Reading your accountant's engagement letter: scope, assumptions and extra fees

Your accountant's engagement letter decides your real fee more than the headline quote does. The clauses that matter most are the scope (exactly which statements, returns and slips are included), the assumptions about the state of your records, the out-of-scope rate and how extra work is approved, and the billing and termination terms. If those are vague, the year end can easily cost more than quoted. Read the letter before signing, ask for changes where it is unclear, and keep it with your corporate records.

This guide is part of the annual accounting cost estimate guide. Figures are illustrative.

Why accountants use engagement letters

Professional standards require the terms of compilation, review and audit engagements to be agreed, typically in writing. The letter sets out the type of engagement, the intended use of the financial statements, the basis of accounting (for a compilation under CSRS 4200), the responsibilities of management and of the practitioner, and the fee arrangements. Tax engagements usually have their own letter or section.

The clauses to read carefully

Clause	What to look for	Why it affects cost
Services included	A list naming each deliverable: compilation, T2, provincial return, T4/T5, RL slips, GST/HST returns, annual corporate filing	Anything not listed is likely billed separately
Management responsibilities	Statements that you are responsible for complete, accurate records	Firms bill when they do work that the letter says is yours
Record condition assumptions	Reconciled accounts, receipts available, delivery deadline	If unmet, fixed fees can be revised
Fee basis	Fixed fee, estimate, or hourly; rates for each staff level	An estimate is not a cap
Out-of-scope work	Rate, and whether you must approve before work starts	Prevents surprise invoices
CRA correspondence	Whether routine letters, reviews or audits are included	Audit support is usually extra
Billing and payment	Retainer, progress billing, interest on late accounts	Cash flow, and whether work stops if unpaid
Records and file ownership	What the firm keeps; how your records are returned	Matters if you switch firms
Termination	How either side ends the engagement	Fees for work in progress
Limitation of liability	Any cap on the firm's liability	Your recourse if there is an error

Common extra-fee triggers

Bookkeeping clean-up. Reconciling accounts, recording missing transactions or reclassifying expenses.
Shareholder loan reconstruction. Working out what the owner took and repaid. See shareholder loans and personal expenses.
Late records. Rush work to meet a filing deadline.
Extra entities. A new holding company, a second business or a partnership interest.
CRA letters. Responding to review requests, processing reviews or audits.
Amended returns. Correcting GST/HST or T2 filings.
Planning advice. Dividend versus salary analysis, purchase or sale of assets, reorganizations.
Meetings beyond the included ones.

Illustrative example: a fixed fee that grew

A letter quotes a fixed $2,800 for the compilation, T2 and T5 slips, "assuming all bank and credit card accounts are reconciled and records are delivered by the agreed date". Out-of-scope work is billed at $125 an hour "with prior notice to the client".

During the year end:

Two months of credit card transactions are missing: 3 hours
A CRA letter asks for support for input tax credits: 2.5 hours
The owner requests advice about buying a vehicle through the corporation: 1.5 hours

Extra: (3 + 2.5 + 1.5) x $125 = 7 x $125 = $875. Total: $2,800 + $875 = $3,675 plus sales tax. Because the letter required prior notice, the owner was told before each item and could choose to supply the credit card statements instead, avoiding the first 3 hours ($375). That clause alone was worth asking for.

What to negotiate

Approval threshold. "No out-of-scope work over $250 without written approval."
Clear list of deliverables. Every return and slip named.
Inclusion of routine CRA letters, for example up to one hour a year.
A fee review point if your volume changes, rather than surprise increases.
Electronic delivery of the final statements and copies of filed returns.
Access to your file and return of records if the engagement ends.

Questions to ask before signing

If my records arrive as described, is the fee fixed, or an estimate?
What are the three most common reasons clients in my situation get billed extra?
Who decides whether something is out of scope?
Will you warn me before you exceed the quote?
Are sales taxes added to the fee?
What happens if I miss your deadline for records?

Use the answers with the accountant selection checklist and compare the proposals against your figures in the fee estimator.

When to get advice on the letter itself

Most engagement letters are standard. If a letter includes broad limitation-of-liability language, unusual retainer requirements, or terms about keeping your records until fees are paid, and the engagement is large, it may be worth having a lawyer read it.

The biggest extra-fee risk is incomplete records; the year-end package checklist prevents most of it, and a project to bring old books up to date is priced in the catch-up bookkeeping guide.

Frequently asked questions

Is the engagement letter renewed every year?

Many firms issue a new letter each year or when the scope changes. Read each one; scope and rates can change.

Can I ask for a fixed fee?

Yes. Many firms offer fixed fees for defined work, provided your records meet the stated assumptions.

What if I disagree with an extra charge?

Ask for a breakdown by task and date, compare it with the letter, and discuss it with the partner. If you cannot resolve it, see switching accountants and fee disputes.

Sources

CPA Canada — professional standards for compilation, review and audit engagements
FRAS Canada — the Auditing and Assurance Standards Board
Canada Revenue Agency — authorizing representatives and responding to CRA reviews