There are two questions that often arise within the profession: When is a CPA prohibited from accepting a contingent fee? And where can one find the rules regarding it? The answers to both, however, are fairly straightforward.
A contingent fee is a fee arrangement in which the amount of the fee is dependent on the attainment of a specific result for the client—for example, a fee based on the amount of a client’s tax refund, or the amount of loan a client receives from a bank. Whether or not accepting these fees constitutes an act discreditable depends, in part, on what services the CPA is performing for the client and how the result is determined.
The rule and interpretations regarding contingent fees can be found in Section 1.510 of the AICPA’s revised Code of Professional Conduct, which became effective Dec. 15, 2014. (Prior to that, Rule 302 governed contingent fees.) Since the NYSSCPA adopted the AICPA’s code as its own conduct code in May 2013, all Society members are subject to it.
Under the code, a member in public practice is proscribed from performing any professional services for a contingent fee when the member or the member’s firm either:
• performs an audit or review of a financial statement for the client;
• performs a compilation of a financial statement for which there is an accountant’s compilation report and the compilation report does not disclose a lack of independence; or
• performs an examination of prospective financial information.
On first glance, one might think that a member who is the VP of finance at a company or a college professor would be exempt from the contingent fee rules—the first is a member in industry and the latter falls into the “other” member category. But this would only be true so long as they aren’t performing any professional services for a client, which includes, among other things, accounting, attest, bookkeeping, tax or valuation services that require accounting and related skills. As soon as a member performs professional services for a client, he or she is a member in public practice regardless of how he or she makes a living. In other words, that college professor who prepares tax returns for a handful of clients is subject to all of the rules in Section 1 of the revised code, which covers members in public practice, including the rule pertaining to contingent fees.
On the tax side, a member who prepares a tax return, amends a tax return or a prepares a claim for refund for a client is proscribed from doing so for a contingent fee.
It is important to note here, that not all fees which are unfixed as to the amount are contingent fees. CPAs will often quote a client a fee within a range. So long as the nature of the fee is determined based upon the effort to be expended and not the result to be achieved, the arrangement is not a contingent fee. For example, quoting a client a fee in a range for performing an audit of a financial statement is not a contingent fee because, in this instance, what the client pays is dependent on how the audit goes, how clean the client’s records are, etc., and not on the issuance of an unmodified opinion.
In addition, fees that are set by a court or other public authority or based on the results of judicial proceedings or the findings of governmental agencies are not contingent fees. This would include, for example, a fee established by a bankruptcy court for professional services rendered by the member on behalf of a client. Fees for representing a client in an IRS examination that are based on the result of the examination are not contingent fees. Other examples of exceptions to the contingent fees rule as it relates to tax matters can be found in Section 1.510.010 of the Code. Please note that the IRS and/or other governmental agencies may have rules regarding contingent fees that are more proscriptive than those in the AICPA’s code.
Hopefully, this has cleared up some of the more troublesome questions regarding the topic of contingent fees. I strongly urge anyone who hasn’t done so already to check out the revised Code of Professional Conduct, which can be viewed on the NYSSCPA’s website.
Victoria Pitkin, CPA, CGMA, has more than 20 years of experience in providing accounting, auditing, tax and consulting services, and is a member of the NYSSCPA’s Professional Ethics Committee. This article is for informational purposes only. For further guidance on professional issues, please see the AICPA Code of Professional Conduct