Frequently Asked Questions From Certified Public Accountants:
Question 1: Can I pay a referral fee or commission to obtain a client?
Summary Answer 1: You cannot pay a referral fee or commission to obtain a client. However, this rule does not preclude payments for the purchase of an accounting practice.
Question 2: Can I receive payments for commissions?
Summary Answer 2: As a licensee, you may accept commission-based compensation for defined services - as long as the fees are disclosed in writing and various prohibited services are not performed. However, you are still prohibited from accepting any fee or commission solely for referral of a client to a third party.
This provision is similar to the American Institute of Certified Public Accountants Rule 503, but has significant exceptions. California's disclosure rules are more stringent for consumer protection and must be in detailed written form.
Under Section 5061 of the Business and Professions Code, a CPA or public accountancy firm is not allowed to collect a commission for the sale of goods or services to a client (or in some instances to the officers and directors of the client) if the firm also performs an audit, a review of a financial statement, a compilation to be used by a third party where the lack of independence is not disclosed or an examination of prospective financial information. Disclosure requirements are contained in Accountancy Regulation 56.
Question 3: Can I perform services on a contingency fee?
Summary Answer 3: California Accountancy Regulation 62 prohibits CPAs from performing for a contingent fee any professional services for a client for whom the licensee or the firm performs services that require independence and in a number of specified circumstances: an audit or review of a financial statement; compilation of a financial statement when the licensee expects that a third party will use the statement and the compilation report does not report the lack of independence; original tax returns; amended tax returns; claims for tax refunds or perform an engagement as a testifying expert witness.
A contingent fee is essentially defined as a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specific finding or result is attained or the fee is dependent upon the finding or the result of the service. Fees are not considered contingent if they are fixed by courts or governmental entities acting in a judicial or regulatory capacity.
Commissions
It is important to research any commission or referral fee payment arrangements. The facts and law must be analyzed as to each circumstance. Where there is marketing or advertising, that needs to be analyzed to determine if it violates the professional rules prohibiting the payment of a referral fee.
Under Section 5061(c) of the California Business and Professions Code, CPAs are not allowed to accept commissions as compensation for services in the following circumstances:
"(c) A person engaged in the practice of public accountancy is prohibited from performing services for a client, or an officer or director of a client, or a client-sponsored retirement plan, for a commission or from receiving a commission from a third party for providing the products or services of that third party to a client, or an officer or director of a client, or a client-sponsored
retirement plan, during the period in which the person also performs for that client, or officer or director of that client, or client-sponsored retirement plan, any of the services listed below and during the period covered by any historical financial statements involved in those listed services:"
An audit or review of a financial statement; or
A compilation of a financial statement when the licensee expects or
reasonably should expect that a third party will use the financial statement
and the licensee's compilation report does not disclose a lack of
independence; or
An examination of prospective financial information; or
Any other attest engagement when the licensee expects or reasonably should
expect that a third party will use the related attestation report; or
Any other services requiring independence.
Prepare an original tax return for a contingent fee.
Prepare an amended tax return, claim for tax refund, or perform other similar tax
services for a contingent fee.
Perform an engagement as a testifying expert for a contingent fee.
This means that if you are not performing any of the services described above in Section 5061(c) and you comply with the disclosure requirements Section 5061(d), you may accept a fee or commission for providing a client with the products or services of a third party where the products or services of a third party are provided in conjunction with professional services provided to the client by you while you are engaged in the practice of public accountancy. Disclosure requirements are contained in Accountancy Regulation 56.
The law is clear that nothing in Section 5061 allowing commissions under limited circumstances "shall be construed to permit the solicitation or acceptance of any fee or commission solely for the referral of a client to a third party."
Full Disclosure Of Commissions
If you are receiving commissions, the disclosure must comply with all of the following:
(1) Be in writing and be clear and conspicuous;
(2) Be signed by the recipient of the product or service;
(3) State the amount of the commission or the basis on which it
will be computed;
(4) Identify the source of the payment and the relationship
between the source of the payment and the person receiving the
payment; and
(5) Be presented to the client at or prior to the time the
recommendation of the product or service is made.
Other restrictions and conditions are included in Regulations 56.1-56.4. A CPA or a CPA firm that may receive a fee or commission must notify clients on firm letterhead prior to or at the time a recommendation of products or services is made that a fee or commission will be paid for the services and that the fee or commission may not be accepted solely for the referral of the client to the third party.
The disclosure must describe the products or services being recommended and identify the third party expected to provide the product and the business relationship with the CPA or CPA firm. A description of the fee or commission that may be received, including the dollar amount of the commission or fee, or the basis on which the payment will be computed, also must be included.
The disclosure is to be signed by the licensee and signed and dated by the client. The disclosure must be clear and conspicuous (in at least 12-point type) and must be retained by the licensee for a minimum of five years. The client also must receive a copy.
Where the products or services cannot be identified at the time of the initial disclosure, the information must be included in a supplemental disclosure within 30 days of receipt of the fee or commission. To qualify as a commission rather than a prohibited referral fee, the commission must be based on services that provide some form of value to the client. At a minimum, this must include consultation with the client regarding the third party's product or service in relationship with the client's circumstances.
In analyzing these issue, it should be remembered that under 5061(f), the term "fee" is defined broadly and "includes, but is not limited to, a commission, rebate, preference, discount, or other consideration, whether in the form of money or otherwise."
Any questions or comments should be directed to: tgreen@greenassoc.com. Tracy Green is a principal at Green and Associates in Los Angeles, California. They focus their practice on the representation of licensed professionals and businesses (including accountants) in civil, business, administrative and criminal proceedings.
