Getting started with client engagement letters in Australia

Client engagement refers to a variety of interactions between a professional service provider and their customers. Interactions can take the shape of email communications or an impromptu chat, Instagram posts or a formal contract – anything that constitutes communication, passive or direct. The formal contract component of this in an engagement letter is not only a great tool to manage the expectations of your client relationships, but as an accountant or bookkeeper they are likely a vital step in staying compliant.

To make the best use of your engagement letter, you should understand what rules and regulations you should be complying with. Guidance for the content, structure and process surrounding your engagement levels will vary based on the registration of individuals and businesses but broadly speaking, all Australian accountants in public practice are subject to the Accounting Professional & Ethics Standard Board APES 305: Terms of Engagement.

Tax agents must comply with the Tax Agent Services Act 2009 (TASA), a part of which is the Code of Professional Conduct (Code) and along with BAS Agents are guided by the Tax Practitioners Board TPB(PN) 3/2019.

The Tax Practitioners Board states that letters of engagement are not a specific legal requirement of the Code. The TPB however, note that:

“The TPB is of the view that the provision of letters of engagement, covering the matters outlined in this practice note, is an important and effective mechanism to assist tax practitioners in ensuring that they comply with the requirements of the Code. Where relevant, it is for this reason that, when considering whether a tax practitioner has breached the Code, the TPB takes into account the existence and content of a letter of engagement between the tax practitioner and client/s. As such, the TPB strongly encourages the use of letters of engagement as a means of avoiding uncertainty and misunderstandings and to assist in compliance with the Code”.

The multiple standards will see some professionals receiving guidance from multiple sources but generally, there are few meaningful differences between alternative sources.

Broadly speaking, you should aim to engage all of your clients. While not a legal requirement for all professional service providers, tax or BAS agents are offered clear guidance by the TPB(PN) 3/2109: “Separate engagement letters should be issued for each client in receipt of your services, unless it is agreed otherwise.”

For example, separate letters are required if you provide services to both:

• A husband and wife
• A partnership and the individual partners
• A company and its shareholders
• A company and its directors
• The trustees of a settlement and it’s beneficiaries

Conversely, the Tax Practitioners Board currently offers no guidance on what constitutes an appropriate agreement to engage entities together, or on which parties would need to sign to ensure legal recognition. While it might seem over-scrupulous, engaging stakeholders individually leaves no room for confusion in the provision of service and streamlines the process of dealing with business undergoing separations, sales or other restructures.

This is not just a compliance issue; there are practical business reasons to engage each entity individually. When you work on an engagement— fundamentally a contract—you need to ensure the correct people sign off the document. There are several circumstances where the “head of the group” may not actually be the designated person to sign off on an engagement, and are also unlikely to be able to enter into contracts on behalf of other individuals.

For this reason, it is crucial to ensure that the party you are contracting with has the authority to enter into the contract and has the authority to give instructions for work to be undertaken. Group engagements also make it very difficult to clearly identify in what capacity a person is entering the contract into - is it as director/partner/trustee/executor, and for what entity are they operating in this capacity?

Consider the unfortunate situation of a marriage or partnership breakdown where one person has entered into contracts on behalf of another. This can cause a whole range of issues for work already performed as well as ongoing services. This is especially concerning if you continued to provide services before knowing about the separation and preparing a new engagement - were you even authorised to do this work, and what fallout can be expected?

Separate engagements provide complete clarity over what services are to be provided to what entity. There is no chance for ambiguity or misunderstanding around service offerings, especially when you consider that it is highly unlikely every entity in the group will be in receipt of the exact same services. An unclear or poorly worded group engagement may see an accountant unable to invoice for services if the client misunderstood what entity was receiving which services, causing a potential dispute.

Providing each entity its own engagement makes the service offering clear, along with the ability to enforce the engagement terms to recover payments.

Both the Tax Practitioners Board and the Accounting Professional & Ethics Standard Board acknowledge that engagements can be recurring or ongoing. Both also recommend fresh engagement whenever there are meaningful changes to the service offering.

Specifically, the Tax Practitioners Board also recommends that at minimum, engagements should be reviewed and reconfirmed annually. Reviewing engagements, however frequently, should be viewed as an opportunity to assess the finer points of engagement. This could mean reassessing fees, reviewing the scope of the service offering or implementing new processes relevant to your client’s business.

Whilst the engagement is a vital step in onboarding new clients, it is a process that should not be confined to the beginning of a relationship. To continue to build strong and transparent relationships you need to implement a system of regular re-engagement, with most accounting regulators and member bodies advocating for a minimum of annual reengagement.

