BONUS: A new breed of engagement letter.
By Jody Padar
The Radical CPA
Scope creep generally takes the form of new services being added once the project has started. Typically, these are not properly reviewed and the team is expected to deliver them with the same resources and in the same time as the original scope.
The opposite of scope creep is scope seep. This is when the accountant or team volunteers to do extra work and take on extra requirements and issues. Now of course the customer will never turn down “free help” and when this is done over and over, the customers quickly assume all of their issues they vaguely speak to you about are included in the price.
MORE ON RADICALISM: The Radical Approach to Bundling Services | The Radical Approach to Pricing | A Radical Close Look at Value Pricing | Get Radical About Pricing | Six Competitive Advantages for The Radical CPA | The Market Is Moving Toward the Radicals | 5 Radical Transparencies; Are You Ready?
Because we’re afraid or not used to confronting uncomfortable subjects (ahem, pricing), too often we let them change a part of our project management. We really need to get solid on what a change request is and make sure that when change requests are implemented, that the required pricing comes with it.
Small Adjustments Over Time
You’re going to start slow. I would say pick a small customer. Go over your prior years’ billings and adjust it to be priced up front. Then I would say also implement it on a new customer, trying out the tools you just learned.
It’s about taking the perspective to move your firm forward. It’s not an all or nothing sum game. It’s about getting started and moving along the process. And you’ll find that once you start doing it, you’ll want to morph everyone into it because it just becomes too cumbersome to manage your firm in two very different ways.
- You’re going to set your packages and
- you’re going to assess your customer individually because you want to modify their packages and make sure the prices reflect their engagement.
- You’re going to present your packages and respond to the customers as needed and
- once you’ve both agreed, you’re going to create your engagement letter, which is going to be significantly different than most current engagement letters (see an example at the end of this post).
A New Type Of Engagement Letter
You need to clearly define the services and support you are including in your monthly fees. The letter is a tool to clearly communicate with the customer. I guarantee that after you’ve gone through this process, many people come back to the engagement letter and use it as a reference point, so you need to make sure that it’s very clear despite having the required mumbo jumbo for insurance purposes.
Think about additional possible add-on services. Check with your insurance company for templates. I guarantee their template isn’t going to be as simple as you want it but somehow we have to marry what we have from our insurance company and what we want from a customer perspective.
Make sure you include details about payments. Set up your automated payments right in the engagement letter. Customers should give you their banking information right away because then you can start auto drafting immediately and you won’t have to worry about chasing it down later.
Include a provision to re-evaluate on a regular basis. Frequency depends on the growth or stability of the customer. We try and do it at least every other year for most of our customers.
Since you’re always communicating with your customers, if there’s something outside of the scope or something that you need to change, you have the opportunity at any time. You no longer have to wait until year-end to amend that engagement letter if it’s no longer meeting your needs.
FU! (Follow Up)
Probably one of the most important things you need to do (and most accountants don’t) is follow up. Make sure the engagement is meeting their needs, that your customers are happy, that all is good. You also want to make sure that once they are set up that you aren’t “giving them too much” and that the scope you determined is correct. You are aiming for a balance on both sides.
Once that’s taken care of, you can just work on strengthening the relationship. Be the trusted advisor. Remember to be proactive and reaffirm that you’re delivering your values so that again, the customer sees it and perceives it. You don’t want them to say, “Oh, I’m paying you this and you’re not giving it.” Sometimes that’s just a matter of telling him how he saved money. It’s going to fundamentally change your firm because you’re going to be
- training the customer,
- setting the customer up for success and
- delivering. It’s fun!
Sample engagement letter
The Radical CPA Example Customer
100 Accounting Avenue
This letter is to confirm our understanding of the services to be rendered. We hope to better meet your expectations of service by clearly identifying the particular services to be provided and their frequency.
None of the services can be relied on to detect errors, fraud, or other illegal acts that may exist. However, we will inform you of any material errors, fraud or illegal acts that come to our attention, unless they are clearly inconsequential. In addition, we have no responsibility to identify and communicate significant deficiencies or material weaknesses in your internal control as part of this engagement.
