7 custom tips for advisory engagement letters

As accounting or tax professionals, we’re well aware of the significance of an engagement letter. It serves as a legal agreement between you and your client outlining the services to be provided, the cost, and other pertinent details. It’s an essential tool for providing clarity on the scope of work, pricing, and payment terms, clearly defines expectations, and used for mitigating risk and ensuring smooth client relationships. But what happens when you expand your offerings into advisory services? Do you need to change your approach to engagement letters?

Absolutely!

Advisory services are often the most important accounting issues clients encounter in their businesses. These include cash flow management, management consulting, risk advisory, financial advisory, and strategic business advice, and involve a different scope and nature of work compared to traditional accounting or tax. For this reason, it’s essential to adapt your engagement letter to match these unique services. Here are seven ways to do that.

#1: Tailor your scope of services

Advisory services can be broad, varied, and, in many cases, more complex than conventional accounting tasks. It’s essential to define precisely what services will be provided, because this helps manage client expectations, and reduces the risk of misunderstandings or disputes.

With the diverse nature of advisory, a one-size-fits-all engagement letter simply doesn’t cut it. The scope of services should be tailored to the specific advisory services offered, ensuring every party is on the same page.

If this sounds time consuming, it doesn’t have to be. You can create and send proposals and engagement letters in minutes using a platform such as Ignition, which also allows you to create your own custom templates. Using these, you can adapt your scope of services for different clients or projects, saving you time.

#2: Include your fee structure

The fee structure for advisory services may also differ from your other accounting or tax services. For example, you might be using value-based pricing for advisory, so your engagement letter should clearly outline this structure to avoid any confusion or disputes about payment. Transparency about costs upfront can also contribute to stronger, trust-based client relationships.

#3: How to deal with out-of-scope requests

In the complex realm of advisory, clients may often have requests that exceed the agreed-upon scope outlined in the engagement letter. In these cases, engagement letters serve as pivotal tools in managing client relationships and controlling the scope of your work. The document acts as your source of truth, grounding discussions and reminding clients of the original agreement—keeping everyone on the same page.

When out-of-scope requests arise, the engagement letter also allows opportunities for negotiation. Rather than accepting out-of-scope work without additional compensation, you can leverage the engagement letter to discuss amendments and additional fees for the extra work. In this way, you can ensure that all your efforts are properly rewarded and maintain a transparent relationship with your clients. Think of your engagement letter not as static document, but a dynamic tool that can be revised as the demands of your advisory services change.

#4: Clearly include your limitations of liability

Advisory services carry unique risks. For instance, strategic business advice carries the potential for disputes if the client’s expected results aren’t achieved. So your engagement letter needs to clearly articulate your limitations of liability. This risk management strategy can help protect your firm and ensure your client is aware of the inherent uncertainties in business advisory services.

#5: Address confidentiality and data protection

When you’re taking a deep dive into your client’s business, it can involve accessing sensitive data. Because of this, your engagement letter should address any confidentiality and data protection issues unique to the services you provide. You might need to include additional clauses or reassurances about how you will protect your client’s data, reinforcing their trust in your services.

#6: Handling any potential conflicts of interest

Advisory can carry a different risk profile when it comes to conflicts of interest. If you’re advising two companies in the same industry, potential conflicts could arise. Your engagement letter should clearly state how you will handle potential conflicts of interest. Being up front about these issues can help maintain your professional integrity and client trust.

#7: Include verbiage on terminating the engagement

Better safe than sorry … the conditions under which the engagement can be terminated might be different for your advisory services, especially if these services are provided on a project or retainer basis. In your engagement letter, it’s a good idea to detail the process for termination, including any notice periods, fees, or obligations. This clarifies expectations, should either party need to end the engagement.

Take the time to customize your letters

Building advisory services into your accounting and tax firm can be a rewarding venture to expand your client base and offer new challenges. But it’s essential not to overlook the legalities and formalities of these new services. Tailoring your engagement letter to suit advisory isn’t just a best practice; it’s a necessity.

By paying attention to the scope of services, fee structure, risk management, confidentiality, potential conflicts of interest, and termination conditions, you can craft an engagement letter that serves you and your clients.

This attention to detail can lead to clear communication, robust client relationships, and a successful advisory practice. It ensures all parties understand their roles, responsibilities, and the unique aspects of the advisory services provided.

So as you venture into advisory, take the time to revisit and revise your engagement letters. It’s a small step, but one that could make a significant difference in the effectiveness and success of your services. It’s not just about ticking a box for best practices; it’s about building solid foundations for your advisory services and, ultimately, your firm’s future growth.

Editor’s note: This blog post was co-written with Ignition. I have obtained permission to share it on my website/social media. For the original source of this post, please visit https://www.ignitionapp.com/blog.