A regular re-engagement process not only creates an opportunity for you to assess your current services and fees, it is an ideal opportunity to discuss with your clients changes in their business or situation which may require a need for different or additional ongoing services. It’s one more way that you can continue to build your client relationships and at the same time increase your service revenue and manage your scope.

In fact, it is nearly impossible to manage scope and mitigate scope creep if your engagements are not kept up to date and regularly reviewed. Without a process of re-engagement when services and client situations change, your baseline to determine if something is in scope, or out of scope, will be wrong. You will find yourself consistently undertaking work with both parties (yourself and your client) unsure if it is “included” in your current agreement or if there will be an extra cost, and potentially extra responsibilities. Whenever you undertake new work without a signed engagement you not only run the risk of not getting paid for unapproved works, but you create a situation where you and your clients' understanding of services can become misaligned potentially leading to a dispute.

The beauty of implementing a process of a minimum of annual re-engagements is the opportunity to review your pricing on at least an annual basis. A pricing review is more than undertaking a basis rollover of existing engagements. It occurs when a practice reviews the basis of their pricing in great detail. This process will include adjusting your pricing to reflect:

• Any changes in the cost of firm operations such as staffing, occupancy and general office expenses.

• Movements in the Consumer Price Index (CPI) which reflects overall costs of living

This process is relevant to all practices regardless of billing model. Both fixed fee and hourly rate firms should undertake this process to keep up with the global increases in the cost of delivering your services, ensuring ongoing profitability.

Accountants and bookkeepers understand that part of running any business includes cash flow management, however they often don't spend enough time doing this for their own business. Luckily Ignition and an effective engagement strategy can assist.

For service providers, a key item for healthy cash flow is keeping your debtor days as low as possible, and within terms. As an industry debtors have been difficult to manage historically and the 2020 Good Bad Ugly survey showed that average debtor days for accounting firms is 50 days. When most terms are between 7-14 days, this is not a good result.

Engagement Letters are the best way to both safeguard your position and cashflow without damaging client relationships, especially when combined with regular invoicing and taking control of payments.

Your engagement letter should include your regularity of invoicing. The more often you invoice and take payments the better, which is why monthly recurring billing arrangements are becoming more popular. If your clients are on a monthly fixed fee arrangement, you are only ever at risk for that one month’s work.

If you find you have underquoted a job, then you should also communicate this quickly with your clients, so there is no surprise if an invoice is higher than expected. Ensure there is a mechanism to do this in your engagement letter and you have the ability to vary the fee if during the engagement additional information comes to light or circumstances change. Surprise invoices often hang around longer in the debtor ledger, as clients were not prepared to pay for them.

If you provide your clients with a clear engagement and payment terms there are very few reasons why they cannot also provide their payments details. By implementing upfront payment, you’ll eliminate late payments – thereby increasing your cash flow.

The way you introduce this to your clients will differ depending on your billing practices. You can do this whether you invoice a set amount each month for all annual services or if you bill on task and job completion.

If you operate on a monthly recurring fees basis, it is simple to take control of your payments, as your client has already agreed to the pricing structure. By taking your clients’ payment details upfront and automatically processing their payments each month, you’ll ensure that your cash flow never suffers. Plus, you can also avoid the unpleasant situation of having to temporarily put a halt on work when your latest invoice hasn’t been paid.

Taking payment details upfront is a similarly useful strategy for clients who operate on a bill on completion basis, whether fixed fee or time billing. For fixed fees the process is quite simple as you have already agreed on a price. If you operate using time-based billing you can still do this. Simply provide your clients with a price range or an hourly rate, all of which can then be billed on completion once the work has been finalised.

You can also eliminate push back from your clients on this by implementing a policy of taking payment on the due date of the invoice as opposed to the date you raise the invoice. This will allow your clients to raise any questions that have between the job completion date and the due date of the invoice, which should keep everybody happy.

Find out more by reading our expert guide on 'How to take control of client relationships with engagement letters'.

The most successful client relationships are built on trust, open communication, and realistic expectation-setting. Understanding your client's needs, pain points, and objectives is key to determining the solution you can offer.

Further, keeping the feedback loop open indicates your commitment to improve and grow with them. Clients appreciate an openness to feedback and a willingness to learn and improve. Follow the steps mentioned above to build lasting relationships with your clients and to keep your professional services business thriving.

To that end, Ignition helps you create exceptional client experiences and foster win-win relationships. With features that facilitate proposals, billing, and client management, Ignition’s client engagement and commerce platform makes doing business a breeze. Start a free trial today.