For practitioners, there is one administrative burdent that never seems to go away. Drawing on AccountingWEB members' advice, Jennifer Adams offers some tips to minimise the pain.
Putting the words “engagement” and “letters” together is one sure way to elicit a groan from the accounting fraternity - as Mark Lee discovered when he discussed new engagement letter guidance from the profession’s regulatory bodies back in June.
The article grappled with the latest 65-page tome from the joint collaborative working party of the accounting and tax institutes, which you would have thought covered most problems. But the article produced 32 responses and 12 follow-up questions, so there do still seem to be some grey areas.
This backdrop filled me with dread when I recently took on clients from an accountant who had previously not produced engagement letters - they weren’t regulated and said they viewed all their clients as friends. It was clear that creating new engagement letters would take some time and not be an easy Friday afternoon task.
Barkster echoed my initial thoughts: “I don't have the time nor inclination to be doing these retrospectively for 350+ existing clients.”
But the task is now done. Based on that (exhausting) experience there follows a checklist of points with relevant links to help you if you also have been lumbered with the task of producing (or reviewing) engagement letters.
Why bother?
- Mark Lee wrote that the ACCA is the only body that obliges members to issue letters of engagement; letters not compulsory for members of other institutes... just recommended: “It's simply good practice and worth considering as it can help protect the member in the event of disputes.”
- The professional insurance company Collegiate Underwriting advised me that the issue of engagement letters is taken into account in calculating insurance premiums, not least when considering indemnity claims. The insurer confirmed it was not bothered how long or short the letter was so long as there was one. As North East Accountant cautioned: “Bottom line is if you get a claim the handling will be out of your hands and decided by the insurance company.”
Suggestions
- Read the entire June 2012 text and check the website of your own and other institutes. For example, the AAT has produced a basic Letter. Use that text as a basis for your own standard template then look at other accountants’ websites; you may be able to borrow elements from other firms to create one to suit your own business.
- Produce a standard covering letter template. Remember Mark Lee’s comment: “If you're going to issue letters of engagement then it's up to you to decide how comprehensive you want them to be and which clauses you want to exclude to shorten them.”
- Decide how to introduce the letters to clients. If sent for signature will they be returned? A number of firms put standard terms on their website and then issuing separate letters for each client. Paul Scholes suggested putting “the interesting stuff” up front and placing terms common to every client in a web document with a hyperlink to it in the specific letter sent to each client. “This should cut it down to a reasonable length’. This assumes all clients have internet access, when a surprisingly number don’t. Kent accountant uses one standard/generic engagement letter with three different appendices for different situations. “I also send out a letter which accompanies the engagement letter which sets out in specific terms exactly what work I will be undertaking for the client,” he said.
- When drafting the letter, keep in mind that some clients may not be regular users of an accountant’s services so they may not understand technical terms. Try to keep it as basic and understandable as possible.
- The AAT’s Guidance to regulation 22 - Letters of engagement gives a basic checklist of points to include as good practice - check that all points have been included in your letter.
- Decide when to issue letters - it is recommended that you not undertake any work until the letters have been signed, but you might decide that the best procedure is to go through the engagement letter with the tax return and get clients to sign both at the same time. It will all depend upon the circumstances and the client relationship.
- Remember to send a copy of the signed letter to client for their reference.
Use the opportunity to review...
- The workings and procedures of your businesses. Think about whether specific clauses should be included (or not). For example, do you charge for the first meeting - or should you? If so remember that distance selling regulations may apply.
- The amount of professional indemnity. PatriciaRr asked whether to include a clause to limit the liability for non-audit engagement letters. AccountingWEB member runningmate thought not, because: “I don't want clients to see it as a green light to claim up to £x and partly because it would give me a false sense of security if the limit were invalidated by s2 Unfair Contract Terms Act 1977.” An alternative suggestion was to include the clause, “We are required by our professional body to hold professional indemnity insurance - details of which can be obtained from our office.”
- Your relationship with other local accountants. It is usual (compulsory if you're regulated) to have a continuity agreement with another firm. Charmaine Sullivan searched the internet and borrowed the following paragraph: “In the event that I become unable to provide the services agreed through incapacity or death, a Continuity Arrangement has been made with Mr X, 20 Church Lane, Anytown, Ratesvilleshire, AB12 3CD. The purpose of this agreement is to look after your interests by providing continuity of services. You will be contacted in the event of such circumstances arising and you will have the option to decline to be covered by these arrangements.”
Use software to save time
In March kevinringer asked the eminently sensible question, can’t computers reduce the time spent on engagement letters? Paul Kelly was a Microsoft Office enthusiast who had worked on a set of standard letters for one client thank linked directly to their billing system. As the client opened the template, the user was asked a series of standard questions and the letter was populated at the same time. That is fine if you afford the time to build the links or pay do it, but the templates still need to be produced. Otherwise SWAT UK has a number of practice manuals that include engagement letter templates (typical cost is £186 inc VAT). You will still have to review them and cut and paste to suit. You will have to work out how much your time is worth.
How often to prepare?
Tax rules and client requirements seem to change on a daily basis but the institutes recommend issuing new letters at least annually, and definitely when additional work is undertaken or type of work altered.
SteveOH said his firm has a two page engagement letter, accompanied by schedules of services (typically 2-3 pages) for personal accounts and tax, company accounts and tax, payroll, VAT and enquiry work. These are accompanied by a terms of business document.
“For the first year the client receives the engagement letter, terms of business and whichever schedules of services are relevant,” he commented.
