The following questions and answers are based on our understanding of the State Board rules as published on November 16, 1998, and have been prepared to help our members respond to the new rules. They have not been reviewed or approved by the State Board of Accountancy, and the Board will not be bound by them. Society members who want their questions about the new rules answered by the State Board should address those questions, in writing, to the State Board at P.O. Box 45000, Newark, NJ 07101.
The old rules allowed CPAs to receive contingent fees in two specific circumstances-for tax services in which the findings are those of the tax authorities and not the CPA, and for services for which fees are to be fixed by courts or other public authorities. Would contingent fees still be allowed, in those circumstances?
Yes. The new rule excludes those two circumstances from the definition of contingent fees.
Would I be able to accept a contingent fee for tax return preparation?
The new rule states that, "A licensee in public practice shall not receive a contingent fee for preparing an original or amended tax return or claim for a tax refund for any client." The AICPA's Code of Professional Conduct contains a similar prohibition. An AICPA Interpretation provides examples of the application of this rule: see AICPA Professional Standards, Vol. 2, Section ET 302.02.
When would it be inappropriate to accept a contingent fee?
In addition to the prohibition described above, contingent fees cannot be accepted from a client if the CPA, or the CPA's firm performs any of the following professional services for that client: (1) an audit or review of a financial statement; (2) a compilation of a financial statement accompanied by a report; or (3) an examination of prospective financial information.
If I performed an audit for a client last year, can I charge a contingent fee for other services this year?
The prohibition period includes the period covered by any historical financial statements for which the CPA has performed "disqualifying services" - eg., audit, review, etc. The prohibition period also includes the period in which the CPA is engaged to perform any of the disqualifying services. An AICPA Ethics Interpretation (no. 101-1) states that "the period of a professional engagement ...lasts for the entire duration of the professional relationship, which could cover many periods ...[and] does not end with the issuance of a report and recommence with the signing of the following year's engagement." If the AICPA Interpretation applies, then an ongoing relationship with a client that results in periodic issuance of one of the disqualifying reports would prohibit the CPA from charging contingent fees to that client during the entire period of that ongoing relationship.
When would it be appropriate to work for a commission?
As with contingent fees, the commission rule is expressed as a prohibition. When commissions are not prohibited, they are allowed. Receipt of commissions, performance fees, and referral fees are prohibited to licensees "in public practice" who perform audits, reviews or compilations of the client's financial statements accompanied by a report, or examine the client's prospective financial information. Members who are "in public practice" could charge commissions for any services, if the member does not perform one of the disqualifying services. Members not "in public practice" could charge commissions for any services. (The "Practice of Public Accounting" is defined in the Society's Code of Professional Conduct - Article VI, Section 2. It is not defined in the Board's Rules). Commissions could be received from clients for referring their products or services to third parties, or could be received from third parties for recommending products or services to clients.
Will the new rules allow CPAs to obtain an investment advisor, broker/dealer, insurance, or other license and still practice public accounting?
CPAs may obtain licenses to perform services outside the practice of public accountancy. Those CPAs who hold such licenses could receive commissions for those services, provided the commissions are not received from, and the services are not sold to, clients for whom the CPAs perform the disqualifying public accounting services. If you do not "practice public accounting," you could charge commissions for your services.
If I'm not in public practice, do any of these new rules apply to me?
All the prohibitions in the new rules run only to "licensees in public practice," with one exception. The rule on contingent fees requires all licensees who receive contingent fees to comply with applicable federal and state securities laws, rules, and registration requirements.
Can I accept a commission for investment advice, if I also perform a write-up or compilation engagement for that client, provided no report has been issued?
The State Board rule prohibits commissions from clients for whom the member performs "...a compilation of a financial statement accompanied by a report." If there's no report (by the CPA), by inference there would be no prohibition. However, the AICPA's Statement on Standards for Accounting and Review Services (AR100.14) says, "Financial statements compiled...should be accompanied by a report stating that...," and an Interpretation thereto (AR 9100.07) says, "Section 100 requires the accountant to issue a report whenever he completes a compilation..." It, therefore, appears that without a report, there has been no completed compilation engagement, under AICPA standards.
Are there any record-keeping requirements?
There are no specific record-keeping requirements in the new rules, but the introductory material says, "The proposed rules require those licensees (who receive commissions, contingent fees, performance fees, and referral fees) to report the fees for tax purposes and to keep adequate records of the transactions." The rules require CPAs who receive commissions, performance fees, or referral fees to disclose that, in writing, to the client or referee. Obviously, CPAs will want to retain evidence that they complied with that rule, so they should retain copies of those notifications with the signatures of the clients/referees.
The proposed rule in November 1997 would have required written notifications by CPAs when they receive commissions. Is that still required?
Yes. The new rule continues that requirement. The notification that the CPA is receiving a commission, performance fee, or referral fee must be: (a) in writing; (b) contemporaneously with or before the recommendation; and (c) signed and dated by the person who receives the referral. The requirements that the notification be in writing, and that it be signed and dated by the referee, go beyond the AICPA Code requirements, which only require that the CPA disclose the matter to the referee.
The prohibition on contingent fees runs to "... a client for whom the licensee ... performs (the disqualifying services)." Similarly, the commission rule prohibits accepting commissions when the CPA "... also performs for that client the (disqualifying services)." Does "a client," in those circumstances, include the owners or officers of a business, or just the business entity itself?
The State Board rules do not address this issue. The staff of the NJSCPA has been informed by the staff of the AICPA Ethics Division that the AICPA staff interprets "client" to mean just the business entity, not the owners personally. If that interpretation is accepted by the State Board, a CPA could perform a disqualifying service (e.g., an audit) for a business entity and also charge commissions and contingent fees to the owners of the entity for services rendered to them personally.
How do the new rules differ from the AICPA Code of Professional Conduct rules?
There are substantive differences in two areas:
- The State Board rules do not allow commissions or contingent fees if the CPA performs, for the client, "...a compilation of a financial statement accompanied by a report..." The AICPA rules prohibit commissions or contingent fees if the CPA performs, for the client, "... a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement, and the member's compilation report does not disclose a lack of independence." Accordingly, if a CPA is not independent of a client, performs a compilation, and discloses the lack of independence, he or she could receive a commission or contingent fee, from that client, under the AICPA rules, but could not receive such fees under the State Board rules.
- Both the State Board and the AICPA rules require disclosures to the person to whom the CPA recommends a product or service to which the commission relates. The State Board requires that the notification be: (a) in writing; (b) contemporaneously with or before the recommendation; and (c) signed and dated by the person who receives the referral. In contrast, the AICPA rule is silent about those three matters.