Engagement Letter

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Every engagement – no matter how large or small (new engagements, repeat engagements) routine or unusual – deserves an engagement letter. Aside from protecting yourself legally: the engagement letter is a written contract between the tax professional and the clients, it helps to clearly define the expectations of the work to be performed. It outlines both the responsibilities for the professional as well as the clients and limits the work to be done to only specifically identified tasks in the letter.

Unless the engagement letter states exactly the work to be performed, the professional and the client do “the dance.” Each party dances around what exactly each meant at the time the work began. Most likely, the professional winds up on the losing end of the dance and goes home at the end of the day eating time to get the work done for an unrealistic and for a price you wouldn’t have agreed.

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While the letter will not immunize you from lawsuits and litigation it can be your first line of defense when a client questions the task at hand.

The engagement letter should cover:

  • the purpose of the engagement
  • specifically what the professional “will and won’t do” (the scope)
  • client instructions and responsibilities
  • reliance on facts the client gives the professional
  • known adverse or negative conditions or circumstances
  • billing rates and estimates
  • request for the client’s signature
  • instructions to return the signed engagement letter

In addition, engagement letters can include:

  • warnings about inadequate internal control;
  • limitations on distribution of financial statements (what the client intends to do with them);
  • arbitration clause; and
  • record retention policy.

Review your engagement letters at least once a year.