Contingency fee based pricing of accounting service is
Updated August 11, 2015 Show
The New Jersey State Board of Accountancy's rules governing commissions and contingent fees present both challenges and opportunities to the CPA profession. The challenges presented by the rules allowing for the collection of commissions and contingent fees can be classified as external and internal. External challenges require interacting with third parties outside the CPA firm and client organizations, while internal challenges involve only the firm and its clients. As to external challenges, some services that may result in commissions or contingent fees may require that a CPA obtain additional licenses. For example, advising clients about suitable investments may require that a CPA register as an investment advisor with the Securities and Exchange Commission or the New Jersey Bureau of Securities. Negotiating the purchase or sale of a business that includes real estate, on the other hand, may require that a CPA obtain a real estate broker's license. Some securities services may require that new separate legal entities be created. If a firm's services extend beyond standard accounting and tax services, its malpractice insurance policy also may have to be amended. Under the rules, CPAs also are required to obtain a signed notification acknowledging disclosure of receipt of a commission, performance fee or referral fee from each entity to which they refer a client, each time they make a referral. Similarly, a firm's referral arrangements with financial institutions should be negotiated and memorialized in writing. Internal challenges can be just as extensive and complex. An immediate concern will be to avoid or terminate disqualifying services for clients from whom commissions or contingent fees will be accepted. If a CPA currently performs an audit, review, or compilation of a client's financial statements and wants to charge commissions or contingent fees to that client, then the audit, review, and compilation services will have to be discontinued for that client. If the services resulting in commissions and contingent fees are expected to be a significant part of the firm's practice, the firm may need to strategically redirect its recruiting and marketing efforts. For example, the firm may now need people with management consulting, negotiating and marketing skills, along with investment advisors and insurance specialists. Depending on the extent of the changes to be undertaken by a firm, it also may be appropriate to consult with legal counsel, insurance agents, securities regulators or other officials before accepting commissions and contingent fees. Definitions and ClarificationsThe New Jersey State Board of Accountancy's regulations on commissions and contingent fees allow CPAs to collect such fees in certain circumstances, and prohibit them from accepting such payments in other situations. Types of services for which a CPA might charge commissions or contingent fees are for investment referrals, sales of business and property, settlements of health care and tax claims, and referrals for mortgage loans and debt and equity financing. Contingent FeeA "contingent fee" is defined as a fee "established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service." A contingent fee arrangement need not be "all or nothing" - it need only be limited to the result of the service. For example, if a CPA negotiates the terms of a lease for a client, and the fee is to be $1,000 if the rent is $5-$6 per square foot, or $2,000 if the rent is less than $5 per square foot-that is a contingent fee. Please note that the regulations prohibit a contingent fee for preparing an original or amended tax return or claim for a tax refund for any client. The regulations also add that a fee is not "contingent," if it is "fixed by a court or other public authority" or is based on "the results of a judicial proceeding." For example, if a CPA performs services for a client in a bankruptcy proceeding and the judge awards a fee to the CPA, it is not a "contingent fee." The distinction is important, since CPAs in these situations would not be prohibited from performing an audit, review, or compilation for that client, as would be the case if they were accepting a commission or contingent fee. The State Board's regulations do not specifically address the issue of how to define a client. The AICPA Ethics Division, however, has stated that "the client" should be interpreted to mean either an individual or, in the case of a business, the entity, and not the owners. If that definition is accepted by the State Board, a CPA would be allowed to perform an audit, or other disqualifying service, for a business and also charge commissions and contingent fees to the owners for services rendered to them personally. CommissionThe regulations do not define a "commission," but do define a "performance fee" as "compensation... on the basis of a share of the capital gains upon, or the capital appreciation of, the funds or any portion of the funds of a client." Apparently, if a CPA negotiated a fee as "X" percent of investments under management, that would be a performance fee. Under the State Board rules, receipt of a performance fee would be prohibited if the CPA performs an audit, review, compilation, or examination of prospective financial information for the client.
The Impact on the CPARegulations N.J.A.C. 13:29-3.8 and 3.12 provide CPAs with tremendous opportunities but, at the same time, open up new areas of liability. Below are some key issues that the CPA needs to consider:
FAQsThe 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 rules. They have not been reviewed or approved by the State Board of Accountancy, and the Board will not be bound by them. NJCPA members who want their questions about the rules answered by the State Board should address those questions, in writing, to the State Board at P.O. Box 45000, Newark, NJ 07101.
IN THIS SECTIONMenuIN THIS SECTIONWhat is contingent based fee?In the law, a contingent fee is defined as a fee charged for a lawyer's services that is payable only if a lawsuit is successful or results in a favorable settlement, usually in the form of a percentage of the amount recovered on behalf of the client.
Which of the following acts by a CPA would most likely be considered a violation of the aicpa code of professional conduct?Which of the following is most likely to violate the AICPA Code of Professional Conduct? Issuing the current year audit report when fees for the past year audit remain uncollected.
What threats to independence are created when a contingent fee is charged by a firm in respect of an assurance engagement?291.152 A contingent fee charged directly or indirectly by a firm in respect of an assurance engagement creates a self-interest threat that cannot be reduced to an acceptable level by applying any safeguard. Accordingly, a firm should not enter into any such fee arrangement.
What are audit fees?Audit Fees are costs incurred by companies to pay public accounting firms to audit the company's financial statements.
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