Engagement Letter – Definition

Cite this article as:"Engagement Letter – Definition," in The Business Professor, updated December 1, 2018, last accessed October 19, 2020, https://thebusinessprofessor.com/lesson/engagement-letter-explained/.


Engagement Letter Definition

An engagement letter is a written document that determines the legal relationship between two parties, such as a professional company and a client. The engagement letter outlines all the requirements, terms, conditions and other related information which are mandatory for the professional relationship.

A Little More on What is an Engagement Letter

An engagement letter must be comprehensive to covers all aspects related to business activities. The purpose of the engagement letter is the same as that of a traditional contract.

The scope of an engagement letter is not limited. Many professionals use engagement letters to ensure the performance of business activities. For instance, manufacturers, exporters, insurers, accountants, and auditors may arrange engagement letters and form a professional relationship with the clients.

An engagement letter determines the scope of the work, such as completion time, contingencies, estimated cost, and other related activities. Also, it defines who will be liable for a loss which incurs due to uncertain events and issues guidelines to accept or reject liabilities.
For instance, if the company hires services of an investment firm to guide them to make investment in stock market and other financial assets, they should outline the scope of the professional relationship. Generally, financial firms perform numerous functions for clients. If the company wants limited services from the financial firm, it would need to define and describe them in a written agreement. In this case, both can utilize an engagement letter to define the relationship.

In addition, an engagement letter may include a clause to cover mediation and arbitration in case of dispute. The clause may include guidance regarding how to settle dispute or any conflicts that may arise between parties to the business. The clause often stresses on stakeholders to avoid legal process which are lengthy and has higher cost.

References for Engagement Letter

Academic Research on Engagement Letter

What is Business Discourse?, Bargiela-Chiappini, F., Nickerson, C., & Planken, B. (2013). In Business Discourse (pp. 3-44). Palgrave Macmillan, London. This chapter discusses the general concept of business discourse, the historical development of business discourse using landmark studies, the hallmark, and the approaches taken in business discourse. It also provides an outline of how business discourse has evolved around the world in recent years.

Genre analysis of business letters of negotiation, dos Santos, V. P. (2002). English for specific purposes, 21(2), 167-199. This article reports on the findings of a survey on Genre Analysis by three books on 117 commercial letters in English exchanged by fax between a Brazilian company and two European companies.

Engagement letters: What practice shows: The results of an ASB survey on the use of engagement letters by CPA firms, Van Son, W. P., Guy, D. M., & Betts, J. F. (1982). Journal of Accountancy (pre-1986), 153(000006), 72.

The art of writing an engagement letter, Zabrosky, A. W. (1999). Consulting to Management, 10(3), 34. This paper provides an insight into the creation of an appropriate engagement letter.

Engagement Letters¬†in Transactional Practice: A Reporter’s Reflections, Wells, D. C. (1999).¬†Mercer L. Rev.,¬†51, 41.

The effect of magnitude of IRS assessment and engagement letters on tax preparer liability, Krawczyk, K., & Sawyers, R. B. (1995). The Journal of the American Taxation Association, 17(2), 71. The purpose of this paper is to examine whether the size of IRS assessments against clients affects liability claims against tax preparers.

Stakeholder relationships: the dialogue of¬†engagement, Foster, D., & Jonker, J. (2005). Corporate Governance: The international journal of business in society,¬†5(5), 51-57. This paper seeks to analyse the nature of the communication process involving stakeholders in a working relationship with organisations. It draws on qualitative research conducted into a controversial issue concerning protected area management in Victoria, Australia, which was conducted within a framework built around Habermas’ concept of communicative action. It provides useful information on the nature of the communication process involving stakeholders in a working relationship with organisations.

Financial Advisor Engagement Letters: Post-Rural/Metro Thoughts and Observations, Klinger-Wilensky, E., & Emeritz, N. (2015). This paper examines the ongoing discussion regarding how, if at all, the process of vetting potential financial advisor conflicts should evolve, since the Rural/Metro case. In this article, the authors present their belief that financial advisor engagement letters are an efficient (although admittedly not the only) tool to vet potential conflicts of a financial advisor.

How certain¬†engagement letter¬†clauses affect the auditor’s assessment of perceived¬†engagement¬†risk for nonissuers, Reinstein, A., Green, B. P., & Beaulieu, P. (2013). Journal of Accounting, Auditing & Finance,¬†28(4), 397-420. This paper analyses the requirement of CPA auditors to use engagement letters or another suitable written understanding to clarify their and their clients’ duties by AICPA auditing standards (e.g., AU-C210, par. 11) for audits of nonissuers.

Engagement Letters, Mancuso, A. J. (1991). the CPA Journal, 61(12), 81. This paper examines the uses, benefits, and draftinng of engagement letters by service rendering individuals/firms. It states the importance considerations when drafting engagement letters, and they include descriptions of the scope of services to be rendered, provisions for fees, and identification of the entity, its name, and the fiscal year end.

The investigation of e-business engagement by SMEs with reference to strategic networks and aggregation: The dairy farming industry, Lockett, N. J., & Brown, D. H. (2003). This paper analyses the increasing rate of governments and service providers concern over the lack of anticipated engagement in e-business by small to medium sized enterprises (SMEs), who are an important contributor to economic activity. This paper explores the use of a conceptual framework which includes theoretical contributions from ICT adoption by SMEs, strategic networks and inter-organisational systems and e-business models literatures in an industry specific context, in this case the UK dairy farming industry.

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