Disclosing Insurance Commissions: CPAs Should Follow the Requirements of Rule 503 of the Code of Conduct

By Alexander, Neil | Journal of Accountancy, September 2002 | Go to article overview

Disclosing Insurance Commissions: CPAs Should Follow the Requirements of Rule 503 of the Code of Conduct


Alexander, Neil, Journal of Accountancy


Most clients are sharper than their advisers give them credit for. That makes them the most likely people to identify--and question--a financial arrangement that appears to influence a CPA's judgment. Should a client somehow fail to discover an undisclosed commission arrangement, his or her attorney or even a competing insurance agent will almost certainly blow the whistle. Once revealed, a hidden commission arrangement could destroy the CPA's credibility with a client. And that's just the beginning. To prevent this from happening, here's what CPAs need to know about disclosing commissions.

WHY DISCLOSE?

The most obvious reason is that the AICPA Code of Professional Conduct, Rule 503--"Commissions and Referral Fees"--requires disclosure. Here's the part of rule 503 pertaining to this discussion: "A member in public practice who is not prohibited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall disclose that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates." It's also important to note that rule 503 prohibits CPAs from accepting commissions from certain attest clients, regardless of disclosure. CPAs can find the entire text of rule 503 at www.aicpa.org/about/ code/et503.htm.

CPAs work hard becoming their clients' trusted advisers. Receipt of commissions may appear to sway that judgment. People judge others by their own experiences and what they would do in similar situations. Even if a particular fee arrangement does not actually influence a CPA's judgment, it may appear to--just as bad from the client's viewpoint. In such situations the CPA becomes just another insurance promoter and his or her role as trusted adviser and valued source of independent advice evaporates. Clients begin to question whose best interests the CPA has at heart--the client's or his or her own?

CPAs should also be aware that some state boards of accountancy have their own rules on commissions and referral fees. Practitioners are advised to check with their own state board to ensure these rules are not more restrictive than the AICPA's.

Telling clients about a commission arrangement before they, their attorney or--even worse--a competing insurance agent discovers it, keeps the relationship open and aboveboard. Disclosure is not a negative thing. The fact is, money is not usually the issue with most clients--unless the CPA fails to make the disclosure early and in a forthright manner.

GETTING CAUGHT

CPAs can get caught failing to disclose commissions in a variety of ways. Here are just a few of the most common:

* The client asks why the CPA brought a particular insurance agent into the transaction. If the client has to ask, the damage is already done. Any answer other than "we have a commission-sharing arrangement" conflicts with rule 503.

* The client or his or her attorney queries the state insurance department to find out if the CPA holds an insurance license. If the CPA does, he or she is most likely receiving a commission. …

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Disclosing Insurance Commissions: CPAs Should Follow the Requirements of Rule 503 of the Code of Conduct
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