The first building block of success: Terms of Engagement and how to get it right
Introduction
Accurate financial statements are more than just paperwork. They guide crucial decisions, impacting everything from small startups to large industries. Accountants play a vital role in converting the financial information provided into a format that will ensure that will facilitate the decisions investors, lenders and other users must make. This is not just a number-crunching exercise, accountants need to also ensure these numbers tell the truth about a company's financial health. However, the responsibilities of management and the accountants compiling the financial statements are not well understood. This is where clear terms of engagement between accountants and their clients come in. They lay down what's expected from both sides, leading to trustworthy financial statements.
Why do we Need to Agree the Terms?
Think of terms of engagement as a contract between an accountant and the client. This contract lays out the job to be done, who needs to do what, the deadlines, how much it'll cost, and the legal bits and pieces that keep everyone in line. It's all about making sure there are no surprises for either side.
What should it cover?
Based on the guidance from ISRS 4410 (Revised) Compilation Engagements, here's how you can structure the contents of an engagement letter:
Objective and Scope of the Engagement:
To compile financial statements following the specified accounting standards (e.g., IFRS for SMEs or other).
Clearly state the nature of the work to be performed, i.e. compilation engagement.
Responsibilities of the Accountant:
Compile the financial statements based on the information provided by the client.
Ensure the compiled financial statements are presented in accordance with the applicable financial reporting framework.
Communicate any significant findings or issues encountered during the compilation process.
Responsibilities of the Client:
Provide all necessary financial records and related information required for the compilation of the financial statements.
Confirm the accuracy and completeness of the information provided to the accountant.
Acknowledge responsibility for the financial statements, including the appropriateness of the accounting policies used.
Fees and Payment Terms:
Detail the fee structure for the engagement, including any basis for additional fees, payment schedules, and terms.
Other information may include:
The duration of the Engagement (the timeline for the compilation process, including start date, milestones, and expected completion date)
Termination of the agreement outlining the conditions under which either party may terminate the engagement, including notice periods and any necessary formalities.
This structure helps ensure all parties have a clear understanding of the engagement's terms, responsibilities, and expectations, thus preventing misunderstandings and keeping the project on track. Refer to CIBA’s Template Engagement Letter that you can download below this article.
Avoid Common Mistakes
Use clear, simple language
When terms of engagement are clear, everyone knows what's expected. This helps avoid confusion, sets realistic expectations, and makes solving any disagreements easier. It also ensures that the accountant's work meets professional and legal standards, which is vital for the credibility of the financial statements they produce.
Sometimes, accountants can slip up by using vague language, assuming both sides have the same understanding, or not updating the terms when rules change. These mistakes can lead to disputes and unhappy clients. To avoid this, it's important to be clear and specific about what's included in the engagement.
Make sure that the client’s understanding is the same
It is best practice for accountants to discuss the terms of engagement with their clients instead of just sending the document as an email. This is a short discussion to ensure that the client understands the responsibilities of both parties and that the deliverables and timeframes are clear. Communication is key!
Revisit annually and update
Once the Terms of Engagement is put in place it does not have to be changed for the next couple of years. However, the terms of engagement should annually review and updated with changes in the client, services performed or when further information is necessary to be included. Keep in mind that new directors/owners should be debriefed on the contents.
Engagement Letter Template
Download CIBA’s Template Engagement Letter based on the ISRS 4410. Take note that his template should be amended as necessary for the purposes of each compilation engagement.
