When entering into a new client relationship, or extending work for an existing client, accountants will know of the importance of agreeing a letter of engagement setting out the terms of service, scope of work and the fee a client must pay. Accountants can contact their professional bodies for guidance on the various templates available to cover most 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.
In this blog we discuss how Initor Global customers have 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 carefully 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 scope of 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 applicable 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 for suitability 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, unambiguous 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 an engagement 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.
Warning signs an engagement may be experiencing ‘scope creep’
Using a fixed or subscription based fee makes quoting for work straightforward for accountants and the fee is easily understood by clients. There is also scope to improve profit margins through investment in technology and improved processes (including outsourcing work), reducing the amount of time taken to complete recurring tasks. However, using a fixed fee or subscription approach means the risk of completing an assignment within the estimated time lies with the accountant. Accountants can often spot ‘red flags’ at an early stage in a new client relationship where the scope of engagement agreed may not be suitable, as shown below.
Multiple questions and requests for additional work from a client
The ongoing discussions needed with clients around the scope of work, the level of fees and the client’s expectations can be stressful and time consuming. Some accountants find their initial assessment of the resources needed to deliver an engagement and keep their clients satisfied is inaccurate. A key warning sign an accountant may have underestimated the resources needed to deliver an assignment is the frequency of contact needed with a client seeking ‘quick advice’ or a service not covered by the engagement letter, such as responding to a letter from HMRC or personal tax advice.
A good example of this is where an accountant is engaged to provide statutory accounts services to a limited company. The accountant acts on behalf of the company to prepare accounts and file them with Companies House and submit the associated tax information to HMRC. Should a director of the company seek personal tax services, such as the preparation of a personal tax return, the work is completely separate to the engagement with the limited company, and requires a different assessment of risk and fees.
The accountant will need suitable clauses in the engagement letter to cover the availability of ad-hoc services and advice, as well as arrangements for additional fees to be charged and any new engagement terms required. Accountants will need to notify clients when the ‘ad-hoc’ clause has been activated and that additional fees will be charged. As with any contractual arrangement, the accountant will need the client’s agreement to the additional work and fees in writing.
Should the accountant undertake work outside the scope of engagement agreed, they expose themselves to the risk of legal action or compensation claims from a client should any issues arise from the (additional) work completed. Maintaining the protections for the accountant provided by the engagement letter is therefore essential.
Information provided by a client is incomplete
Accountants find some clients wish to maintain their own accounting records and require specific services only at key points in the accounting period or tax year. While this may be appealing to accountants using a fixed fee or subscription based engagement model, problems can arise where the client does not meet their responsibilities to maintain adequate accounting records.
The provision of incomplete or late information by a client means the accountant is immediately under pressure to turn around work quickly, with additional, more expensive resources often needed to achieve deadlines. Client errors may need to be corrected and additional information obtained from different sources to allow the accountant to complete their work to the required professional standard. Clients are often unresponsive to requests for information and fail to acknowledge the risk of fines or penalties for the late submission of information to regulators.
The engagement letter should clearly state the scope of responsibilities of the accountant and the client. Where a client does not meet their responsibilities, the accountant requires a mechanism to charge additional fees, usually activating the ad-hoc clauses in the engagement letter. The accountant must manage such client relationships carefully, ensuring clients are reminded that responsibility for any fines or penalties incurred for the late completion of work due to inadequate record keeping lies entirely with the client themselves. Where deadlines are missed, the accountant should carefully consider whether the client should be disengaged given the risk of non-payment of fees and additional resources needed to complete an engagement.
Disputes and inconsistencies
While engagement letters state the scope of work required to complete the assignment, clients may dispute the level of work required for delivery. There may also be a gap in expectations about the extent of work to be completed within the agreed fee, especially where the client has sought information from the accountant which they perceive as formal advice which is not provided in writing. Clients may also make it difficult for accountants to complete their work, by providing inconsistent instructions or not providing information at all.
Where a client’s behavior is unreasonable, accountants should seek to activate the disengagement clause in the engagement letter. The engagement letter should also provide information to allow clients to make a formal complaint to the accountants’ professional body in the event a dispute cannot be resolved.
Managing liabilities arising from a client dispute
Engagement letters should contain information on the scope of the accountants liability should a dispute arise. The amount of liability an accountant is prepared to suffer should be based on an assessment of risk for each type of client and their business, the nature of the assignment to be completed and the risk of losses arising. It is not good practice to have a single level of liability regardless of the type of engagement involved.
Accountants may seek to align the amount of their liability based on the amount of fee an individual client is paying. However, the approach may not be appropriate based on the nature of the engagement. For instance, a fee of £100 for completion of a personal tax return may contain a high risk of error and the fee multiple basis to limit the amount of liability is unlikely to be appropriate.
The amount of liability needs to be capable of negotiation with a client to evidence the accountant’s assessment of risk and likelihood of a liability arising and should have regard to the amount of professional liability insurance held by the accountant.
When an engagement comes to an end, the accountant should provide a disengagement letter to ensure the responsibilities of each party to complete relevant tasks to enable a smooth exit and continuing operation of the client’s business are clear. For instance, the accountant may agree to provide information from the client’s accounting software in a format the client can easily transfer to another accountant. The letter should also state any outstanding work to be completed on statutory accounts and tax returns, including the filing of payroll information and VAT returns up to the date the engagement ends. The disengagement letter will also state the accountant is no longer an agent for the client and they will need to make arrangements for filing information in the future, such as the annual confirmation statement required by Companies House for a limited company.
How Initor Global can help your Practice manage engagements
At Initor Global, we have been providing offshore services to accountants since 2006. Our customers include sole proprietors, as well as small and medium sized UK Accountancy Practices. Our outsourced tax, accounting and payroll services are suitable for all client engagements – from sole traders and micro businesses to SMEs and large companies. We offer services paid for by the hour, a half-time equivalent or a full-time equivalent employee basis.
Typically, the cost of outsourcing work to Initor Global is 50% less than a UK resource, securing immediate reductions in your cost base and allowing you to deliver engagements more effectively.
You will find that outsourcing recurring tasks such as bookkeeping, payroll or accounts preparation frees up time to help clients and secure better value for money from your engagements.
Our services include:
- Digital Bookkeeping
- Year-End Accounts
- Company Tax
- Personal Tax
- Secretarial Services.
To arrange an informal discussion and a free, no obligation trial of our services, please contact us at [email protected] or visit our website at www.initor-global.co.uk. You can also call us on 0203 519 2121.