A good bookkeeping engagement letter will help you clarify the tasks you’re hiring for. This way, you will not easily get into any confusion with your bookkeeper. We’ll go over what should be in the letter and how to write one.
While a good bookkeeping engagement letter eliminates confusion and sets clear expectations, you’ll also need an expert bookkeeper.
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What is a Bookkeeping Engagement Letter?
A bookkeeping engagement letter is a formal document. It outlines the terms and conditions of a professional relationship between a bookkeeper and a client. This document acts as a roadmap for the hiring relationship. As such, it aims to set clear expectations for both parties around the scope and responsibilities of the role.
Bookkeeping Letter of Engagement vs. Contract
Letter of engagement and contract are two commonly used legal documents used to engage with clients. The purpose behind both documents is similar – to mention the terms and conditions of a professional relationship between bookkeeper and client.
However, there are some differences between the documents that set them apart:
| Purpose | It gives you an outline of the scope of bookkeeping tasks and specifies fees, billing methods, and payment terms. | It defines more stringent terms and conditions like confidentiality, non-compete, or liability clauses. |
| Formality and Enforceability | This document is less formal and only serves as a professional document to set clear expectations. | A contract is highly formal and is enforceable in a court of law. |
| Use Cases in Bookkeeping | It is suitable for routine bookkeeping for smaller projects. | It’s only necessary for complex, long-term bookkeeping projects. |
Why Do You Need an Engagement Letter for Bookkeeping?
If you’re hiring a bookkeeper to manage your books, drafting a letter of engagement is essential. It sets clear expectations and boundaries for your professional venture.
You’ll have a clear outline of what to expect from the services, clarity of payment terms, and responsibilities, which will prevent misunderstandings or scope creep.
While not legally binding, this serves as a formal document. It protects you and the bookkeeper by serving as a reference point in case of dispute.
Think of it as a best practice for handling sensitive financial data and aligning it with industry standards. It is also a foundation for a collaborative bookkeeping relationship.
Key Components of an Effective Bookkeeping Engagement Letter
A well-crafted bookkeeping engagement letter outlines the expectations and responsibilities of each party. By doing so, it protects both the bookkeeper and the client. Below is a breakdown of the essential elements.
Scope of Service
The letter details the specific bookkeeping tasks covered by the engagement. This can include:
- Data entry for transactions – receipts, invoices, bank statements
- Managing accounts payable and receivable
- Reconciling bank and credit card statements
- Generating financial reports – profit & loss, balance sheet
- Categorizing expenses
Make sure that you are as specific as possible with these tasks. This way, you can avoid confusion about what’s included and what additional services might incur extra fees.
Client Responsibilities
This section defines what the client needs to provide for the bookkeeper to do their job. This may include:
- Timely access to financial records (invoices, receipts, bank statements)
- Accurate and complete information
- Approval of reports and reconciliations
Bookkeeper Responsibilities
The letter also specifies the bookkeeper’s duties, including maintaining accurate books and following agreed-upon accounting procedures.
When you hire a bookkeeper, you will also want to clarify things like how you want them to communicate with you. Make sure to specify your expectations around meeting deadlines for reports and deliverables.
Fees and Billing
Every engagement letter must clarify how the client will compensate the bookkeeper. Common options for compensation include:
- Hourly rate – the hourly charge for regular services.
- Monthly retainer – a fixed monthly fee for a pre-determined set of services.
- Per-project fee – a flat fee for a specific project – e.g. clean-up of past bookkeeping records.
- Additional fees for unforeseen services and overtime.
The letter should also include the invoicing schedule (e.g. monthly, quarterly) and the payment terms (e.g. due upon receipt, net 30 days). You can also outline late payment penalties in this section.
Term and Termination
The document also outlines the engagement period and the process for termination by either party. If you don’t know how long you’ll need bookkeeping services for, you can list it as an ongoing engagement.
Make sure to detail the conditions under which you or the hire can break the engagement. For example, reasons for termination can include non-payment, breach of contract, or dissatisfaction with services. This will help you avoid legal disputes down the line. Outline the process of termination, too, and include any conditions, such as providing 30 days’ written notice.
