Cleaning Up the Profession: Clients Take a Stand on Commissions & Contingency Fees

Article excerpt

After many years of investigations, discussions, analysis and rules, in August, 1990, a final consent order from the Federal Trade Commission (FTC) became effective. The American Institute of Certified Public Accountants agreed with the FTC not to restrict accountants from accepting contingent fees and commissions from non-audit clients.

The Federal Trade Commission had been concerned with this issue of commissions and contingent fees for a long period of time. In 1985, the FTC began an extensive investigation of the accounting profession and its code of ethics. Upon completion of its inquiries and deliberations, the Commission concluded that several professional rules of conduct discouraged competition among public accountants. Specifically, the FTC suggested that the code be amended to allow accountants to accept contingent fees and commissions, to pay for referrals to use trade names, to vouch for the achievability of forecasts and to engage in unrestricted advertising.

The FTC complaint that led to the final consent order charged that the AICPA illegally restrained competition and deprived consumers of information about the "availability, price, and quality of CPA services" by:

* preventing CPAs from accepting work on a contingent-fee or commission basis for those for whom they are not performing audit or other attest services;

* preventing CPAs from accepting work on a contingent-fee or commission basis for those for whom they are not performing audit or other attest services;

* restricting truthful, nondeceptive advertising, such as the use of truthful claims in comparative advertising;

* restricting CPA solicitation of clients and the use of referral fees; and

* banning the use of nondeceptive trade names.

Prior to the challenge by the FTC, both the AICPA and state legislation had prohibited the taking of commissions. The AICPA Code of Professional Conduct Rule 503 stated:

"Commissions. A member shall not pay a commission to obtain a client nor shall such licensee accept a commission for a referral to a client of products of services of other."

In addition, Rule 103 of the National Association of State Boards of Accountancy (NASBA) Code of Professional Conduct and Rule 9 of the National Society of Public Accountants (NSPA) Rules of Professional Conduct reiterate the language of the AICPA.

The agreement between the FTC and the AICPA now permits a CPA to accept commissions or contingent fees from clients for whom no "attest services" are performed. Attest services are defined as: 1) any audit; 2) any review of a financial statement; 3) any compilation where the CPA does not disclose a lack of independence; and 4) an examination of a prospective financial statement. A practitioner would be allowed to pay or accept referral fees for all services. However, the AICPA is not precluded from requiring a CPA to disclose any commission or referral fee.

But in October, 1991, the AICPA revised its position and decided to help states enact legislation to uphold their bans on commissions and contingent fees. Since state-legislated rules would not be subject to Federal regulations, it would be possible for a state to legislate a different approach to this problem than had been agreed upon in the decree between the AICPA and the FTC. AICPA president Philip Chenok stated in a Wall Street Journal interview that "many accountants are concerned that taking commissions impairs the objectivity of accountants and erodes their reputation for integrity with the public." Now there is empirical evidence to support that view from a national survey of corporate shareholders.

Position of State Societies

After the final order, each CPA State Society had to vote on whether or not to adopt the AICPA agreement with the FTC. Many state societies had patterned their rules after the AICPA's newest by-laws, which allow commissions for products or services supplied by third parties to nonattest clients. …