There are two questions that often arise within the profession: When is a CPA prohibited from accepting a contingent fee? And where can one find the rules regarding it? The answers to both, however, are fairly straightforward. Show
A contingent fee is a fee arrangement in which the amount of the fee is dependent on the attainment of a specific result for the client—for example, a fee based on the amount of a client’s tax refund, or the amount of loan a client receives from a bank. Whether or not accepting these fees constitutes an act discreditable depends, in part, on what services the CPA is performing for the client and how the result is determined. The rule and interpretations regarding contingent fees can be found in Section 1.510 of the AICPA’s revised Code of Professional Conduct, which became effective Dec. 15, 2014. (Prior to that, Rule 302 governed contingent fees.) Since the NYSSCPA adopted the AICPA’s code as its own conduct code in May 2013, all Society members are subject to it. Under the code, a member in public practice is proscribed from performing any professional services for a contingent fee when the member or the member’s firm either: • performs an audit or review of a financial statement for the client; • performs a compilation of a financial statement for which there is an accountant’s compilation report and the compilation report does not disclose a lack of independence; or • performs an examination of prospective financial information. On first glance, one might think that a member who is the VP of finance at a company or a college professor would be exempt from the contingent fee rules—the first is a member in industry and the latter falls into the “other” member category. But this would only be true so long as they aren’t performing any professional services for a client, which includes, among other things, accounting, attest, bookkeeping, tax or valuation services that require accounting and related skills. As soon as a member performs professional services for a client, he or she is a member in public practice regardless of how he or she makes a living. In other words, that college professor who prepares tax returns for a handful of clients is subject to all of the rules in Section 1 of the revised code, which covers members in public practice, including the rule pertaining to contingent fees. On the tax side, a member who prepares a tax return, amends a tax return or a prepares a claim for refund for a client is proscribed from doing so for a contingent fee. It is important to note here, that not all fees which are unfixed as to the amount are contingent fees. CPAs will often quote a client a fee within a range. So long as the nature of the fee is determined based upon the effort to be expended and not the result to be achieved, the arrangement is not a contingent fee. For example, quoting a client a fee in a range for performing an audit of a financial statement is not a contingent fee because, in this instance, what the client pays is dependent on how the audit goes, how clean the client’s records are, etc., and not on the issuance of an unmodified opinion. In addition, fees that are set by a court or other public authority or based on the results of judicial proceedings or the findings of governmental agencies are not contingent fees. This would include, for example, a fee established by a bankruptcy court for professional services rendered by the member on behalf of a client. Fees for representing a client in an IRS examination that are based on the result of the examination are not contingent fees. Other examples of exceptions to the contingent fees rule as it relates to tax matters can be found in Section 1.510.010 of the Code. Please note that the IRS and/or other governmental agencies may have rules regarding contingent fees that are more proscriptive than those in the AICPA’s code. Hopefully, this has cleared up some of the more troublesome questions regarding the topic of contingent fees. I strongly urge anyone who hasn’t done so already to check out the revised Code of Professional Conduct, which can be viewed on the NYSSCPA’s website. Victoria Pitkin, CPA, CGMA, has more than 20 years of experience in providing accounting, auditing, tax and consulting services, and is a member of the NYSSCPA’s Professional Ethics Committee. This article is for informational purposes only. For further guidance on professional issues, please see the AICPA Code of Professional Conduct During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on
improper influence on the conduct of audits? The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit. It is unlawful for (1) any officer or director of an issuer to do any act (2) to fraudulently influence, coerce,
manipulate, or mislead any auditor performing an audit if (3) the purpose is to render the financial statements materially misleading. The CFO is not excused by failure to affect the audit. A violation of the profession’s ethical standards most likely occurred when a CPA in public practice Expressed an unmodified opinion on the Year 2 financial statements when fees for the Year 1 audit were unpaid. Audit fees that are long past due take on the characteristics of a loan. Independence is impaired if billed or unbilled fees, or a note arising from the fees, for client services rendered more than 1 year prior to the current year’s report date, remain unpaid when the current year’s report is issued. However, this ruling does not apply if the client
is in bankruptcy. Moreover, long overdue fees do not preclude the CPA from performing services not requiring independence. Which of the following best describes the effect of a contingent fee arrangement on the auditor’s independence? The contingent fee arrangement impairs independence. A fee is contingent if it is dependent on a finding or a result. A member in public practice cannot perform certain services for a contingent fee without impairing independence, e.g., (1) audits or reviews of financial statements, (2) an examination of prospective financial information, (3) certain tax services, and (4) a compilation that reasonably might be used by a third party that does not disclose the lack of independence in the report. The General Standards Rule does not require a member to Provide assurance about prospective financial statements. Guidance for assurance on prospective statements is provided by AT-C 305, Prospective Financial Information. During the course of an audit, an auditor required additional research and consultation with others. This additional research and consultation is considered to be An appropriate part of the professional conduct of the engagement. The Code of Professional Conduct states that in many cases additional research and consultation with others may be necessary during an engagement. The auditor should not undertake the engagement unless (s)he has or expects to gain the knowledge to complete the audit with professional competence. Ann Covington, CPA, has been asked to perform a consulting services engagement concerning the analysis of a potential merger. She has little experience with the industry involved. What is her most appropriate action? Accept the engagement and perform additional research or consult with others to obtain sufficient competence. The CPA may accept the engagement but should conduct research or