The engagement letter is an essential tool for any accounting firm. It’s the first thing your clients will see, so it needs to convey professionalism and trustworthiness. But most importantly, an effective engagement letter can help you build stronger client relationships and drive growth by increasing retention rates.
In this article, we’ll explain everything you need to know about crafting engaging letters that convert your audience into clients.
What Are Engagement Letters in Accounting?
According to Mango Practice Management, engagement letters in accounting are a form of client communication for the services provided. They include the terms and conditions related to the services that will be offered within the agreed contract. Additionally, they also define the scope of work and clarify the responsibilities of both parties.
In fact, engagement letters are one of the best tools Certified Public Accountants have to help manage their professional liability risk. As a result, the AICPA Professional Liability Insurance Program found that an acceptable engagement letter was provided in around 56% of tax claims made against CPA firms.
Here are the key elements typically included in an engagement letter:
- Identification of parties: Names and addresses of the client and the accounting firm.
- Scope of services: A detailed description of the specific services that the accountant or accounting firm will provide. This section helps avoid misunderstandings about the nature and extent of the work to be performed.
- Responsibilities of the client: Outline the responsibilities of the client, such as providing accurate and complete information, access to necessary documents, and cooperation with the accountant.
- Responsibilities of the accountant: Specify the responsibilities of the accountant, including the methods and standards they will use, the timing of deliverables, and any other relevant details.
- Timeline: Specify the timeframe within which the services will be provided, including any key deadlines.
- Fees and payment terms: Clearly state the fees for the services and the payment terms. This may include information on hourly rates, fixed fees, or any other billing arrangement.
- Terms of engagement: Include any specific terms or conditions that both parties need to be aware of, such as termination clauses, confidentiality agreements, and dispute resolution mechanisms.
- Limitation of liability: Define the extent of the accountant’s liability for errors, omissions, or other issues that may arise during the engagement.
- Signature and acceptance: Both parties should sign the engagement letter to indicate their acceptance of the terms and conditions outlined in the document.
Understanding Your Audience
The first step in creating a strong engagement letter is understanding your audience. To do this, you need to know their needs and wants. This will help you keep the communication clear.
As stated by Mango Practice Management, a clear understanding of roles and expectations forms the core of an engagement letter. And without understanding your audience, you cannot keep this communication clear. For instance, you won’t be able to clearly define the scope of work if you don’t know who your audience is.
Here are some key considerations to help you tailor engagement letters to your audience:
- Client-centric language: Use clear and simple language that your clients can understand. Avoid legal jargon as much as possible.
- Stakeholder involvement: Understand who the key stakeholders are in the engagement. This could include not just clients but also regulatory bodies, third-party service providers, etc. Tailor sections of the letter to address specific concerns or requirements of different stakeholders.
- Legal and regulatory compliance: Ensure that your engagement letters comply with all relevant laws and regulations.
- Communication preferences: Understand your client’s preferred mode of communication and specify it in the engagement letter. If relevant, communicate how often you will provide updates and in what format.
Crafting Impactful Engagement Letters
The next step in creating an engagement letter that will grab your client’s attention is to craft a clear and concise message. There are two ways you can do this: by using the right words or by using the right language. When it comes to choosing words, remember that less is more.
Your goal should be to write out your point in as few words as possible while still maintaining its meaning and impact. This means you should avoid beating around the bush with unnecessary fluff or filler words like “um” or “like.”
- Use action verbs in place of adjectives.
- Think about how each sentence contributes to your overall point; if it doesn’t add anything new, cut it.
Impactful engagement letters can also help simplify the onboarding process. When your clients understand what services they can expect from you, it becomes easier for them to trust you. This results in a smooth and straightforward onboarding, where both parties have a clear idea of what they are getting into.
This smooth onboarding is vital for many clients. Around 86% of people say that they are more likely to stay loyal to a business if the onboarding process is welcoming. Thus, creating a simplified onboarding with engagement letters can help increase customer retention.
Leveraging Technology for Personalization
Personalization is vital for building strong and lasting relationships with customers. According to a McKinsey report, 71% of consumers expect companies to provide personalized interactions. Moreover, 76% get frustrated when this does not happen. Personalization helps in driving profitable outcomes.
Technology has come a long way in the field of helping draft an impact and personalized engagement letter for your clients. Here are some ways in which you can leverage technology.
- Create a template for your engagement letter that you can use across all of your clients, then customize it with each new client’s information.
- Use technology to make it easy to create, edit, and send letters. You’ll also want an easy way for clients to access their letters online. This will help them refer back to engagement letters at any time by logging into their account on your website or app.
- Track results from each mailing campaign: How many people opened the emails? How many clicked through? Did any of those leads convert into sales opportunities?
Navigating Challenges and Solutions
As you embark on the journey of designing your own engagement letters, it’s important to understand that you will face challenges. For instance, the most common source of malpractice claims against CPA firms is tax issues. Reasons range from misunderstandings between the CPA and the client to improper advice and filing errors.
Challenges can take many forms and come from a variety of sources:
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Ambiguity and misunderstandings:
- Challenge: Vague language or technical jargon may lead to misunderstandings.
- Solution: Use clear and simple language. Define terms and concepts that may be unfamiliar to the client. Clearly outline the scope of services.
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Scope creep:
- Challenge: Clients may expect services outside the agreed-upon scope, leading to scope creep.
- Solution: Clearly define the scope of work, detailing what is and isn’t included. Mention additional fees for services beyond the agreed scope.
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Communication gaps:
- Challenge: Inadequate communication may lead to missed deadlines or unmet expectations.
- Solution: Establish communication protocols in the engagement letter. Specify how often you’ll provide updates, preferred communication channels, and contact persons on both sides.
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Fee disputes:
- Challenge: Disagreements over fees can strain the client-accountant relationship.
- Solution: Clearly outline the fee structure, billing methods, and payment terms in the engagement letter. Specify when invoices will be sent and how overdue payments will be handled.
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Client expectations:
- Challenge: Clients may have unrealistic expectations about the outcomes of accounting services.
- Solution: Clearly state what the client can reasonably expect from the services provided. Educate clients about the limitations and possibilities of accounting services.
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Changes in circumstances:
- Challenge: Changes in the client’s business or financial situation may affect the agreed-upon scope.
- Solution: Include provisions for amending the engagement letter in case of significant changes in circumstances. Specify how changes will be communicated and approved.
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Termination of services:
- Challenge: The circumstances under which either party can terminate the engagement may not be clear.
- Solution: Clearly outline the conditions under which either party can terminate the engagement and the procedures to be followed.
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Confidentiality and data security:
- Challenge: Ensuring the security and confidentiality of client information.
- Solution: Include robust confidentiality and data security clauses. Outline the measures in place to protect client information.
Conclusion
We hope this guide has given you a better understanding of engagement letters and how they can be used to connect with clients. The truth is, there’s no one-size-fits-all approach to writing an engagement letter. It depends on your business, your industry, and your audience. But we do believe that it’s important for all accountants to think about how their letters will resonate with their clients.