For subsequent years the client only gets the engagement letter, which refers to the schedules and terms already sent. If the assignment changes, for example if the client becomes VAT-registered, they will also get a new schedule.
“For most of my clients, and for most years, all they receive from me is the one-and-a-bit page engagement letter.”
Jennifer Adams FCIS TEP ATT is a freelance writer and author specialising in tax and company secretarial issues, and can be contacted at Abacus Business Solutions.
You might also be interested in
Jennifer Adams is Consulting Editor of AccountingWEB and is a professional business author specialising in corporate governance and taxation. She runs her own accounting and consultancy business with offices based in Surrey and Dorset.
Replies (22)
Please login or register to join the discussion.
Basic letter
The link to the basic letter does not work
Can anyone supply the text please ?
AAT Guidance - is this better?
http://www.aat.org.uk/sites/default/files/assets/MIP-regulation-22.pdf
Don't understand
I don't understand why it's such a bother. It's just another document to ask the client to approve. It runs off the software. Takes a minute or two each. And if there's a misunderstanding a well written LoE can save a fortune.
LoE Software
What software? I would love it.
Software
I'd also like to know what software produces the letters.
Thx
Engagement Letters
Runs off the software?? What do you use??
Engagement Letters
Issuing them annually??? I can't believe that this is necessary - I have always used 3 years as the basic longevity with extra schedules issued if further services required.
With this and anti money laundering requirements, compliance review and other red tape I will soon be spending more time on admin than on clinet business - surely that can't be right.
But on the bright side - thank heavens for computers - can you imagine doing all this with carbon paper!!
Letters of engagement
The letter for our firm runs to about 10 pages and we have about 1500 personal clients not to mention corporates and partnerships - that few minutes per client really eats into my secretary's time.
A good tip
When you raise an engagement letter make sure you send an additional copy for the client to return signed.
Do not email it or fax it, send by Royal Mail.
That way you have checked the address for MLR purposes
Now if the client tells you that he has received it and brings it back or does not sign it, as long as he acknowledges that he has had it you know he lives there.
I suppose you can put a code reference on it and ask him for the number?
Email address, this is important to have for convenience. If you have queries and want proof that you have communicated best to email Q&A's
Emailing accounts saves money. If you are a cheap accountant its worth charging for a hard copy if requested.
Does It?
No, it proves he at least has access to that address.
Thanks for link but
Can we have this text also;
'The letter of engagement must include the Limited Assurance Engagement wording contained in the template "letter of engagement for general clients", which can be downloaded from the
MIP Zone '
2 opportunities
The engagement letter gives two opportunities to creat terms that are over and above "the usual"
Those opportunities are to limit liability ( I refer to non audit clients only ) and to build into engagement letters for limited liability entities personal guarantees of the owners in reltaion to our fees.
We dont just slide these clauses in we draw clients' attention to them. We experience no resistance to them from clients.
The time it takes
Number of pages? Ours run to 8 pages.
With a computer you don't need a secretary, although I can see the benefit of having one. It's literally one more doc to send to the client with his tax return / accounts, or whatever.
Always send out two copies, one for the client and one to be returned. I send an SAE, too, every time I send anything to a client that I would like back.
The only real problems I have are clients in the UAE. Attachments to emails frequently don't seem to arrive and when I've posted paper they don't seem to arrive, either. But the CIOT has an answer for this problem.
engagement leeters and PII
We supply our insured's with suitable wordings as part of our Risk Mnagement for our Underwriters. p.m me advice.
Engagement Letters
As a MIP, this should be one of the first letter you send to a new client
Client's copy
First time we ever sent out engagement letters we forgot to send copies for clients to retain - not a single one noticed this !
But surely by definition they don't need to be sent annually ? If so they'd be called re-engagement letters.
Eddystone
Hi
the engagement letter sets out the details of your contract so it should not need to be replaced unless the contractual arrangement changes or our regulators indicate a chnage is needed.
@ Mark Lee, LoE is also mandatory for AAT MiPs
Just to clarify that issuing a LoE is also mandatory for AAT Members in Practice. This became mandatory from October 2011.
returned by client
Does anybody ever check that the signed copy returned by clients is the one they actually sent them to sign and return ie the client has not inserted a clause claiming ownership of your soul?
Industry standard terms
Engagement letters should really be sent annually as legislative churn is ever increasing. RTI is the latest one, which will render all payroll engagement letters out of date. However this is a major administrative burden.
What I want to see are the institutes publish standard industry terms. In essence you can then boil the engagement letter down to one side of A4 to say something like 'this engagement is in accordance with ACCA standard terms, copies of which can be found on the ACCA website' and then list the services provided, such as accounts, payroll, self-assessment. ACCA can then continuously update the terms centrally. Lets face it, probably 98% of the engagement letters are boilerplate and it is daft that we all have to churn it out each time. I seem to recall that something similar is done with RICS members who simply refer to the RICS standard terms in their engagement letters.
Mark Lee - as a respected commentator on engagement letters do you think this idea is a runner?
Digita
My Digita tax return software has a basic engagement letter. - obviously automatically inserts the name and address.
To everyone who has commented on this article (last one dated April 2017 - good to know it is still being read 5 years later!) about how their software creates engagement letters - please note my comment dated 11 Nov 201.
- some tax software programmes did not have this facility at the time of writing. As I commented - my Digita one did (dont use it anymore) but my Taxfiler programme still does not. In any event a standard letter invariably needs to be reworked.
But to satisfy all I've put an update comment at the end of the article.