AICPA Proposal Redefines "Client"

Permits Commissions in Relation to Attest Clients

By Ann E. Spaulding

The AICPA issued an exposure draft on November 16 that provides guidance on accepting commissions and contingent fees in relation to attest clients, and also proposes changes to a number of other ethics interpretations and rulings. Comments are due by January 15, 1999.

The exposure draft includes a proposal that takes a new look at who the client is when evaluating whether a CPA can accept contingent fees, commissions, and referral fees in relation to an attest client. This provision offers guidance when providing professional services, such as investment advisory or other consulting services, to the owners or employees of an attest client or to an employee benefit plan sponsored by an attest client. The owners, employees, and benefit plan are considered to be separate clients from the attest client. Therefore, a member can enter into a contingent fee arrangement with, or refer products or services for a commission to, the owners, employees, or employee benefit plan of an attest client.

"I am very concerned about the erosion of the appearance of independence," said Vincent J. Love, immediate past chair of the Society's Professional Ethics Committee, referring to the exposure draft. "The AICPA and the state society should think long and hard before allowing any service for a commission or contingent fee to be performed for owners of an attest client. You need to be very careful when separating the owner from the business in determining if you can accept contingent fees or commissions."

The ethics exposure draft also includes the following
provisions:

* Contingent fees for attest clients - A new ruling under Rule 302, Contingent Fees, offers guidance when providing investment advisory services for an attest client for a fee based on a percentage of the client's investment portfolio. The ruling permits such an arrangement provided that certain conditions are met.

* Accounting services for attest clients - The proposal revises Interpretation 101-3, Accounting Services, to address the various nonattest services that a member may perform for an attest client in today's practice environment, and the impact of such services on the member's independence. In general, a member's independence would not be considered impaired provided the member does not perform any management functions or make management decisions for the attest client. The revision gives numerous examples of services that would and would not impair independence.

"Practitioners who perform accounting services for clients should certainly look at this proposal," Love said. "The examples are helpful but, in my opinion, the very first one listed needs clarification. It appears to say independence is impaired if a practitioner determines appropriate account classification for transactions without management direction. I think it should say 'without management direction or approval.' The meaning of 'direction' needs clarification. There are many instances when a client asks the accountant how a transaction should be classified and the client approves the decision but does not necessarily direct the accountant. Members should really look carefully at this proposal to see if they agree with these changes."

* Association with entities that have loans to attest clients - A new ethics ruling provides guidance to members who are associated with entities that have a loan to a client for whom services are performed that require independence. If the member can control the entity, the entity itself is considered a part of the CPA firm and independence is impaired. If the member cannot control the entity but is connected as an officer, director, or principal shareholder, the member should consider Interpretation 102-2, Conflicts of Interest, which may require disclosure of the relationship to and consent from the client and other appropriate parties.

* Negligence and knowingly misrepresenting facts - The proposal revises Interpretation 501-4, which addresses negligence in the preparation of financial statements or records, and Interpretation 102-1, Integrity and Objectivity, which relates to a member who knowingly misrepresents facts in the preparation of financial statements or records. The revisions expand the interpretations to include those members who have the authority but fail to correct an entity's financial statements or records that are known to be materially false and misleading, or those members who sign a document containing materially false and misleading information.

* Failure to file tax returns or pay tax liability - A new interpretation relates to a member who fails to file his or her personal tax returns or tax returns of the member's firm in a timely manner, including the firm's payroll tax returns and the remittance of related taxes. The AICPA takes the position that because the public associates CPAs with the performance of quality tax services, a member who does not timely file his or her own or firm's tax returns has discredited the profession, and the member's actions also constitute a breach of his or her fiduciary responsibility on behalf of firm employees.

Because of these significant ethics changes, Love stressed the need for CPAs to carefully review the proposals. "Members should get a copy of this exposure draft because of its importance to many of their practices--everyone should comment."

For a copy of the exposure draft, see the AICPA's website, www.aicpa.org, or contact NYSSCPA Director of Ethics and Regulation Ann E. Spaulding at (212) 719-8348, (800) 633-6320, or aspaulding@nysscpa.org.