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How to create a CPA engagement letter

A CPA engagement letter outlines the business agreement, its terms and pricing. It sets expectations and helps protect both parties. Let’s dig into what’s included in a CPA engagement letter and how you can create your own.

What is a CPA engagement letter?

A CPA engagement letter is a written agreement between you (or your practice) and the client. It defines the scope of work and typically outlines the terms of payment for the working arrangement.

Why is it important to have a letter of engagement with clients?

Set expectations

Your letter of engagement helps set expectations between you and your clients. It clearly lays out what clients can expect when working with you, helps prevent misunderstandings, and ensures all parties are aware of their obligations. A CPA letter of engagement also shows your clients that you’re a professional and that can inspire more trust. 

Set the scope of services

A letter of engagement also helps establish the scope of work you’ll provide. It ensures alignment between what the client wants from you, what you’ll provide, and at what cost. If the client subsequently wants additional services, you can price these separately. This helps to protect you from “scope creep”. 

In addition, a letter of engagement helps protect you legally. For this reason, some business insurance providers require them.

What should a CPA engagement letter include?

There are several items that should always be included; for example: 

Parties involved

The first thing your letter should do is outline the parties involved in the agreement. Typically this defines both the legal name of the entity and a shorthand version (such as the Client) that’s used as a placeholder throughout the rest of the letter.

Scope of services

After defining the parties, an engagement letter typically moves to defining the scope of services to be provided. This section should clearly spell out not only what you’re going to do for the client, but also anything you’re not going to do. In other words, if there are limits to your services, define them here.

Period of engagement

The engagement letter establishes the time frame of your working relationship with the client. This could be a specific duration, such as a financial year, or until a certain project is completed. 

Again, if there are limits or guardrails you want to put in place, they should be clearly defined. For example, you might state that the engagement will last until the client has signed off on completion of a particular project, but that the duration isn't to exceed four months. If there are any milestones or other deadlines along the way, this is also the place to put them. 

Fee structure

Next, your engagement letter should include the fees for your work and how your fees should be paid. This section may look a bit different depending on how you structure your services — some CPAs might charge by the hour, while others bill a flat fee for various services. This is also the place to put payment deadlines, and any late fees chargeable.

Ownership of documents

This section describes who owns the documents, paperwork, files and other material produced during the engagement. Typically, only the final output of any work done goes to the client, and the CPA or practice retains ownership of anything produced in the course of the engagement.

Client responsibilities

This part of the engagement letter defines any responsibilities the client has in the relationship. For example, they may certify here that they’ll provide accurate, updated records so you can do your job properly. This is also the place to outline any specific deadlines for the client to provide said information. 

Governing standards

In this section, you should outline and summarise any government regulations or rules from other regulatory bodies that apply to the agreement. You might want to include a blanket statement that you’ll follow these reporting requirements or standards of work.

Confirmation of terms 

As you wrap up your CPA engagement letter, it’s good to include a summary section that confirms the broad scope of the document and places the onus on the client to actually read the letter in full. 

Handling of personal information

Finally, your engagement letter should include a disclaimer or section outlining how you’ll handle the client’s personal or confidential information. This might include a blanket statement about not selling their information.

If you use cloud software, store files offsite, or contract with any third parties that may see a client’s information, you should also include this here. The client’s acceptance of the engagement letter also confirms they accept its terms.

When should CPAs reissue engagement letters?

In general, you want to reissue an engagement letter any time there are significant changes to any of the following:

  • Scope of work or fees: Any changes to the planned scope of work or fees, no matter how small, are important enough to document in a fresh letter of engagement.

  • Legal or regulatory requirements: If there are changes to any government regulations that you’re required to comply with, you should update your engagement letters to match.

  • Changes to the names or ownership of any of the entities: If your business name changes, or your clients rebrand, you should update your documents with the new names to ensure they remain legally valid.

It’s also not a bad idea to reissue an engagement letter to a client periodically if you only perform work for them on an intermittent basis. This can be a nice courtesy, even if nothing has changed in the letter itself.

Stay productive and profitable with MYOB

A CPA engagement letter is a fantastic way to protect all parties in a business relationship. It’s a must for modern CPAs and accounting practices. 

Another must is effective accounting and practice management software. MYOB’s solutions can help you deliver on your terms of engagement and provide the best possible service to your clients. 

Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.

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