Confidentiality
A proper bookkeeping engagement letter ensures that both parties understand the utmost importance of keeping financial information confidential. Don’t forget to include your requirements for data and backup procedures to ensure its security.
This section can specify what information you consider as confidential. It should also define any limitations you have for how the bookkeeper can use or disclose this information.
Compliance and Liability Terms
The letter can briefly mention the bookkeeper’s responsibility to follow generally accepted accounting principles (GAAP) or relevant industry standards.
It should also outline the limitations of liability for both parties. For example, you can detail the client’s responsibility for providing accurate information and the bookkeeper’s liability for errors or omissions. We recommend that you consult with a lawyer to make sure that you use appropriate language.
Additional Requirements
If you want the bookkeeper to use specific accounting software, include this in the letter. You should also specify who will pay for the software and other associated costs.
By including these essential elements in a bookkeeping engagement letter, both the bookkeeper and the client can establish a clear understanding of the services provided, expectations, and responsibilities. This helps to minimize misunderstandings and fosters a smooth working relationship.
Step-by-Step Guide to Writing a Bookkeeping Engagement Letter
A bookkeeping engagement letter serves as a vital roadmap for the working relationship between client and bookkeeper. It’s important to make sure you compose it well.
1. Gather Client Information
Make sure you have all the correct information for the client. Client details include basic information like:
- Legal name and business name (if different)
- Contact information – phone number, email address, etc.
- Tax ID number
Include information on the client’s business structure, too – sole proprietorship, partnership, LLC, corporation, etc. This will help the bookkeeper determine the client’s tax implications and reporting requirements.
Add the pertinent financial information, like:
- Current accounting software used
- Existing bookkeeping practices
- Bank account information
- Credit card details
- Typical monthly transaction volume
Make sure you are on the same page about your needs and expectations before drafting an engagement letter. You should have a conversation about the specific bookkeeping tasks you require and how often you need reports generated. Talk about what level of detail you expect in these reports, and other similar details.
2. Confirm Service Agreement
Make sure you are on the same page about the service agreement. Use the information you have on client needs to define the specific bookkeeping tasks you want done. Be as clear and concise as possible. Decide on details like:
- Desired engagement period with start and end dates.
- Notice period for termination by either party.
- Preferred payment rate and method.
- Invoicing schedule and payment terms.
Clearly outline the client’s responsibilities in detail, including timely provision of records and approvals. Define how frequently you want the bookkeeper to give updates and in what format that communication should be. Include specific reporting deadlines.
3. Structure the Letter
The goal for any engagement letter is to be clear, concise, and professional. Ensure the information flows logically, with clear transitions between sections. Maintain a professional and formal tone throughout the document, and prefer clear language over technical terms.
Introduction
Begin with a clear opening statement that explains the purpose of the document – i.e., this is an engagement letter outlining the terms of service between client and bookkeeper.
State the full legal names and business names of both parties involved in the agreement. Then, specify the date that the agreement becomes effective.
Services Provided
Create a distinct section that outlines the specific bookkeeping services expected. List each service clearly, avoiding technical jargon wherever possible. Make sure that the services you detail align with the client’s needs that you discussed earlier.
Consider using bullet points to improve readability so no one gets confused.
Responsibilities
Create another separate section, divided into two parts for Client Responsibilities and Bookkeeper Responsibilities.
Under Client Responsibilities, outline what the client is expected to provide. Aside from the abovementioned, this can include details like secure login details for accounting software, and timely approval of reports and reconciliations.
Under Bookkeeper Responsibilities, detail their duties and other expectations, as above.
Term and Termination
Specify the start and end date of the engagement period. Make sure the reasons and process for legal termination by either party is clear.
Payment Terms
Dedicate another section to outlining compensation. Clearly state the fee structure, invoicing schedule, when payments will be due, and any late payment penalties, as aforementioned.
Clauses
Include clearly placed clauses to emphasize other important details.
- Confidentiality – State the importance of confidentiality in handling the client’s financial information. This includes secure data storage requirements and assurances.
- Compliance – Mention the bookkeeper’s responsibility to follow GAAP or relevant industry standards.