consult with others to obtain a sufficient level of knowledge about the subject of the engagement. An AICPA member should undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence. A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, Year 3. Many of the firm’s former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit? The client’s CFO was the lead partner on the audit until December 31, Year 1. Independence of the accounting firm is impaired if a former partner or professional employee of the firm is subsequently employed or associated with an attest client in a key position. However, independence is not impaired if the person is no longer associated or active with the CPA firm and any retirement compensation is fixed. A CPA firm is independent if the former lead partner did not participate in any capacity in the audit of the issuer during the year before the beginning of the audit. Each of the following broker-dealer relationships impairs auditor independence with respect to a broker-dealer issuer audit client except The auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation. Under SEC Independence Standards, an accountant is not independent when (1) the accounting firm, (2) any covered person in the firm, or (3) any of the covered person’s immediate family members has any brokerage or similar accounts maintained with a broker-dealer that is an audit client if (1) the accounts include any asset other than cash or securities or (2) the value of the assets in the accounts exceeds the amount that is subject to a Securities Investor Protection Corporation advance for those accounts. Thus, a cash balance in a brokerage account that is fully insured under the Securities Investor Protection Act (SIPA) does not impair independence. Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients’ express permission? A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties. A member shall not disclose confidential client information without the client’s consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his or her name confidential information. If no exception applies, client confidentiality has been violated. When is the independence of the CPA auditor of a client company’s financial statements most likely to be impaired because of involvement in litigation? Shareholders of the client bring a class action against the client, its management, and the CPA. The CPA files a cross-claim against management alleging fraud. Independence is not necessarily impaired when the CPA is a co-defendant with the client. However, cross-claims filed by the co-defendants against each other may impair independence. For example, the client may allege that the CPA was negligent, or the CPA may allege that the client’s management committed fraud. In these circumstances, the interests of the client and the CPA are opposed, and independence may be impaired. The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a Set of specific, mandatory rules describing minimum levels of conduct a member must maintain. The AICPA Code contains Principles and Rules. The principles are goal-oriented. The rules provide more specific guidance. The principles call for an unswerving commitment to honorable behavior but are not mandatory. The AICPA bylaws require members to adhere to the Rules. Those who fail to comply with the rules may face disciplinary action. When a former partner of a registered public accounting firm who left the firm 2 years ago accepts a financial reporting oversight role at an issuer audit client, the independence of the registered public accounting firm is considered impaired unless which of the following is true? The former partner has no remaining capital balance in the registered public accounting firm. PCAOB Interim Independence Standards apply to audits of issuers. They include the AICPA’s prior Conduct Rule 101, Independence, and related rulings and interpretations as of April 16, 2003, to the extent not superseded or amended. According to these PCAOB interim standards, a firm’s independence may be impaired with respect to a client if a partner or professional employee leaves the firm and is subsequently employed by or associated with that client in a key position. However, independence is not impaired if, among other things, amounts due to the former partner or professional employee for (1) his or her previous interest in the firm and (2) unfunded, vested retirement benefits are not material to the firm. This assumes that the underlying formula used to calculate the payments remains fixed during the payout period. Retirement benefits also may be adjusted for inflation, and interest may be paid on amounts due. Moreover, the former partner or professional employee must not be in a position to influence the accounting firm’s operations or financial policies. Under SEC independence standards, a registered public accounting firm is not independent if a former partner, principal, shareholder, or professional employee is in an accounting role or a financial reporting oversight role at an issuer audit client. But independence is not impaired if the individual (1) does not influence the accounting firm’s operations or financial policies, (2) has no capital balances in the accounting firm, and (3) has no financial arrangement with the accounting firm other than one providing for regular payment of a fixed dollar amount (not dependent on the revenues, profits, or earnings of the accounting firm). PCAOB rules require compliance with the SEC rules if they are more restrictive. The AICPA Code of Professional Conduct is violated if a CPA accepts a fee for services and the fee is Payable after a specified finding is attained in a review of financial statements. A contingent fee is dependent on a specified finding. The Code prohibits contingent fees (1) for the audit or review of a financial statement, (2) for a compilation if a third party is reasonably expected to use the financial statement and the report does not mention the member’s lack of independence, (3) for an examination of prospective financial information, and (4) for the preparation of original or amended tax returns or claims for tax refunds. However, contingent fees may be accepted for other services. Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance? A distinguishing mark of a profession is its acceptance of responsibility to the public. According to the Principles section of the AICPA Code of Professional Conduct, “Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. A distinguishing mark of a profession is acceptance of its responsibility to the public.” Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer’s audit committee? Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. Before accepting an initial engagement under PCAOB standards, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm if it becomes the auditor; and (3) document the substance of the discussion. At least annually for each issuer audit client, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm; (3) document the substance of the discussion; and (4) affirm to the audit committee in writing that the firm is independent. In which of the following situations would a covered member’s independence be considered to be impaired? I. The covered member maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution. II & III. When a member leases property to or from a client, independence is not impaired if (1) the lease meets the criteria of an operating lease, (2) the terms and conditions of the agreement compare with those of similar leases, and (3) all amounts are paid in accordance with the lease. However, if the lease meets all the criteria of a capital lease, it impairs a covered member’s independence. The reason is that a capital lease is considered a loan to or from the client. Moreover, independence is impaired if, during the period of the professional engagement, a covered member had (or was committed to acquire) any direct or any material indirect financial interest in the client. When a covered member is a trust beneficiary, the trust is deemed to be a direct financial interest, and the underlying investments are indirect financial interests. However, the beneficiary of a blind trust is also the grantor. The grantor normally can amend or revoke the trust, and the investments will finally revert to him or her. Thus, the blind trust and the investments are deemed to be direct financial interests of the covered member. An accounting firm’s independence is most likely to be impaired when The firm and the client have a material cooperative arrangement. Independence is impaired if, during the engagement or at the time of expressing an opinion, a member’s firm had any material cooperative arrangement with the client. A cooperative arrangement involves joint participation in a business activity. However, joint participation in a business activity is not a cooperative arrangement when the participants (1) do not have a common understanding, arrangement, or agreement; (2) are not responsible for the other’s activities or results; and (3) are not agents for each other. Which of the following areas of professional responsibility should be observed by a CPA not in public practice? Objectivity: Yes Under the Integrity and Objectivity Rule, members in public practice and in business must maintain objectivity and integrity, be free of conflicts of interest, not knowingly misrepresent facts, and not subordinate his or her judgment to others when performing professional services. But the Independence Rule applies only to CPAs in public practice. According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent? Disclosure of confidential client information to a third-party service provider when the member does not enter into a confidentiality agreement with the provider. A member in public practice must not disclose confidential client information without the client’s consent. However, this rule does not affect a CPA’s obligations to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, and (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. Moreover, a member in public practice may disclose confidential client information to a third-party service provider used by the member to provide professional services or for administrative support purposes. However, before using such a service provider, the member should enter into a contract with the service provider to maintain the confidentiality of the information and be reasonably assured that the service provider has appropriate procedures to prevent the unauthorized release of confidential information to others. If the member does not have a confidentiality agreement with a third-party service provider, specific client consent should be obtained. According to the AICPA Code of Professional Conduct, which of the following actions will impair independence? Participating in the hiring or termination of a client’s employees. A member’s independence is impaired by assuming management responsibilities for an attest client. The management participation threat to independence cannot be reduced to an acceptable level if a member (1) commits the client to employee compensation or benefit arrangements or (2) hires or terminates the client’s employees (ET 1.295.135.03). Which of the following actions by a CPA most likely violates the profession’s ethical standards? Retaining client-provided records after the client has demanded their return. Retention of client-provided records after demand is made for them by the client is an act discreditable to the profession and a violation of the Code. Even if the state in which a member practices grants a lien on certain records, this ethical standard is applicable. Which of the following violates the AICPA’s Code of Professional Conduct? A member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually. Two CPAs who are in fact not in partnership should not use a letterhead showing both names. Such a representation is misleading. Furthermore, some courts have held that such an arrangement may be a de facto partnership, and the individual CPAs may be liable for the obligations of the de facto partnership and of the de facto partners. The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity. Objectivity in the Code refers to a CPA’s ability To maintain an impartial attitude on all matters that come under the CPA’s review. According to the Principles, “Objectivity is a state of mind, a quality that lends itself to a member’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.” A member of the AICPA may render which service under a contingent fee arrangement? A CPA provides investment advisory services, with the fee based on a percentage of the client’s investment portfolio. The member is not in violation of the Code if (1) the fee is based on a specified percentage of the portfolio, (2) the dollar amount of the portfolio on which the fee is based is determined at the beginning of each quarter (or longer period, if agreed) and is adjusted only for client additions or withdrawals, and (3) the fee arrangement is not renewed more often than quarterly. What threats to independence are created when a contingent fee is charged by a firm in respect of an assurance engagement?Contingent Fees
291.152 A contingent fee charged directly or indirectly by a firm in respect of an assurance engagement creates a self-interest threat that cannot be reduced to an acceptable level by applying any safeguard. Accordingly, a firm should not enter into any such fee arrangement.
Which of the following audit procedures is used extensively throughout the audit but does not by itself provide sufficient appropriate evidence?Inquiry is an audit procedure that is used extensively throughout the audit and often is complementary to performing other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.
Which of the following documents are examples of audit evidence generated by the client?Which of the following documents are examples of audit evidence generated by the client? Shipping documents and receiving reports. bc: Shipping documents and receiving reports are a result of the operations of the client. As goods are shipped to customers, a shipping document is prepared by the client.
In which of the following circumstances is a registered public accounting firm's independence impaired with respect to an issuer?Independence will be impaired if the CPA has a direct financial interest with an attestation client or a material indirect financial interest in a client.
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A member of the aicpa may render which service under a contingent fee arrangement?
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