Engagement letter
An engagement letter is a written agreement that describes the business relationship to be entered into by a client and a company. The letter details the scope of the agreement, its terms, and costs. The purpose of an engagement letter is to set expectations on both sides of the agreement. An engagement letter defines a business relationship between two parties and limits the company's responsibilities, directly or by inference. Many businesses, including attorneys, auditors, accountants, and consultants, routinely use engagement letters, whether their clients are individuals or large corporations [Investopedia].
An engagement letter must be signed by authorized representatives of both parties before it is considered to be a legally binding arrangement. Since this letter is treated as a contract, it should address the obligations of both parties. These obligations include the exact services to be provided (including any due dates), performance criteria, the exact amount and timing of payments to be made by the client, any warranties of performance, and how either party can terminate the contract. It can be used when one or both parties are unwilling to enter a more complex contractual arrangement [AccountingTools].
Engagement letters are drafted and entered into before a professional services firm starts providing its service to the client. A single engagement letter may contain details regarding multiple services to be performed by a firm. Still, each specific type of service is often detailed in a separate engagement letter. Engagement letters can be effective for a very long period. It is recommended to review the terms of the agreement at least annually to ensure that any updates if needed, are noted. If changes are required, a new engagement or supplement letter should be set in place. These letters usually also include a termination clause that allows either of the two parties to exit the agreement with certain applicable conditions that vary between each letter [CFI].
Engagement Letter: What It Is, How It Works, Why It's Important. Investopedia. Retrieved from: https://www.investopedia.com/terms/e/engagement-letter.asp
Engagement letter definition. AccountingTools. Retrieved from: https://www.accountingtools.com/articles/engagement-letter
Engagement Letter. CFI. Retrieved from: https://corporatefinanceinstitute.com/resources/valuation/engagement-letter/