Their website is: http://www.greenassoc.com/
Question 1: Can I pay a referral fee or commission to obtain a client?
Summary Answer 1: You cannot pay a referral fee or commission to obtain a client. However, this rule does not preclude payments for the purchase of an accounting practice.
Question 2: Can I receive payments for commissions?
Summary Answer 2: As a licensee, you may accept commission-based compensation for defined services - as long as the fees are disclosed in writing and various prohibited services are not performed. However, you are still prohibited from accepting any fee or commission solely for referral of a client to a third party.
This provision is similar to the American Institute of Certified Public Accountants Rule 503, but has significant exceptions. California's disclosure rules are more stringent for consumer protection and must be in detailed written form.
Under Section 5061 of the Business and Professions Code, a CPA or public accountancy firm is not allowed to collect a commission for the sale of goods or services to a client (or in some instances to the officers and directors of the client) if the firm also performs an audit, a review of a financial statement, a compilation to be used by a third party where the lack of independence is not disclosed or an examination of prospective financial information. Disclosure requirements are contained in Accountancy Regulation 56.
Question 3: Can I perform services on a contingency fee?
Summary Answer 3: California Accountancy Regulation 62 prohibits CPAs from performing for a contingent fee any professional services for a client for whom the licensee or the firm performs services that require independence and in a number of specified circumstances: an audit or review of a financial statement; compilation of a financial statement when the licensee expects that a third party will use the statement and the compilation report does not report the lack of independence; original tax returns; amended tax returns; claims for tax refunds or perform an engagement as a testifying expert witness.
A contingent fee is essentially defined as a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specific finding or result is attained or the fee is dependent upon the finding or the result of the service. Fees are not considered contingent if they are fixed by courts or governmental entities acting in a judicial or regulatory capacity.
Commissions
It is important to research any commission or referral fee payment arrangements. The facts and law must be analyzed as to each circumstance. Where there is marketing or advertising, that needs to be analyzed to determine if it violates the professional rules prohibiting the payment of a referral fee.
Under Section 5061(c) of the California Business and Professions Code, CPAs are not allowed to accept commissions as compensation for services in the following circumstances:
"(c) A person engaged in the practice of public accountancy is prohibited from performing services for a client, or an officer or director of a client, or a client-sponsored retirement plan, for a commission or from receiving a commission from a third party for providing the products or services of that third party to a client, or an officer or director of a client, or a client-sponsored
retirement plan, during the period in which the person also performs for that client, or officer or director of that client, or client-sponsored retirement plan, any of the services listed below and during the period covered by any historical financial statements involved in those listed services:"
An audit or review of a financial statement; or
A compilation of a financial statement when the licensee expects or
reasonably should expect that a third party will use the financial statement
and the licensee's compilation report does not disclose a lack of
independence; or
An examination of prospective financial information; or
Any other attest engagement when the licensee expects or reasonably should
expect that a third party will use the related attestation report; or
Any other services requiring independence.
Prepare an original tax return for a contingent fee.
Prepare an amended tax return, claim for tax refund, or perform other similar tax
services for a contingent fee.
Perform an engagement as a testifying expert for a contingent fee.
This means that if you are not performing any of the services described above in Section 5061(c) and you comply with the disclosure requirements Section 5061(d), you may accept a fee or commission for providing a client with the products or services of a third party where the products or services of a third party are provided in conjunction with professional services provided to the client by you while you are engaged in the practice of public accountancy. Disclosure requirements are contained in Accountancy Regulation 56.
The law is clear that nothing in Section 5061 allowing commissions under limited circumstances "shall be construed to permit the solicitation or acceptance of any fee or commission solely for the referral of a client to a third party."
Full Disclosure Of Commissions
If you are receiving commissions, the disclosure must comply with all of the following:
(1) Be in writing and be clear and conspicuous;
(2) Be signed by the recipient of the product or service;
(3) State the amount of the commission or the basis on which it
will be computed;
(4) Identify the source of the payment and the relationship
between the source of the payment and the person receiving the
payment; and
(5) Be presented to the client at or prior to the time the
recommendation of the product or service is made.
Other restrictions and conditions are included in Regulations 56.1-56.4. A CPA or a CPA firm that may receive a fee or commission must notify clients on firm letterhead prior to or at the time a recommendation of products or services is made that a fee or commission will be paid for the services and that the fee or commission may not be accepted solely for the referral of the client to the third party.
The disclosure must describe the products or services being recommended and identify the third party expected to provide the product and the business relationship with the CPA or CPA firm. A description of the fee or commission that may be received, including the dollar amount of the commission or fee, or the basis on which the payment will be computed, also must be included.
The disclosure is to be signed by the licensee and signed and dated by the client. The disclosure must be clear and conspicuous (in at least 12-point type) and must be retained by the licensee for a minimum of five years. The client also must receive a copy.
Where the products or services cannot be identified at the time of the initial disclosure, the information must be included in a supplemental disclosure within 30 days of receipt of the fee or commission. To qualify as a commission rather than a prohibited referral fee, the commission must be based on services that provide some form of value to the client. At a minimum, this must include consultation with the client regarding the third party's product or service in relationship with the client's circumstances.
In analyzing these issue, it should be remembered that under 5061(f), the term "fee" is defined broadly and "includes, but is not limited to, a commission, rebate, preference, discount, or other consideration, whether in the form of money or otherwise."
Any questions or comments should be directed to: tgreen@greenassoc.com. Tracy Green is a principal at Green and Associates in Los Angeles, California. They focus their practice on the representation of licensed professionals and businesses (including accountants) in civil, business, administrative and criminal proceedings.
Their website is: http://www.greenassoc.com/
