Integrity and Objectivity in a Commission Environment

By James A. Woehlke, CPA

Two of the CPA profession's most important values are integrity and objectivity. They are enshrined in our Code of Professional Conduct in Rule 102. The CPA Vision Project's list of five "core values" includes both integrity and objectivity. (See page 18 for more information on the Vision Project.) These values, then, are among the defining characteristics of CPAs, both historically and in the future. According to the Society's and AICPA's codes of professional conduct,

"Integrity is an element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions.

"Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and the public trust should not be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle.

"Objectivity is a state of mind, a quality that lends value to a member's services. [It] imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest."

Commissions and Ethics Rules

Traditionally, CPAs have considered commissions--and contingent fees, for that matter--to be at odds with integrity and objectivity. They were proud of the fact that they did not accept commissions and included prohibitions against them in their ethics rules since the early 1900s. In the 1980s, however, the Federal Trade Commission began looking at the profession's ethics rules; concluded that the AICPA's rules prohibiting commissions, contingent fees, and referral fees constituted restraints on trade; and began negotiating for changes.

The FTC has little or no authority over the states. Therefore, although the FTC can force professional associations to change their ethics rules, it cannot force changes to the rules imposed by state regulators (in New York, the board of regents).

In 1988, the AICPA worked out an agreement with the FTC to change the AICPA's ethics rules and allow commissions, contingent fees, and referral fees, subject to certain limitations. The FTC-AICPA agreement states that commissions must be allowed for nonattest clients, using a client-by-client determination as outlined in Rule 503 of the AICPA Code of Professional Conduct. This also is the rule contained in the Uniform Accountancy Act.

Although the FTC has no jurisdiction over state regulators, 30 state governments have changed their rules to allow CPAs to accept commissions. New York is not among them.

Many CPAs argue that an engagement-by-engagement, and not a client-by-client, approach should determine when a CPA can accept commissions. This would allow commission fee arrangements for nonattest engagements of attest clients. The Society's Professional Ethics Committee recommended, and the Executive Committee approved, that our rule be changed to permit client-based commissions. A ballot to the entire membership would take place before the Society's rule can be changed. In any case, the New York State Department of Education recently concluded that the board of regents' prohibition on commissions cannot be enforced for CPA services outside of the state law's narrowly defined scope of practice (primarily the attest function).

Maintaining Integrity and Objectivity

Much of the CPA profession is already facing a perplexing dilemma. How can you maintain your integrity and objectivity and accept commissions at the same time? This question will be answered more definitively over time as the state societies' and the AICPA's ethics committees grapple with the issues posed by the new environment. But two things seem clear even at this stage.

First, the client must be made aware of the fee arrangement. With disclosure, if the client does not approve of the commission arrangement, the client can find another CPA who does not take commissions. In a way, it is the client who decides if the CPA will take commissions. This is the market's permission.

At a national meeting of state boards of accountancy, the state boards that allow commissions reported they were not experiencing any problems or complaints. Although all state boards mandate, some requirements are stronger than others. For instance, Colorado CPAs must declare in writing the nature, amount, and source of any commission prior to performing the service. Other states merely require disclosure, without listing specific guidelines.