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Using engagement letters to drive profitability and growth

21st Feb 2024
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Initor Global UK provides premium outsourced services to UK accountants and businesses.

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When starting out on a new client relationship, or undertaking more work for an existing client, accountants will know the importance of issuing a letter of engagement setting out the terms of service, scope of work and the fee a client must pay. Helpfully, most accountancy bodies provide guidance and templates to cover all types of engagement.

Once an engagement letter is issued and signed by the client, many accountants feel this initial compliance requirement is complete and plough on with the assignment. However, the modern accountant now sees the ongoing review of an engagement as an opportunity to revisit fees, examine how effectively services are being delivered, and to offer more services as a client relationship develops.

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Initor Global UK

In this blog we discuss how Initor Global customers ave successfully used our services to manage their client engagements, increase profit margins and scale their business.

Issuing an engagement letter for a new client or assignment

Any accountant providing services to a client must ensure they are qualified to provide the services required. For instance, when offering tax, or statutory audit and accounting services, the accountant must consider whether a Practising Certificate is required based on the nature of the engagement. Operating as a Practising accountant, tax specialist or statutory auditor without the relevant certification can result in disciplinary action from professional bodies or legal action from clients. If an accountant has any doubt about the services they can provide based on their qualifications, they should contact their professional body for advice before commencing an engagement.

Once the accountant is satisfied they are qualified to provide the services a client needs, they should prepare an engagement letter setting out the terms and contractual requirements of each party. The engagement letter is a key document to be referred to should any disputes about an engagement arise and has the same legal status as any commercial contract.

Ideally, the engagement letter should be issued and signed by both parties before any work commences on an assignment. If an accountant finds they have undertaken work without an appropriate engagement letter, a letter should be prepared to specify the date the engagement commenced and signed by the client as soon as possible. Engagement letters cannot be backdated.

When preparing an engagement letter, some accountants are reluctant to include specific responsibilities a client must fulfill. However, the success of any assignment requires both parties to acknowledge their responsibilities to enable effective communication, documentation, record keeping, arrangements to pay fees, the termination of engagement, and any statutory reporting responsibilities assigned to the client and the accountant. Parties will also need to understand the limitations of their responsibilities which should also be stated in the engagement letter.

Keeping the terms of an engagement and fees under review

Many accountants are reluctant to keep their client base and engagements under regular review, preferring to avoid the difficult conversations about ‘scope creep’ or client suitability which may require additional fees or, in extreme circumstances, the termination of an engagement.  Undertaking an annual review of all engagements is essential to identify assignments where profit margins are not being met or where the scope of work needed by a client has changed and the accountant can no longer deliver. More regular reviews may be necessary where clients are deemed to be higher risk or involve the provision of more complex services, such as specialist tax or advisory services.

An effective engagement letter will set out in clear, easily understood language, the scope of work to be completed by the accountant and arrangements for changing it. The accountant may find they need to charge additional fees because the scope of work has been extended, or the original fee negotiated is no longer reasonable because of changing circumstances. The accountant will usually seek to issue a new engagement letter or an extension to the original specifying any permanent change in the scope of work and fees.

To manage the progress of any engagement, accountants require effective time recording systems to ensure they present up to date information about costs incurred to inform discussions with a client about increasing fees or changing the way services are delivered. Most clients understand the value of additional contact with their accountant and are open to discussing any changes. While an increase in fees may be unwelcome, clients are usually persuaded of the value of the additional work required.

By keeping the scope of an engagement under regular review, accountants can identify opportunities to outsource recurring tasks such as bookkeeping, VAT return submission or the preparation of annual accounts. Most engagement letters contain clauses enabling the outsourcing of work to an offshore provider at the discretion of the accountant. Clients are usually comfortable with such clauses which enable the accountant to deliver an engagement effectively. Accountants find that outsourcing recurring tasks such as bookkeeping, payroll or accounts preparation enables them to secure better value for money from the engagement and they can improve the overall client experience.

If you are an accountant looking to outsource services, increase margins and improve the quality of engagements you deliver, you can book a video call with one of Initor Global’s expert advisors using this link or send an email to [email protected]. You can also read our detailed guide to managing engagements.