Are you considering becoming an accounting consultant? Do you know how to set yourself up for success with consulting engagement letters? More than ever, accountants are pursuing CPA consulting opportunities to uplevel their careers and provide the services they excel in the most. But before diving into consulting, it’s important to understand the risks of the trade and how to minimize them.
Here at Gusto, we’re committed to helping you achieve excellence in every aspect of accounting. So we’re thrilled to partner with CPA Academy and share the ins and outs of providing CPA consulting services.
The webinar “Engagement Letters: You’re Under Consulting Risk Since the First Client Signed” was hosted by Josh Lance, and you can check out the full webinar here. It’s brimming with practical, actionable advice to help you create a game plan for your consulting career.
Josh is the Head of Accounting at Practice Ignition and the founder of Lance CPA Group, a virtual CPA firm that provides cloud accounting, tax, and consulting services to craft breweries and digital agencies across the United States. He’s a certified CPA, a Chartered Global Management Consultant, and was named one of CPA Practice Advisor’s 40 under 40 in 2017, 2018, and 2019.
Evaluating expertise for consulting services
Mitigating risk begins with ensuring you’re equipped to serve your clients in the manner they expect you to. Before diving into consulting, you’ll want to identify all of the services you’re able to competently provide. It’s important to look at them in detail and with a critical eye—make sure you’re really comfortable with everything you list. Don’t try to do everything, and don’t try to wing it. Build your reputation by reliably producing exceptional results and giving stellar service that will win you referrals. Taking on work that’s above your skill level could only damage your reputation.
People in the industry say things like, ‘Hey, we’re just going to fake it till we make it,’ or, ‘I’m going to make it up as I go along here.’ … From a risk management perspective, when we take on consulting engagements, we need to make sure we actually have the skills to be able to deliver that service with competence. If you don’t have that, and [you] say, ‘Hey, we’re going to help you make a better cash flow forecast,’ and [you’ve] never done that before, that’s not really a good risk-management practice. That’s going to cause issues [that can] potentially get you sued or have legal action taken against you.– Josh Lance
The last thing you need as a new consultant is an angry client and a lawsuit. Furthermore, your clients are bound to notice sloppy or haphazard work even if you don’t make a mistake big enough to warrant legal action. You can save yourself a lot of stress by choosing to focus only on what you can realistically do.
You’ll also want to be very clear about all details of your work in all communications. One of the biggest pieces of documentation you’ll need to create will be your engagement letter. This details the scope of the agreement you have with the client, its costs, and its terms. While it’s not a contract, it is a legally binding document that can be used in a court of law. As you might guess, your engagement letter will be one of the most critical pieces of documentation you’ll need to use. Miscommunications happen when you assume the person reading your letter is thinking the same way you do. Never assume—spell things out in as much detail as possible.
If you’re preparing engagement letters with your clients and [you] have a really broad scope of services or … you say something like, ‘We’ll provide consulting services to X, Y, Z company,’ that can mean a lot of [different things.] … We don’t want to have people making assumptions or interpretations when it comes to our scope in our engagement letter. That’s just a recipe for disaster.– Josh Lance
Communication will determine the level of risk you have in your consulting career. If you’re unsure about how to go about this, consider using tools like Practice Ignition’s automated engagement letter tool.
Crafting an effective consulting engagement letter
A good engagement letter should cover all your bases should you need it in a court of law, in the event that you’re asked to perform work you didn’t intend to do, or simply as a reference point for expectations. Use language that states all duties explicitly, leaving no room for ambiguity or mixed messages. Remember, a term that you know well in a certain context may have a different meaning for your client. Avoid generalities.
[A bad example is,] ‘We will provide accounting, payroll tax, and consulting services on a monthly basis.’ It’s very … generic. We may know in our heads what tax services mean … and what accounting services are because of what services we normally perform for our clients, but our clients may have different interpretations of [them.]– Josh Lance
What type of miscommunication can happen here? We may interpret monthly accounting services to be simple bookkeeping, while our client might assume it includes KPI analysis. If we’re not great with KPI analysis, but feel pressured to do it because of the failed communication, we risk having poor performance, a strained client relationship, and a lot of stress. So what does a good engagement letter look like?
