Engagement Letter
Lays forth the terms of the agreement between a client and a business.
What Is an Engagement Letter?
A letter of engagement is a formal contract that is enforceable in commercial transactions. These letters are legally enforceable; therefore, you can file a lawsuit for damages if the other party fails to uphold the terms of the agreement. It reduces a counterparty's risk.
A letter of engagement lays forth the terms of the agreement between a client and a business. The letter describes the nature, conditions, and costs of the agreement. Its purpose is to define each party's obligations to the contract clearly.
It serves the same purpose as a two-party contract. However, it has less formal work than a contract and often avoids legalese.
The letter's purpose is to clearly and succinctly outline the obligations, terms and conditions, deadline or deadlines, and compensation for the services to be provided.
Key Takeaways
- The Engagement Letter serves as a formal agreement between the company and the Association regarding specific services like audits and tax preparation.
- The Engagement Letter must be delivered before work starts, whereas the Representation Letter is sent with the draft audit and should be signed within 60 days.
- The Engagement Letter is not directly required to offer an opinion on financial accounts.
- The Engagement Letter must be signed by relevant authorities before work commences.
Understanding Engagement Letter
A letter of engagement also serves to specify the company's service parameters. For example, when a person or organization hires an attorney, the letter may outline the precise objective or region of expertise where their services might be used.
A contractor who engages a lawyer to draft a land purchase agreement is prohibited from contacting the lawyer for help on his divorce. Although it won't be stated as blatantly in the engagement letter, the message will be obvious.
It's crucial to establish expectations. The client is more at ease knowing when a service will be done and how much it will cost.
If there are additional costs, such as required software, that the customer must purchase separately and are not covered by the agreement, they are specified in the letter.
The company has established limitations on the type of job that must be done. This is done to avoid "scope creep," which is something that every tax lawyer and accountant hates.
The letter may also list extra services not covered by the current contract but might be added later if necessary, along with an estimate of the additional expenses.
A letter of engagement may include a clause requesting binding arbitration or mediation for the relationship. This provision offers direction for handling any disagreements that develop between the parties.
Engagement Letters Standard Format
Although each letter of engagement is unique, they all have a similar structure.
The following is a sample letter format:
1. Stakeholders: A list of the stakeholders involved is included at the start of every letter of engagement. One of the parties is the professional services provider, while the customer is the one who receives the services.
2. Type of Service: The type of services provided is mentioned in the letter.
- Particulars of the Service: The agreement includes details regarding the type of work that will be done. This is done to avoid misunderstandings and establish clear expectations for the level of service. Typically, the section on the specific service contains information about timetables and pricing.
- Each party's obligations: The section describes the responsibilities each party to an engagement must uphold. For example, a client may be required to provide specific information to the professional services firm.
Note
The termination clause provides information on how to end an arrangement and the conditions under which the letter may be judged to have ended.
3. Disclaimer: The disclaimer section describes the scope of the service offered. In addition, it draws attention to the limitations of the service and the restrictions on how the result should be understood.
4. Duration And Validity: The letter may only be in force until a certain period or until the entire service is rendered and completed.
Engagement Letter uses
Before a professional services business begins to provide its services to the customer, letters of engagement are created and entered into.
An engagement letter's effectiveness can be sustained for a very long time. Therefore, it is suggested that you review the conditions of the agreement at least once a year to ensure that any necessary updates are noted.
If changes are required, a new letter of engagement or a supplement letter should be employed.
A termination clause is frequently included in the letters as well. This clause enables either party to withdraw from the contract under specific circumstances that differ from letter to letter.
Letters of engagement differ from regular contracts because they tend to be less formal and shorter. However, they share several significant characteristics, such as being legally binding and intended to lower responsibility.
Consider a situation where a client wants to hire an accounting company to prepare their taxes. The customer believes that the scope of services would include filing taxes for the previous two fiscal years based on a phone conversation they had with the accounting company.
However, based on that phone conversation, the accounting company believes the service scope will only cover the most recent financial year.
The next day, the accounting firm drafts an engagement letter stating their comprehension of the engagement term. However, after reading it, the buyer realizes it falls short of their expectations.
They ask that the letter be updated to include information from the two most recent fiscal years. The accounting firm revises the letter, which all parties then sign.
