follow the standards.
in the old days you could go into a shoe store and purchase sneakers or gym shoes. nowadays, there are tennis shoes, running shoes, cross trainers, aerobic shoes, basketball shoes, soccer shoes and the list goes on and on.
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perhaps the billable hour paradigm soon will go the way of the gym shoe. accountants need to realize that in pricing their services, one pricing method will no longer do. as with athletic shoes, accounting and consulting services can be priced in many different ways.
many professionals believe that pricing arrangements other than on a fee-per-hour basis are unethical or illegal. it is necessary, therefore, to make the following distinction: if someone is going to be unethical, it will not be a result of the billing method he or she uses. there is no intent here to encourage or suggest unethical billing; without question, charging a client for six hours of work when only four hours were performed is unethical.
“the moment you make a mistake in pricing, you’re eating into your reputation or your profits.” – katharine paine
independence and objectivity are the two key elements that are of the most concern to accountants when they think about alternative billing methods. commissions, contingency fees, success fees and the like can be acceptable in some cases as long as:
- the client is aware of the fee arrangement before the start of the engagement.
- the arrangement complies with the rules of conduct of the aicpa and the relevant state cpa society and state board of accountancy.
discussion of rule 302, “contingent fees”
the aicpa defines a contingent fee as “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.”
the following is an extract from the aicpa professional standards, rule 302, “contingent fees.”
a member in public practice shall not
- perform for a contingent fee any professional services for, or receive such a fee from a client for whom the member or the member’s firm performs
- an audit or review of a financial statement; or
- a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or
- an examination of prospective financial information; . . .
although the above list does not include all attest services, for simplicity a client receiving these services is hereafter referred to as an attest client.
this prohibition applies during the period of the professional engagement and the period covered by the historical financial statements.
rule 302 also prohibits the preparation of an original or amended tax return or a claim for tax refund for a contingent fee for any event. however, in tax matters, a fee is not regarded as being contingent if it is determined based on the results of a judicial proceeding or the finding of a governmental agency.
there are many examples in which a contingency fee would be acceptable under the current ethical guidelines:
- representing a client in connection with a revenue agent’s examination of the client’s federal or state income tax return
- filing an amended federal or state income tax return claiming a tax refund based on a tax issue that is the subject of a test case involving a different taxpayer or with respect to which the taxing authority is developing a position
- filing an amended federal or state income tax return (or refund claim) claiming a tax refund in an amount greater than the threshold for review by the joint committee on taxation or state taxing authority
- requesting a refund of either overpayments of interest or penalties charged to a client’s account or tax deposits that a federal or state taxing authority improperly accounted for in circumstances in which the taxing authority has established procedures for the substantive review of such refund requests
- requesting, by means of a protest or similar document, the state or local taxing authority’s consideration of a reduction in a property’s assessed value under an established taxing authority’s review process for hearing all taxpayer arguments relating to assessed value
- representing a client in connection with obtaining a private letter ruling or influencing the drafting of a regulation or statute
- a member’s spouse may provide services for a contingent fee to a client for whom the member performs a service listed above in the “contingent fees rule” without causing the member to be in violation of the “contingent fees rule” if (a) the activities of the member’s spouse are separate from the member’s practice and (b) the member is not significantly involved in the spouse’s activities.
- a member of member’s firm may provide investment advisory services for a fee based on a percentage of the investment portfolio to a client for whom the member performs a service listed above in the “contingent fees rule” without violating that rule if all of the following safeguards are met:
- the fee is determined based on a specified percentage of the client’s investment portfolio.
- the dollar amount of the portfolio on which the fee is based is determined at the beginning of each quarter (or longer period of time as may be agreed upon) and is adjusted only for the client’s additions or withdrawals during the period.
- the fee arrangement is not renewed with the client more frequently than on a quarterly basis.
- the selling of a business for a non-attest client in which a fixed fee will be charged only if the transaction is successful; the performance of an executive search when the price of the service is based on the success of finding the right candidate for a position. as long as the service does not occur or the fee is not received during the prohibition period described above, the firm could charge this client a contingent fee for performing any of these services.
discussion of rule 503, “commissions and referral fees”
considering the multi-service relationships that many professionals have with their clients, a situation may arise whereby the professional is asked to perform a commission-based service.
- prohibited commissions. a member in public practice 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 member or member’s firm also performs for that client.
- an audit or review of a financial statement; or a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or
- an examination of prospective financial information.
this prohibition applies during the period in which the member is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in such listed services.
disclosure of permitted commissions: a member in public practice who is not prohibited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall disclose that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates.
referral fees: any member who accepts a referral fee for recommending or referring any service of a cpa to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.
however, the receipt of a permissible commission must be disclosed to the client when the performance of the service is complete and the fee is determined.