WSR 00-19-008

PROPOSED RULES

BOARD OF ACCOUNTANCY


[ Filed September 6, 2000, 2:58 p.m. ]

Original Notice.

Preproposal statement of inquiry was filed as WSR 99-23-055.

Title of Rule: WAC 4-25-626 Can I accept commission, referral, or contingent fees?

Purpose: To address the national trend towards lifting the prohibition against certified public accountants (CPAs) receiving compensation in the form of commissions, referral, and contingent fees.

Statutory Authority for Adoption: RCW 18.04.055(2).

Statute Being Implemented: RCW 18.04.055(2).

Summary: Allows CPAs to receive compensation in the form of commissions, referral fees, and contingent fees from nonattest clients provided specific disclosure requirements are met.

Reasons Supporting Proposal: Nationally, the prohibition against CPAs receiving commissions and contingent fees is being lifted. Only eight boards of accountancy (out of fifty-four) do not allows commissions. A recent survey of Washington CPAs indicates two-thirds believe commissions and contingent fees should be allowed with disclosure.

Name of Agency Personnel Responsible for Drafting, Implementation and Enforcement: Dana M. McInturff, CPA, 711 South Capitol Way, #400, Olympia, (360) 586-0163.

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: In order to protect the public interest, the board proposes to continue the prohibition of CPAs being compensated in a manner which tends to bias or give the appearance of tending to bias the results of their attest services. However, to permit Washington CPAs to practice public accounting on a level playing field with other CPAs nationwide, the board is proposing to align its rule regarding CPA compensation with the Uniform Accountancy Act (UAA), to follow the national trend of allowing compensation in the form of commissions, referral fees, and contingent fees, and to address the profession's desire to allow commissions and contingent fees with disclosure. In order to ensure the public is sufficiently informed the board proposal requires all CPAs accepting commissions, referral fees, and contingent fees to disclose in writing and in advance of client acceptance the method of calculating the fee and the CPA's role as the client's advisor.

Proposal Changes the Following Existing Rules: Continues the prohibition against CPAs accepting commissions, contingent, or referral fees from clients for whom the CPAs are performing attest services.

Lifts the prohibition against CPAs licensed to practice public accounting accepting commissions, contingent, and referral fees from clients for whom the CPAs are not performing attest services provided specific disclosure requirements are met.

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: WestCoast TriCities Hotel, Clearwater A Meeting Room, 1101 North Columbia Center Boulevard, Kennewick, WA, on October 27, 2000, at 9:30 a.m.

Assistance for Persons with Disabilities: Contact Cheryl Sexton by October 20, 2000, 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 October 25, 2000.

Date of Intended Adoption: October 27, 2000.

August 23, 2000

Dana M. McInturff, CPA

Executive Director

OTS-4262.2


AMENDATORY SECTION(Amending WSR 98-12-055, filed 5/29/98, effective 6/29/98)

WAC 4-25-626
((Can I accept commission, referral, or contingent fees?)) What compensation methods are allowable?

(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.)) A licensee shall not for a commission recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission, when the licensee also performs for that client:

(a) An audit or review of a financial statement; or

(b) A compilation of a financial statement when the licensee expects, or reasonably might expect, that a third party will use the financial statement and the licensee's compilation report does not disclose a lack of independence; or

(c) An examination of prospective financial information or other service performed under the Statement of Standards for Attestation Engagement.

This prohibition applies during the period in which the licensee is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in such listed services.

(2) A licensee who is not prohibited by this section from performing services for or receiving a commission and who is paid or expects to be paid a commission shall disclose, consistent with the requirements set forth in subsection (7) of this section, that fact to any person or entity to whom the licensee recommends or refers a product or service to which the commission relates.

(3) 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, consistent with the requirements set forth in subsection (7) of this section, such acceptance or payment to the client.

(4) A licensee shall not:

(a) Perform for a contingent fee any professional services for, or receive such a fee from a client for whom the licensee or the licensee's firm performs:

(i) An audit or review of a financial statement; or

(ii) A compilation of a financial statement when the licensee expects, or reasonably might expect, that a third party will use the financial statement and the licensee's compilation report does not disclose a lack of independence; or

(iii) An examination of prospective financial information or other service performed under the Statement of Standards for Attestation Engagement; or

(b) Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client.

(5) The prohibition in subsection (4)(a) of this section applies during the period in which the licensee is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in any such listed services.

(6) Except as stated in the next sentence, a contingent fee is 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. Solely for purposes of this section, fees are not regarded as being contingent if fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings or the findings of governmental agencies. A licensee's fees may vary depending, for example, on the complexity of services rendered.

(7)(a) If a licensee accepts a contingent fee and the situation involves adverse parties and the licensee expects the findings or results will receive substantive consideration by the adverse parties or their agents, the licensee must:

(i) Obtain a written agreement from the client stating they will provide the licensee the names and addresses of the adverse parties or the primary agents of the adverse parties; and

(ii) Provide prompt written notification to the adverse parties or their agents of their role as the client's advisor and recommend the adverse parties or their agents seek their own advisor.

(b) All commission, referral and contingent fee arrangements must:

(i) Be disclosed in writing and in advance of client acceptance;

(ii) Include the method of calculating the fee; and

(iii) Specify the licensee's role as the client's advisor.

(8) A CPA who is not in public practice may accept contingent, commission, and referral fees. However, they must disclose to the client, in advance and in writing, the nature, source and amount of fee.

[Statutory Authority: RCW 18.04.055(2). 98-12-055, 4-25-626, filed 5/29/98, effective 6/29/98.]

Washington State Code Reviser's Office