How Engagement Letters Protect Bookkeepers from Liability
If there's one document that can make or break your defense in an E&O claim, it's your engagement letter. Yet many bookkeepers either skip this step entirely or use vague templates that don't adequately protect them.
A well-drafted engagement letter is your first line of defense—and it costs nothing but a few minutes of time.
What Is an Engagement Letter?
An engagement letter is a written agreement between you and your client that defines:
- What services you will provide
- What services you will NOT provide
- Responsibilities of each party
- Fees and payment terms
- Terms and conditions of the engagement
Think of it as a contract that sets clear expectations from day one.
Why Engagement Letters Matter for Liability
1. They Define Scope Boundaries
The most common source of bookkeeper claims? Clients expecting services that were never agreed upon.
Without an engagement letter, your client might assume:
- You're responsible for catching fraud
- You'll file their tax returns
- You're providing financial advice
- You're backing up their data
With a clear engagement letter, you can specifically disclaim these responsibilities.
2. They Create a Paper Trail
When claims arise—sometimes years after the work was done—memories fade and stories change. An engagement letter provides contemporaneous evidence of what was agreed.
3. They Demonstrate Professionalism
Insurance defense attorneys tell us that engagement letters significantly strengthen your position in claims. They show:
- Professional practices
- Clear communication
- Good faith efforts to set expectations
Juries and arbitrators react more favorably to bookkeepers who clearly communicated with their clients.
4. They May Reduce Your Insurance Premiums
Some insurers offer discounts (5-10%) for bookkeepers who require engagement letters for all clients. Even if no discount is available, consistent use of engagement letters reduces your likelihood of claims—which keeps premiums lower over time.
Essential Elements of a Bookkeeper Engagement Letter
Services to Be Performed
Be specific about what you'll do:
Good: "Prepare monthly bank reconciliations for Chase Business Checking account ending in 4521 and QuickBooks cash account."
Bad: "Provide bookkeeping services."
List each service separately. If it's not listed, it's not included.
Services NOT Included
Explicitly state what you're not doing:
- "This engagement does not include tax preparation or tax advice."
- "We are not responsible for detecting fraud or defalcation."
- "Financial statement preparation does not constitute an audit, review, or compilation under professional standards."
- "We will not provide investment advice or recommendations."
Client Responsibilities
Your client has obligations too. Spell them out:
- Provide accurate and complete information
- Respond to questions within X business days
- Review reports and notify you of errors within X days
- Maintain adequate internal controls
- Make timely payments
This matters because if a claim arises, you may be able to show the client failed their responsibilities.
Limitation of Liability Clause
Consult with an attorney about appropriate language, but consider:
- Limiting liability to the fees paid for services
- Requiring claims be brought within a specific timeframe
- Specifying binding arbitration instead of litigation
- Stating that consequential and punitive damages are excluded
Note: These clauses aren't enforceable everywhere, but they can still provide protection in many situations.
Fee Structure and Payment Terms
Clear fee agreements reduce disputes:
- Hourly rate or fixed fee
- What triggers additional charges
- Payment due dates
- Late payment consequences
- Retainer requirements
Termination Provisions
How can either party end the relationship?
- Notice requirements
- Obligations upon termination
- Return of documents
- Final billing procedures
Document Retention
Specify how long you'll keep records:
- Physical documents
- Electronic files
- What happens after retention period
This protects you from claims that arise years after services ended.
Sample Engagement Letter Language
Here's example language for key provisions (have an attorney review before using):
Scope Limitation
Fraud Disclaimer
> "Our engagement cannot be relied upon to detect fraud, defalcations, or other irregularities. We are not responsible for the detection or prevention of fraud, as our procedures are not designed for such purposes."Client Responsibilities
> "You agree to provide us with all information and records necessary to perform the services described. You are responsible for the accuracy and completeness of information provided. Failure to provide requested information in a timely manner may result in our inability to complete services by agreed deadlines."Limitation of Liability
> "You agree that our liability for any claim arising out of this engagement shall be limited to the total fees paid for services rendered during the twelve months preceding the date the claim arises."Best Practices for Engagement Letters
1. Get Signatures
An unsigned engagement letter is better than nothing, but a signed copy is much stronger evidence.2. Update Annually
Client relationships evolve. Review and renew engagement letters each year—or whenever services change significantly.3. Document Scope Changes
When a client asks you to do something new (like handle payroll when you only did bookkeeping), create an addendum to the engagement letter.4. Keep Copies Forever
Engagement letters should be retained indefinitely. You may need them years after the relationship ends.5. Use Separate Letters for Different Services
If you provide distinct services (bookkeeping vs. tax prep), consider separate engagement letters. This allows you to limit liability for each service area.The Bottom Line
An engagement letter won't prevent all claims—but it will:
- Reduce misunderstandings that lead to claims
- Strengthen your defense when claims do arise
- Demonstrate professional practices
- Potentially reduce your insurance costs
Combined with professional liability insurance, engagement letters form a critical part of your risk management strategy.
Need help protecting your practice? Get a free insurance quote → and talk to our specialists about comprehensive protection for bookkeepers.