In the same way that a life-belt can mean the difference between swimming and sinking, an effective engagement letter can help ease the sinking feeling that occurs when faced with a claim notification. The lack of a properly scoped letter of engagement has been identified as a key element in successful claims against accountancy professionals. A robust engagement letter may protect your practice from a claim, assist greatly in the defence of any claim or, at very least, mitigate any loss.
Engagement letters are often seen as time-consuming administration. Some practitioners doubtless see them as merely a compliance box to tick. If that is how they are viewed in your practice, could you be missing out on the advantages and risk management benefits of properly crafted engagement letters?
A benefit, not a burden
At your initial meeting, you will have discussed the client’s requirements, the services your firm can provide and what the client can expect to receive. Then comes the process of writing up that client’s transaction into an engagement letter. Many individuals regard that step as an administrative burden or a compliance necessity. Rather than viewing an engagement letter as a non-value-added activity, think of the positive business benefits that it can deliver. A properly drafted engagement letter can be a powerful tool to:
help summarise client discussions
manage expectations
set out services
increase transparency to the client
help clients understand fees and the value being delivered by the practice
avoid awkward conversations on fee increases
avoid misunderstandings.
This leaves more time for actually delivering the service and obtaining payment rather than resolving complaints or miscommunication.
First line of defence
If you do find yourself facing a claim, one of the first questions your professional indemnity insurers are likely to ask is - what services were you providing and what does your letter of engagement say? All too often, the answer is – I don’t have a letter of engagement – in which case you will likely find yourself immediately on the back foot when trying to build a defence.
Scope of services
That said, it is too simple to suggest a letter of engagement does, of itself, offer full protection, but a well drafted letter almost certainly will. There are a number of areas where it has been found that letters don’t achieve their desired result. One such area is what would best be described as ‘scope creep’. How often do you undertake a client engagement for a specific piece of work and half way through suddenly you’re being asked questions about a completely different area of work?
In that situation, do you try to answer the question and then just leave it, or do you specifically state you are not advising on such matters and to do so we must firstly amend our terms of business? If the former, it may be the client is entitled to accept that 'ad hoc' advice as being something on which they can rely.
In a similar vein, do you ever think about setting out in your engagement an area of work which is specifically excluded for the agreement? As with ‘scope creep’, the client may (wrongly) assume you have agreed to give certain advice if it is not specifically noted as being excluded.
Our tip – readability
Research has shown that there are a number of principles to consider to get the best out of your letters of engagement to avoid the client losing interest at page one. These are:
A clear purpose. Demonstrate the reason for the letter and the importance of reading it.
Short. If it is not feasible to keep the engagement letter very short, break information down into digestible paragraphs.
Plain English. The use of complex language, complex sentence structure or heavily caveated sentences should be minimised.
Prioritise. The letter should anticipate the information which will be most relevant to the client.
Personalised. Focus on that individual’s transaction and try to exclude generic information.
Easy to read. Avoid small fonts and densely spaced paragraphs. Headings, bullet points and tables can assist in making the document easier to read.
Highlight key information. Make it easier for clients to focus on key points using bold text or headers.
Consider additional opportunities to engage. This refers to following up the initial engagement letter with other detailed communications.
There is nothing to be lost in asking the question whether a more effective initial communication could be developed by putting some (if not all) of the above principles into practice.
Mark Gray – service leader Mid Market PI, Lockton Companies
If you have any questions please contact your Lockton Account Manager for further advice or email ACCAaccountants@uk.lockton.com
Lockton is ACCA’s recommended broker for professional indemnity insurance
Digitalising your practice’s client onboarding process
ACCA is collaborating with Practice Ignition to provide a solution that helps you to streamline and automate your client onboarding experience, from engagement letter creation to debt recovery.
Practice Ignition has launched a version of its product with ACCA templates. These templates have recently been updated by ACCA.
Their return on investment calculator allows you to determine how much your ROI would be if you use Practice Ignition in your firm.
They have bespoke pricing for smaller firms (a client base of fewer than 15), so if you are interested, please get in touch with alice@practiceignition.com (put 'ACCA templates' into the subject line) and a member of the Practice Ignition team will be in contact.
Rest assured that ACCA will always have free engagement letters for members to use. You can download our free factsheets from our website:
Each factsheet contains a main client covering letter with a privacy notice, a terms and conditions document and the most commonly used schedules of services.
