WSR 98-01-231

PROPOSED RULES

BOARD OF ACCOUNTANCY

[Filed December 24, 1997, 12:00 p.m.]

Original Notice.

Preproposal statement of inquiry was filed as WSR 96-03-114.

Title of Rule: New section WAC 4-25-626 Compensation.

Purpose:

To clarify the prohibition against certified public accountants (CPAs), engaged in the practice of public accounting, paying or receiving commissions, referral fees, and/or contingent fees except to allow CPAs, engaged in the practice of public accounting, to accept contingent fees in very restricted situations.

To require CPAs, not in the practice of public accounting but using the CPA title, to make full disclosure when compensated by commission, referral fee, or contingent fee.

Statutory Authority for Adoption: RCW 18.04.055.

Statute Being Implemented: RCW 18.04.055(2).

Summary: Sets forth that certified public accountants (CPAs) may not be compensated in a manner which tends to bias or give the appearance of tending to bias the results of their services or report.

Reasons Supporting Proposal: The board has received questions from the public regarding the appropriateness of commissions, referral fees, and contingent fees for CPAs. Also, the board has tried several complaint cases over the years wherein certified public accountants (CPAs) have misled, defrauded, or otherwise abused clients' trust in investment sales transactions where the CPA was compensated by third parties for selling or referring a product to clients. The board believes it [is] in the public's best interest to continue the prohibition against CPAs paying or receiving commissions and referral fees and to allow contingent fees only in very restricted situations. The board considers this rule necessary to clarify its position on compensation.

Name of Agency Personnel Responsible for Drafting, Implementation and Enforcement: Dana M. McInturff, CPA, 210 East Union, Suite A, Olympia, (360) 664-9194.

Name of Proponent: Board of Accountancy, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: The board is proposing this rule to protect the public from certified public accountants (CPAs) who may wish to be compensated in a manner which tends to bias or give the appearance of tending to bias the results of their services or report. WAC 4-25-626 prohibits a CPA who is engaged in the practice of public accounting from paying or accepting a commission or referral fee: (1) To obtain a client; (2) for referral of a client; (3) for the sale or referral to a client of product or services of others. WAC 4-25-626 allows a CPA who is engaged in the practice of public accounting to accept a fee which is contingent on the findings or results except the CPA may not accept a contingent fee for: (1) Attest services; (2) other than attest services provided during an attest engagement or during the period covered by the attest period; (3) an arrangement that violates federal law, or the laws of Washington state or its municipalities; (4) preparation of an original tax return; (5) in situations involving adverse parties. WAC 4-25-626 requires that a CPA using the CPA title who is not engaged in the practice of public accounting and who is compensated by commission, referral fee, or contingent fee to fully disclose, in writing, the nature, source, and amount of compensation.

Proposal Changes the Following Existing Rules: New section combines current rules WAC 4-25-625 Commissions and referral fees and 4-25-627 Contingent fees into one rule with the following changes:

(1) Lists four situations involving compensation arrangements the board considers to be commissions or referral fees.

(2) Allows CPAs engaged in the practice of public accounting to accept fees which are contingent on the findings or results of such professional services in very restricted situations.

(3) Requires CPAs who are not engaged in the practice of public accounting (but using the CPA title) and who are compensated by commission, referral fee, or contingent fee to disclose, in writing, the nature, source, and amount of compensation.

No small business economic impact statement has been prepared under chapter 19.85 RCW. The proposed rule will not have more than minor economic impact on business.

RCW 34.05.328 does not apply to this rule adoption. The Board of Accountancy is not one of the agencies required to submit to the requirements of RCW 34.05.328.

Hearing Location: Bank of California Building, 900 4th Avenue, 24th Floor, Attorney General Training Center, Seattle, WA, on Thursday, January 29, 1998, at 9:30 a.m.

Assistance for Persons with Disabilities: Contact Cheryl Sexton by January 26, 1998, TDD (800) 833-6384, or (360) 664-9194.

Submit Written Comments to: Dana M. McInturff, P.O. Box 9131, Olympia, WA 98507-9131, FAX (360) 664-9190, by January 28, 1998.

Date of Intended Adoption: January 29, 1998.

December 24, 1997

Dana M. McInturff, CPA

Executive Director

NEW SECTION

WAC 4-25-626 Compensation. (1) A licensee shall not enter into compensation arrangements or accept payments for attest services that in any way tend to bias or give the appearance of tending to bias the results of attest services or the licensee's report.

(2) Commissions and referral fees. A licensee shall not, in the course of his or her practice of public accounting or with respect to any client for whom the licensee provides public accounting services, pay a commission or referral fee to obtain a client, receive a commission or referral fee for referral of a client, or accept a commission or referral fee for a sale or referral to a client of products or services of others. This rule does not prohibit payments for the purchase of all, or a material part of an accounting practice, or payments to an employee for referral of a client, or retirement payments to persons formerly engaged in the practice of public accounting, or payments to the heirs or estates of such persons.

Commissions and referral fees under this rule are those payments received or compensation arrangements with respect to a transaction involving a licensee in which:

(a) The primary contractual relationship for the product or service is not made directly between the client and licensee;

(b) The licensee is not the party primarily responsible to the client for the performance or reliability of the product or service;

(c) There is no significant value added or intended to be added to the product or service in the transaction by the licensee; or

(d) A third party instead of the client pays the licensee for the products or services.

(3) Contingent fees. A licensee may agree to perform or perform professional services for a fee which is contingent on the findings or results of such professional services, with the following restrictions:

A licensee shall not, in the course of his or her practice of public accounting:

(a) Accept a contingent fee for attest services;

(b) Accept a contingent fee for other than attest services:

(i) When such other services are, have been or are to be provided during the period of an attest engagement requiring independence; or

(ii) When such other services are, have been or are to be provided during the period covered by the independent licensee's attest report;

(c) Accept a contingent fee if the arrangement meets any of the definitions of "commissions and referral fees" in WAC 4-25-626(2);

(d) Accept a contingent fee for preparation of original tax returns, but may otherwise accept a contingent fee in situations where the licensee reasonably expects that the findings or results, on which the contingent fee is based, will receive substantive consideration by tax authorities;

(e) Accept a contingent fee in situations involving adverse party(ies) unless:

(i) The licensee obtains written agreement from the client that the client shall promptly provide to the licensee the name(s) and address(es) of the adverse party(ies) or the primary agent of adverse party(ies) to the transaction; and

(ii) The licensee provides prompt written notification to the adverse party(ies) of their agent of the licensee's role as advisor for his or her client in the transaction and recommends that the adverse party(ies) or their agent seek their own advisor; and

(iii) The licensee reasonably expects that the findings or results, on which the contingent fee is based, will receive substantive consideration by the adverse party(ies) or their agent;

(f) Accept a contingent fee if the arrangements would violate federal laws or the laws or regulations of Washington state or its municipalities;

Contingent fee arrangements must:

(i) Be in writing, including the method of calculating the fee;

(ii) Specify the licensee's role as advisor for his or her client; and

(iii) Be available to the board or other regulatory agencies upon request.

(4) A CPA who:

(a) Represents him/herself to a client or customer as a CPA; and

(b) Is not known by that client or customer to be engaged in the practice of public accountancy; and

(c) Is compensated by commission, referral fee or contingent fee shall fully disclose, in writing, the nature, course and amount of commission, referral fee or contingent fee to a client or customer.

(5) Compensation that is set by the courts, judicial proceedings, public authorities or governmental agencies is not prohibited under this rule.

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