- Confirm client’s acknowledgment to the terms of the engagement and request client’s signature
Additional areas to consider:
- Include warnings regarding inadequate internal controls
- Explain limitations regarding financial statement distribution
- Include alternative dispute resolution language (i.e., mediation for all disputes and an arbitration clause for fee disputes only)
- Review efficacy of limitation of liability clauses with your risk advisor or legal counsel
What you should avoid:
- promotional information and other forms of marketing in your engagement letter. Defer marketing information to other documents. Your engagement letter should be viewed as a contract and composed accordingly. It is not the place to convince a client that your firm is the answer to all their problems. It limits your services, rather than selling them.
- all-encompassing language that expands rather than limits the scope of your work.
- legal jargon, ambiguity, abbreviations or words only a CPA would understand. Make your engagement letter easy for your client to understand. Review the letter with your client and get a signature before beginning any work.
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