Both parties would not have known that their expectations for the extent of the service were out of alignment if the accounting firm had not written the initial engagement letter. This might have easily turned into a he-said-she-said argument later on.
Note
Multiple services to be provided by a company may be described in a single letter of engagement, but most frequently, each distinct service is described in a separate engagement letter.
Drafting An Engagement Letter
To prepare and correspond to a letter of engagement, follow these steps:
1. Identify the corporate executive by the name
An employee with the authority to speak for the customer, such as the head of the company or the department manager, is the one who gets the engagement letter.
Write a title page that addresses the firm president by name. You can prove that the letter's contents are specific to your connection with that customer.
2. Specify the purpose of the partnership
Dedicate the first few sentences of the letter to the type of service you're providing to the company. It may be beneficial to be specific to show the client that you understand what's expected of you.
Note
Consider including a brief definition of the service or product you're rendering. If the project includes several submissions, you can also describe those in this section.
3. List the client's responsibilities
List the tasks you can perform to manage their services effectively. This portion of the article aims to establish performance criteria for the workplace. Then, to meet the client's needs, you can choose how to structure your approach as the party supplying the product.
The organization's staff can provide their approval for the jobs that will enable them to achieve the desired result. However, according to the engagement letter's section, you could also be required to complete your tasks before receiving payment.
4. Determine the project's completion schedule
The project's completion timetable indicates the precise day you turn in the assignment to the customer.
The purpose of this part is to ensure that you are aware of how much time you have left to fulfill your duties. Additionally, customers can predict when they will get the services they ordered.
The size of the project determines the length of this section. If the assignment consists of several parts, each of which must be turned in separately, you can list the specific due dates in the letter.
Note
Consider distinguishing between more manageable milestones and the deadline by which the customer anticipates receiving the full project.
5. Describe the assets the customer provides
When you and the client talk about the benefits of your services, the salesperson may have agreed to provide resources to help you do your work. Mention the customer's assistance in the engagement letter to ensure that you meet their needs.
You may demonstrate that everyone is dedicated to realizing the intended objective. For instance, the top officers could consent to provide you access to an office so you can put together technology or do data analysis.
6. Attach a disclaimer
The letter's disclaimer may be found there. It demonstrates the limitations of the job you gave the customer. It also includes guidelines for the client to review the product.
7. Validate the terms of the agreement
The last section of the engagement letter includes a date representing how long the partnership details are valid. You can also specify the procedures for ending the relationship with the client before the date occurs.
Note
If you and the client mutually decide to part ways, you can refer to the validity clause on the document to determine how to proceed.
Engagement Vs. Representation Letter
The difference between the two can be seen as:
| Aspect | Engagement Letter | Representation Letter |
|---|---|---|
| Purpose | Agreement for providing specific services (e.g., audit, tax preparation) | Certifies accountability for financial statements and accuracy of data provided for audit |
| Signatories | Board and Management of the company and Association | President, Treasurer, and Management of the Association |
| Delivery | Delivered to the company's office before work commences | Sent with the draft audit to complete the audit process |
| Timeframe for signing | Must be signed before work commences | Within 60 days of draft audit issuance |
| Consequences of delay | May postpone commencement of services | May necessitate additional auditing steps, increasing costs |
| Relationship to audit | Establishes terms of agreement for audit services | Essential for completing the audit process |
| Auditor requirement | Not directly required | Usually required before an auditor offers an opinion on financial accounts |
| Regulatory reference | Influenced by guidelines set by the American Institute of Certified Public Accountants (AICPA) or the International Auditing and Assurance Standards Board (IAASB) | Detailed in AU Section 333 by the Public Company Accounting Oversight Board |
Conclusion
These days, many businesses send this extremely crucial letter to the client as an email attachment and request a digital signature.
If your customer cannot do so, give them a fax number and ask them to print, sign, and fax the letter back to you, or have them scan it into their email to submit. Businesses are discovering that digital storage costs less than a physical copy.
Even though talking about money can be awkward, you must clarify the charges as clearly as possible and include any services you will charge more than the amount you agreed upon.
If businesses that provide services don't define their boundaries in a formal and legally enforceable contract, they risk all kinds of issues.
The letters of engagement primarily safeguard businesses from legal action while providing customers clarity regarding the services they anticipate receiving.
They serve as a less complicated, more affordable substitute for a standard contract while attempting to prevent misunderstandings.
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