Commissions and Contingent Fees:

Definitions and Clarifications

The New Jersey State Board of Accountancy's regulations on commissions and contingent fees allow CPAs to collect such fees in certain circumstances, and prohibit them from accepting such payments in other situations. 

Types of services for which a CPA might charge commissions or contingent fees are for investment referrals, sales of business and property, settlements of health care and tax claims, and referrals for mortgage loans and debt and equity financing.  

Contingent Fee

A "contingent fee" is defined 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." A contingent fee arrangement need not be "all or nothing" - it need only be limited to the result of the service. For example, if a CPA negotiates the terms of a lease for a client, and the fee is to be $1,000 if the rent is $5-$6 per square foot, or $2,000 if the rent is less than $5 per square foot-that is a contingent fee. 

Please note that the regulations prohibit a contingent fee for preparing an original or amended tax return or claim for a tax refund for any client. The regulations also add that a fee is not "contingent," if it is "fixed by a court or other public authority" or is based on "the results of a judicial proceeding." For example, if a CPA performs services for a client in a bankruptcy proceeding and the judge awards a fee to the CPA, it is not a "contingent fee." The distinction is important, since CPAs in these situations would not be prohibited from performing an audit, review, or compilation for that client, as would be the case if they were accepting a commission or contingent fee. 

The State Board's regulations do not specifically address the issue of how to define a client. The AICPA Ethics Division, however, has stated that "the client" should be interpreted to mean either an individual or, in the case of a business, the entity, and not the owners. If that definition is accepted by the State Board, a CPA would be allowed to perform an audit, or other disqualifying service, for a business and also charge commissions and contingent fees to the owners for services rendered to them personally.  

Commission

The regulations do not define a "commission," but do define a "performance fee" as "compensation... on the basis of a share of the capital gains upon, or the capital appreciation of, the funds or any portion of the funds of a client." Apparently, if a CPA negotiated a fee as "X" percent of investments under management, that would be a performance fee. Under the State Board rules, receipt of a performance fee would be prohibited if the CPA performs an audit, review, compilation, or examination of prospective financial information for the client. 

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