December 1999

Hearing Spotlights Commissions Controversy

By Ann E. Spaulding

The November 16 hearing sponsored by Assembly Majority Leader Michael J. Bragman (Syracuse) and Assembly Standing Committee on Higher Education Chair Edward C. Sullivan (Manhattan) regarding bills before the State Legislature to reform New York's accountancy laws presented testimony on both sides of the issue of whether New York CPAs should accept commissions.

Assembly bill A. 8600, which the NYSSCPA supports, would permit CPAs to accept commissions for nonattest clients provided that CPAs disclose the fee arrangements.

Speakers Advocate Consumer Choice

Representatives from H.D. Vest Financial Services--a company with more than 8,600 advisors nationwide, including approximately 422 in New York, some of whom are CPAs--were among those who testified on public interest issues concerning commissions. Terra Gray, H.D. Vest director of government affairs, said that consumers should have the right to choose ethical professionals and decide how to compensate them.

Assemblyman Bragman asked what the drawback would be to New York state if it does not allow commissions.

"Consumers would be at a disadvantage," Gray said. "Those that don't have a big brokerage firm can go to their trusted tax professional. Commissions can be a cost-effective alternative to consumers."

Gray also noted that all states contiguous to New York except Connecticut permit CPAs to take commissions and that Connecticut is considering removing its prohibition.

"I have a lot of CPAs who live on the New York border and go across to other states," she said. "The disadvantage is that the state loses commerce."

H.D. Vest provides training and support services to tax professionals looking to add financial planning to their practices, and some of its representatives accept commissions in accordance with their states' laws. Two New York H.D. Vest representatives, Earl Ramero, an enrolled agent, and Daniel Cuddy, a CPA, also spoke in favor of commissions at the hearing.

"When clients come to a CPA for tax advice, they are looking for financial guidance," Cuddy said. "The ability to accept commissions helps to serve clients that cannot afford fee-for-services."

Assemblyman Sullivan questioned whether the fee disclosure is sufficient to protect the public. He asked what kind of disclosure H.D. Vest uses.

"I actually read with the client the key issues in the disclosure agreement, one of which is that I am compensated and from where," Ramero said. "Furthermore, H.D. Vest has a practice of auditing its affiliates to make sure they comply with Vest's disclosure policies."

SED Opposes Commissions

Johanna Duncan-Poitier, deputy commissioner for the State Education Department Office of the Professions, expressed strong concern that accepting commissions and referral fees will compromise CPAs' integrity, objectivity, and independence.

The SED conceded that under the current law it cannot discipline CPAs for accepting commissions from nonattest clients. Prompted by the acquisition of the nonattest assets of New York CPA firm Goldstein Golub Kessler & Co. PC by American Express Tax & Business Services, the SED extensively reviewed the state education law (which governs the accounting profession) and reached the opinion that since the law defines accountancy's scope of practice as attest work, state regulators only have authority over CPAs with respect to attest services.

Assemblyman Bragman asked for clarification that New York CPAs performing nonattest services could take commissions now.

"We have no ability to regulate CPAs outside of audit and attest," Duncan-Poitier said. "We have no authority over [commissions]."

"Something has to be done if the State Education Department doesn't have the ability to regulate," Bragman said. "We need to strike a balance."

The SED has sponsored legislation (A. 8789) to expand the scope of practice that would allow the state to enforce Regents rules prohibiting commissions and discipline CPAs for services beyond attest work. (See related article for more on the scope of practice issue and the SED's proposed legislation.)

CPAs Testify Pro and Con

Former NYSSCPA President Eli Mason, of Mason & Co., was the first to address commissions in his testimony. He characterized the issue as pandering--simply selling names to insurance and stockbrokerage firms.

"The bill permits commissions for giving names," Mason said. "That's not commissions. That's kickbacks. My firm could have had a million dollars for pandering names. We don't accept kickbacks from insurance or stockbrokers."

Jo Ann Golden, NYSSCPA secretary and president of Jo Ann Golden CPA, PC, disagreed and said that even though she did not foresee taking commissions as part of her practice, she does not view accepting them as a conflict. She said it is inappropriate to prohibit other CPAs from receiving commissions, particularly since A. 8600 requires disclosure.

On the other hand, Charles Pegler, of Charles R. Pegler, CPA, PLLC, questioned the ability to trust any businessperson that earns his or her compensation based on commissions. He said that permitting CPAs to take commissions would taint the entire profession and that once commissions were permitted in one of the professions, they would spread to all the licensed professions.

Others who testified also addressed the public's view on commissions. Vincent J. Love, of Kramer & Love, agreed with Gray and said that the public should have the option to use commission-based fee structures to pay CPAs. Love, who chairs the NYSSCPA Auditing Standards and Procedures Committee and is immediate past chair of the Society's Professional Ethics Committee, said he does not see a conflict--even though he personally does not perform any services that would involve commissions or referral fees. He pointed out that the accounting profession protects the public through its ethics program.

"How do we safeguard the public?" he said. "Incorporate the Society's Code of Ethics rules and interpretations that require objectivity, integrity, and acting in the client's best interest."

As a result of an ethics rule approved by an NYSSCPA membership ballot last April, Society members must disclose commissions to clients in writing and determine that the product or service is appropriate for the client.

Herbert Schoenfeld, a CPA representing the National Conference of CPA Practitioners (NCCPAP), also mentioned the public interest in his testimony. He said his organization has not taken a position on commissions: Some members accept commissions and others question whether accepting them is appropriate.

Industry CPAs Voice Support

A number of CPAs in industry testified in support of permitting commission-based fee structures in the accounting profession. (See related article on page 22 for more on the testimony of industry CPAs.)

"By allowing CPAs to accept commissions or referral fees from nonattest clients, CPAs could operate on a more even field with other advisors and professionals," said Rudolph L. Hertlein, senior vice president of corporate development at Viacom. We presently deal with various individuals as consultants, investment bankers, and advisors on a commission or contingent fee basis. How much better it would be if the CPA could perform the same services and under the same fee arrangements and, therefore, by a licensed professional within a level playing field."

Nadine Gordon Lee, NYSSCPA vice president and managing director of United States Trust Co., testified that the public would be protected if the rules provide disclosure on how the CPA and the firm receive compensation and the impact of any direct and indirect compensation arrangements on the cost to the buyer. She agreed with Cuddy that a commissions fee structure could offer the public more flexible payment options for services.

Unless the New York State Legislature acts to change the current law, CPAs in New York currently can enter into a commission fee arrangement with nonattest clients; NYSSCPA members must disclose the arrangement in writing. If A. 8600 passes, this capability will continue. If SED-sponsored A. 8789 prevails, it will not. *

Commissions and Contingent Fees