Below are the services we expect to provide:
We will prepare the tax returns noted above from information furnished to us by you or by your designated person. If you believe there is any additional information available which might be applicable to any of the areas listed or discussed, please advise us so that we may consider such data. We will not audit or independently verify any data submitted. However, we may ask you to clarify certain information or furnish us with additional data.
We will also be available to answer inquiries on specific tax matters or assist you in planning to minimize income taxes or related financial or business matters. All returns are subject to review by the taxing authorities. In the event of a government tax audit, we will be available upon request to represent or assist you. Such additional services are not included in our fee for preparation of the return.
The ever-increasing complexity of tax laws has added considerably to the efforts required in preparing your returns. Further, in the past several years, Congress has legislated a number of “penalty” provisions which are intended to enforce new and stricter standards of compliance with the tax laws. Penalties for failure to comply with these standards can be substantial. As a result, it has become increasingly important for you to carefully organize tax records in assisting preparation, as well as provide support and substantiation and to keep us informed of circumstances that may require additional consideration.
For example, your deductions for “listed property” (including automobiles), travel expenses and entertainment must be supported by the necessary records, as required under Section 274 of the Internal Revenue Code. If you have any questions as to the type of records required, please ask us for advice in that regard.
We will use our best professional judgment in preparing your returns, but we cannot assure that positions taken on your tax returns will not be contested by federal or state authorities. If the tax liability should be contested, there may be additional assessments of tax, interest and penalties which are your responsibility.
What We’ll Do
On a periodic basis, we will review all accounting transactions for our client. This includes checks, deposits, and other transactions affecting the checking account. It also includes estimates, invoices, credit memos, and all customer transactions. It includes vendor transactions: bills, item receipts, checks, credit card charges and purchase orders. We will review the bank reconciliation for the checking account. We will also enter adjusting journal entries as necessary, including depreciation.
What We Won’t Do
We will make no attempt to adjust the records to reflect Generally Accepted Accounting Principles or to reflect proper tax recordkeeping. We will not audit or verify the data you submit. We may provide reports that contain portions of financial information; these reports are for internal management use only. We will not provide any financial statements and will not perform any compilation, review or audit of any of the financial information. We do not, at any time, provide legal services, of any type. We have not been requested to discover errors, misrepresentations, fraud, illegal acts or theft. Therefore, we have not included any procedures designed or intended to discover such acts, and you agree we have no responsibility to do so.
What We Need From You
To perform our services, we will need to obtain information on a timely and periodic basis from your company. The accounting file and any other items that we obtain from you will be used without any further verification or investigation on your part.
Services Outside the Scope of This Letter
You may request that we perform additional services at a future date not included in this engagement letter. If this occurs, we will communicate regarding the scope and estimated cost of these additional services. Engagements for additional services will make necessary we issue a separate engagement letter to reflect the obligations of both parties.
Our fees are based on the assumption you will provide our office with all the information needed, in good order, and on a timely basis. Any additional services provided beyond those marked above will be quoted separately prior to beginning the work.
The more relevant the information you provide to us on a monthly or quarterly basis (i.e., copies of all new loans, invoices for assets purchased, monthly information on savings), the better the information we will be able to provide you. If we do NOT draft your fees, we will mail or electronically deliver an invoice monthly to your attention for all services rendered. For annual services, we will give you an invoice when the work is complete. All invoices are payable upon receipt. An interest charge of 1.5% monthly will be applied to any balance over 30 days old.
Details for drafting your bank monthly for the quoted services are noted below:
Upon signing engagement letter then we will auto draft 500 per month from your business bank account; please provide the details below. Additionally, from the options below, please choose which day you prefer we debit your account. All contracts are “under review” for the first 90 days to make sure our services and your understanding were not miscommunicated and/or misunderstood by either party. At that time, New Vision CPA Group reserves the right to request a new contract to be drawn up that more accurately reflects the services desired.
If you decide to cancel our contract before the above end date, then we will bill you a reasonable fee for the professional services already completed and delivered to you at the time you cancel the contract, minus the monthly drafts already completed. This invoice will be due upon receipt.