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.

Citation of Existing Rules Affected by this Order: New section WAC 4-25-626; and repealing WAC 4-25-625 and 4-25-627 [see WSR 98-12-056].

Statutory Authority for Adoption: RCW 18.04.055(2).

Adopted under notice filed as WSR 98-01-231 on December 24, 1997.

Changes Other than Editing from Proposed to Adopted Version: 1. Presented the rule in a clear writing style for easier understanding (included a change in the title of the rule--from Compensation to Can I accept commission, referral, or contingent fees?

2. Added language from the Uniform Accountancy Act (UAA) regarding referral fees: "Any licensee who accepts a referral fee for recommending or referring any service of a licensee to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment in advance to the client."

3. Added language to allow a licensee in public practice to accept a contingent fee for tax services which will receive substantive consideration by tax authorities provided to a client during that client's attest engagement or during the period covered by the respective attest report.

4. Added language to prohibit a licensee in public practice from accepting a contingent fee for preparation of amended tax returns in addition to original tax returns.

5. Added language to require a licensee to disclose all contingent fee arrangements in advance of client acceptance.

Number of Sections Adopted in Order to Comply with Federal Statute: New 0, amended 0, repealed 0; Federal Rules or Standards: New 0, amended 0, repealed 0; or Recently Enacted State Statutes: New 0, amended 0, repealed 0.

Number of Sections Adopted at Request of a Nongovernmental Entity: New 1, amended 0, repealed 0.

Number of Sections Adopted on the Agency's Own Initiative: New 0, amended 0, repealed 0.

Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 1, amended 0, repealed 0.

Number of Sections Adopted Using Negotiated Rule Making: New 0, amended 0, repealed 0; Pilot Rule Making: New 0, amended 0, repealed 0; or Other Alternative Rule Making: New 1, amended 0, repealed 0.

Effective Date of Rule: Thirty-one days after filing.

May 28, 1998

Cheryl M. Sexton

Confidential Secretary

NEW SECTION

WAC 4-25-626  Can I accept commission, referral, or contingent fees? (1) Commissions and referral fees are compensation arrangements where:

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

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

(c) The CPA adds no significant value to the product or service; or

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

(2) A CPA who is not in public practice but using the title CPA may accept commission, referral, and contingent fees. However, the CPA must disclose in writing to the client the nature, source and amount of the commission, referral or contingent fee.

(3) The following parameters define the limited circumstances in which a licensee in public practice may be compensated on a commission or referral fee basis. This rule does not apply to compensation set by courts, judicial proceedings, public authorities or governmental agencies.

(a) A licensee in public practice may not enter into compensation arrangements 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.

(b) A licensee in public practice may not accept a commission or referral fee, as defined in subsection (1) of this section, for the sale or referral to a client of products or services of others.

(c) Any licensee who accepts a referral fee for recommending or referring any service of a licensee to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment in advance to the client.

(4) A licensee in public practice may not accept a contingent fee for:

(a) Attest services;

(b) Other services, except for tax services which will receive substantive consideration by tax authorities, provided to a client during that client's attest engagement or during the period covered by the respective attest report;

(c) An arrangement meeting any of the definitions of commissions and referral fees in subsection (1) of this section;

(d) An arrangement that violates federal laws or the laws or regulations of Washington state or its municipalities; or

(e) Preparation of original or amended tax returns (a licensee may accept a contingent fee in situations where the licensee reasonably expects the finding or results, on which the contingent fee is based, will receive substantive consideration by tax authorities);

(f) For services other than those in (a) through (e) of this subsection, a licensee in public practice may perform professional services for a fee which is contingent on the findings or results of the professional services with the following restrictions:

(i) If the situation involves adverse party(ies) and the licensee expects the findings or results will receive substantive consideration by the adverse party(ies) or their agent(s), the licensee must:

(A) Obtain a written agreement from the client stating the client will provide to the licensee the name(s) and address(es) of the adverse party(ies) or the primary agent(s) of the adverse party(ies); and

(B) Provide prompt written notification to the adverse party(ies) or their agent(s) of the licensee's role as the client's advisor and recommend the adverse party(ies) or their agent(s) seek their own advisor.

(ii) All contingent fee arrangements must:

(A) Be disclosed in advance of client acceptance;

(B) Be in writing;

(C) Include the method of calculating the fee;

(D) Specify the licensee's role as the client's advisor; and

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

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