- Dispute Resolution – Outline the structured approach you will take to resolve disputes, effectively mitigating conflict and avoiding costly litigation whenever possible.
Closing
Include a closing statement that summarizes the agreement, followed by a signature line for both the client and the bookkeeper. Make sure to use complete printed names and applicable titles. Include the client’s authorized representative if they are transacting on the client’s behalf.
When you’re done drafting the letter, proofread it thoroughly before signing it.
Common Missteps to Avoid in the Process
Although a letter of engagement is written to outline a professional relationship, errors can occur in the process that render the documents ineffective.
Here are key missteps to avoid:
- Vague Service Descriptions: Ambiguity in describing services, such as using general terms like “bookkeeping services,” can lead to confusion. Instead, detail specific tasks, such as transaction entry, account reconciliation, and financial reporting.
- Failure to Specify Client Responsibilities: Although the scope of the bookkeeping services list is well defined, the failure to specify the responsibilities of the client may cause disruption in workflows. Define what the client needs to provide, such as timely financial data, account access, or responses to queries.
- Poorly Defined Payment Terms: This misstep can cost both the bookkeeper and the client a lot of money. Specify the payment structure (like hourly, flat fee, or retainer), billing schedules, and late payment penalties.
- Neglecting Process Automation: Manually drafting, sending, and tracking engagement letters can lead to inefficiencies, errors, and inconsistencies. Not using automated tools or templates can make the process time-consuming and prone to oversight.
Adapting Bookkeeping Engagement Letter Template
You can adapt different types of engagement letters for bookkeeping services to fit your specific needs. Here are some tips to do that:
Basic Bookkeeping Services
A basic template is great for a new startup that requires basic bookkeeping services. This includes data entry, bank reconciliation, and monthly financial statements.
- Focus on detailing the specific tasks included in each task. For example, under “data entry,” you can list accounts receivable and payable, and expenses.
- Specify the type of financial statements the bookkeeper will provide, like a profit & loss statement and balance sheet.
- Including a clause that defines any limitations on complex bookkeeping tasks that are not included, like payroll processing.
Clean-Up and Catch-Up Services
This type of engagement is distinctly different from regular bookkeeping services. It focuses on helping a client get up to speed when they have neglected their bookkeeping for several months.
- Clearly define the scope of what the bookkeeper will clean up, like categorizing past transactions and reconciling historical bank statements.
- Give an estimated timeframe for the job.
- Specify the details of additional fees for unexpected complexities, such as missing receipts.
Bookkeeping for Ecommerce Businesses
Specific industries have different needs. For example, an online store owner needs bookkeeping services that can manage online sales transactions.
- Outline specific integrations between the client’s ecommerce platform and their accounting software and bank accounts. Include what additional fees apply for getting help with that.
- Detail how the bookkeeper will handle inventory management specifics like cost of goods sold calculations.
Tax Preparation Assistance
This engagement is very specific to tax season and tax documentation. It’s not what most bookkeepers commonly do. In fact, most businesses engage accountants, not bookkeepers, to help with taxes.
- Make sure to state that the bookkeeper is not qualified to offer tax preparation advice.
- Mention the limitations of their work and an understanding of the need to collaborate with a qualified tax professional.
- Specify how the bookkeeper will securely share data with other parties.
Legal Considerations
An engagement letter is a binding agreement between a client and bookkeeper, or the legal entities they represent. The letter outlines the terms of service, and carries legal implications.
Once signed by both parties, an engagement letter becomes a legally enforceable contract. This means both parties are bound by the terms and conditions outlined in the document. A court can be used to enforce the agreement if there’s a breach of contract.
By understanding the legal implications of your bookkeeping engagement letter, you can create a document that protects both parties. This will foster strong and transparent working relationships.
Best Practices for Drafting a Bookkeeping Engagement Letter
A well-written bookkeeping engagement letter can help ensure a clear, professional, and mutually understanding relationship between the bookkeeper and the client.
To ensure the letter effectively supports the bookkeeper-client relationship, consider these best practices:
- Be Transparent and Specific: Define what is included and excluded from the agreement, such as the scope of services, fees, and payment terms, to prevent misunderstandings.