A good example [is] … ‘We’re going to provide monthly services, and we’re going to break it down to what this is.’ So, ‘We are going to record and classify transactions on a weekly basis, reconcile your bank, credit card, and loan accounts monthly, and provide monthly financial reports, including balance sheet, income statement, and statement of cash flows. We’re going to provide four hours of consulting to discuss your business performance in areas, opportunities, and purpose.’ [That’s] very … clear.– Josh Lance
Josh made another great point—just because you’re limited in what you can offer initially doesn’t mean you should settle for those limited services for the long term. It’s always a great idea to invest in training and professional development. So whether you need to bump up your knowledge in HR practices, benefits, or retirement plans, seek out further training.
To make sure you’re paid fairly and that you’re not bombarded with work you didn’t agree to, track and document everything you do for the client. Josh shared that you also might consider changing the way you bill clients. Instead of doing an invoice with 30 days to pay, try having clients pay immediately after an objective is complete. Most importantly, cover your bases for every client you have, even those you deem to be reliable.
Get engagement letters in place and have every one of your clients under [one]. [It’s] a huge area of risk management. … It’s a [good] way to make sure that you’re actually getting paid for your work, that everyone’s in agreement for the work that you’re doing, and helps avoid these … scope creep issues. [Once we have the] engagement letter in place … we’re not going to start working [until it] has been signed by a client. We want to make sure that the engagement letter is good for a certain period of time.– Josh Lance
Considering how common scope creep can be—which is the addition of additional work or responsibilities that were not initially agreed upon— it’s wise to have strong documentation and clear expectations. This will mitigate this risk significantly.
Components of consulting
You can also minimize risk by setting consistently high standards for the work you perform. To keep quality control high, it’s helpful to work within a simple framework to guide you through any challenge, great or small. You may wish to follow the three pillars of consulting as determined by the Statement of Standards on Consulting Services. By following this format, you’ll have a good framework to simplify complex challenges and communicate them in ways that don’t leave room for ambiguity.
- Findings: How you assess your client’s current state in your area of expertise. These are based on hard data and observation.
- Conclusions: What you determine needs to be improved upon or changed. Your conclusions should always be based on analysis and forecasting.
- Suggestions: Which approach or approaches would work best to achieve this goal. Remember to offer these based on your expertise and problem-solving abilities.
To be an effective consultant, provide as many solutions as possible for every challenge you assess. Your goal should be to empower the client to make wise decisions and to work together for the best possible outcome. Every client will have a differing set of circumstances, challenges, and needs. You could have five clients with similar problems and identical possible courses of action, yet you might recommend a completely different solution for each one.
Consulting services really entail problem-solving, valuation of alternatives, and recommendations or implementations of a course of action with the primary objective to provide advice that’s only for the use and benefit of the client.– Josh Lance
Being a CPA consultant is a rewarding career path that’s well worth the risks. You get to use your expertise, mastery of your craft, and desire to help others all while being well-compensated for it. It’s an exciting role that deserves the time and attention you need to minimize your risks.
Learn more about how to mitigate risk for consulting engagements
More and more CPAs are making the move to providing CPA consulting services. While it’s a wonderful career path, it does come with risks. To mitigate these, you’ll want to create an engagement letter for every client you have. This document will hold up in a court of law and serves to set expectations on both sides of the agreement. It’s a critical piece to your risk-management strategy.
It’s important that the language you use be detailed and explicit, leaving no room for misunderstandings. Remember that your interpretation of a term may differ greatly from your client’s interpretations. Lay out exactly how you’ll be helping your client to avoid being burdened with unexpected duties.
When determining what services you’ll provide, stick to those you can confidently, competently do. As a new consultant, your reputation is essential to your success. It’s better to get further training and provide new services down the line than risk doing a bad job. This could lead to a damaged reputation at best, and legal action at worst. Quality control will also be essential to this strategy, so use a formula that distills even the most complex challenges into manageable pieces.
Gusto’s mission is to create a world that empowers a better life. We’re here to support the professional development that will help you thrive in all areas of your life. Don’t forget to check out our next article based on the same webinar: “Scope Management for Consulting: What You Need to Know.”
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