What are Engagement Letters?

Patrick Roland

Engagement letters are very common tools that act as contracts for services between groups. Tax accountants, lawyers and other service-oriented professions provide these documents to clients. The specifics of each engagement letter are different, but they generally include four distinct parts of the contract.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The first part of engagement letters always deals with the services being provided to the client. Depending on the issuer of the letter, it can prescribe anything from an accountant performing an audit of a client's specific accounts to something more open-ended, such as an attorney's legal retainer agreement. This part of the letter normally also breaks down the specific responsibilities, such as what tasks the auditor will be performing and what results or reports will be provided to the client, if any.

The second portion of engagement letters usually deals with any specific caveats to the responsibilities and services being provided. This is where the issuer of the letter explains any possible constraints of performing work and what the possible consequences will be. One example is an accounting firm stating that it needs access to records for a specific amount of time or it cannot guarantee delivery of its audit. The delivery time of these services, known as the deadline, also is covered in this section. It makes the time expectations clear for both parties and acknowledges that failure to meet this deadline is a breach of the contract.

Client assistance is firmly listed in the third section of most engagement letters. This section intends to state what assistance, if any, the client is expected to provide the issuer of the letter. This encompasses a lot of tasks but usually refers to filling out paperwork or opening accounts. This section usually states that a fee will be added if the client fails to handle these responsibilities. This also is the portion of the letter that addresses any outside contractors who will be needed, such as an appraiser who will determine the value of the client's assets for a law firm that is handling the client's divorce.

Finally, a disclaimer stating the issuer's intent to perform its duties to the best of abilities is a standard part of the fourth section. The fee for this service also is listed. At the end of the engagement letter, all of the parties involved will sign and date the paperwork to complete the contract.

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