- Focus on Mutual Accountability: In the bookkeeper-client relationship, the bookkeeper should commit to delivering accurate, timely reports, while the client should agree to provide complete and timely financial information.
- Prioritize Confidentiality: There should be an added clause concerning confidentiality to help reassure the client that sensitive information will be protected.
- Keep it Flexible: Allow room for amending the agreement as the client’s needs or the scope of work may evolve.
- Ensure Legal and Regulatory Compliance: Include clauses that align with industry standards and legal requirements for bookkeeping services, especially when it comes to data protection and financial reporting.
- Maintain Professional Language: Use clear, concise, and professional language to reflect the seriousness of the relationship while making the document easy to understand.
- Keep the Agreement Up to Date: Make it a habit to review and update engagement letters regularly to implement any changes in laws, bookkeeping practices, or client needs.
- Promote Dispute Prevention and Resolution: Adding a section that outlines how disagreements will be handled, such as through mediation or arbitration.
- Formalize the Agreement with Signatures: An unsigned letter is of no value, so ensure both parties sign and date the document.
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You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
Frequently Asked Questions
Here are some commonly asked questions while preparing a bookkeeping engagement letter.
What should I do if the other party refuses to sign the engagement letter?
The first step is open communication to discuss underlying concerns. Their hesitation may be due to a misunderstanding of the letter’s purpose. Explain its importance and how it protects both parties.
Review the letter together and see if there’s room for negotiation on specific areas they find unfavorable. Be willing to adjust the document within reason so you can reach an agreement.
If negotiations don’t work, consider offering a simplified service agreement. However, watch out for red flags that may be telling you it’s better to find someone else.
How often should we review and update an engagement letter?
We recommend that you review your engagement letter at least once a year. This ensures that both parties are still in alignment with the work agreed upon.
You will only need to update it if anything changes in your working relationship or the scope of tasks. You can ask to renegotiate at any time, but you must honor the agreement if the other party disagrees.
Can a Bookkeeping Engagement Letter Be Updated After It’s Signed?
Yes, a bookkeeping engagement letter can be updated after signing, but with the mutual consent of the parties involved. Updates are often necessary when the scope of services changes, bookkeeper costs are redefined, or legal or regulatory requirements evolve. To maintain clarity, document the updates in writing and have both the bookkeeper and client sign the revised agreement.
How Do I Ensure the Terms Are Fair in My Engagement Letter?
To ensure fairness, start by aligning the terms of the engagement letter with the scope of services provided. Clearly outline what services are included, the fees charged, and the responsibilities of both parties.
Benchmark your fees against industry standards to avoid underpricing or overcharging. Use transparent language, include reasonable deadlines, and avoid one-sided clauses that disproportionately favor one party.
Reviewing the letter with legal or professional advice can further confirm that the terms are equitable and compliant with regulations.
What Are the Risks of Not Having a Bookkeeper Engagement Letter?
Without a bookkeeping engagement letter, both the bookkeeper and the client are at great risk of the following issues:
- Misunderstandings: Clients may expect additional tasks without a clear scope of services, leading to disputes or unmanageable workloads.
- Payment Issues: There might be late payments to the bookkeeper by the client or a dispute regarding extra fees.
- Legal Vulnerabilities: In case of disagreements, there is no formal agreement to fall back on for resolution.
- Erosion of Trust: The absence of a formal document can undermine professionalism and lead to misunderstandings about roles, responsibilities, or data confidentiality.
Where Can I Find a Free Bookkeeping Engagement Letter Template?
You can find free bookkeeping engagement letter templates on websites catering to accounting and bookkeeping professionals, such as:
- Professional associations like the American Institute of CPAs (AICPA) or your local bookkeeping association.
- Platforms like IgnitionApp offer templates alongside tools for creating engagement letters.
- Legal template websites such as LawDepot often provide free or low-cost templates.
In Summary
A clear and concise engagement letter helps both the bookkeeper and the client to avoid misunderstandings and ensure a smooth working relationship. By gathering information effectively, you can create a comprehensive letter that protects both parties.
Remember, consulting with a lawyer is a good idea to ensure the legal aspects of the letter are sound, particularly regarding limitations of liability.
