Within the accounting profession, we’re certainly familiar with engagement letters.
An engagement letter is a written agreement to perform services in exchange for compensation. According to APES 305 (Terms of engagement), “members in public practice are required to document and communicate to the client the terms of engagement.” Key elements of an engagement letter may include the following:
* Purpose, Scope and Output of the Engagement
* Period of Engagement
* Responsibilities
* Involvement of Others
* Outsourced Services
* Storage of Personal Information
* Fee for service
* Limitation of Liability
* Ownership of Documents
* Confirmation of Terms
As firms move from a compliance tax and accounting role to an advisory role, it’s clear that a traditional ‘engagement’ letter is not adequate in truly explaining the scope of work and the nature of the professional relationship. Indeed, the absence of such an understanding is likely to lead to significant issues as the service provider and receiver try to manage expectations.
The solution for proactive firms is to move from the traditional engagement letter to a formal service agreement, where there is a contract to perform a specific service over a specific period of time in return for an agreed fee for service.
Of course, a service agreement is also an engagement letter. The point being made here is that to really engage the client, a clear effort at proactive communication is necessary. Otherwise, issues are likely to arise including:
* Uncontrolled variations in scope of work
* Significant write-offs as clients demand more
* Client dissatisfaction due to lack of review
* Scope of work becomes less relevant as client needs change.
5 actions your firm should consider to really take control of the client relationship:
1. Engage the client annually and use the pre-engagement process to review client expectations and needs.
2. Take the time to go through the document with the client. Treat it as a proposal and use the time to outline both the value of the service and specific scope of work.
3. Explain mutual commitments in relation to communication and turnaround time.
4. Outline carefully what will happen if scope of work changes and ensure that there is clear, upfront agreement on new work before it begins.
5. Work does not start until the client ‘accepts’ formal proposal as a service agreement by signing and returning the proposal.
CLICK HERE to download the pdf document “Ground rules for client engagement”
