Commissions and Contingent Fees

Updated August 11, 2015

The New Jersey State Board of Accountancy's rules governing commissions and contingent fees present both challenges and opportunities to the CPA profession.

The challenges presented by the rules allowing for the collection of commissions and contingent fees can be classified as external and internal. External challenges require interacting with third parties outside the CPA firm and client organizations, while internal challenges involve only the firm and its clients.

As to external challenges, some services that may result in commissions or contingent fees may require that a CPA obtain additional licenses. For example, advising clients about suitable investments may require that a CPA register as an investment advisor with the Securities and Exchange Commission or the New Jersey Bureau of Securities. Negotiating the purchase or sale of a business that includes real estate, on the other hand, may require that a CPA obtain a real estate broker's license. Some securities services may require that new separate legal entities be created. If a firm's services extend beyond standard accounting and tax services, its malpractice insurance policy also may have to be amended.

Under the rules, CPAs also are required to obtain a signed notification acknowledging disclosure of receipt of a commission, performance fee or referral fee from each entity to which they refer a client, each time they make a referral. Similarly, a firm's referral arrangements with financial institutions should be negotiated and memorialized in writing.

Internal challenges can be just as extensive and complex. An immediate concern will be to avoid or terminate disqualifying services for clients from whom commissions or contingent fees will be accepted. If a CPA currently performs an audit, review, or compilation of a client's financial statements and wants to charge commissions or contingent fees to that client, then the audit, review, and compilation services will have to be discontinued for that client.

If the services resulting in commissions and contingent fees are expected to be a significant part of the firm's practice, the firm may need to strategically redirect its recruiting and marketing efforts. For example, the firm may now need people with management consulting, negotiating and marketing skills, along with investment advisors and insurance specialists.

Depending on the extent of the changes to be undertaken by a firm, it also may be appropriate to consult with legal counsel, insurance agents, securities regulators or other officials before accepting 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. 


The Impact on the CPA

Regulations N.J.A.C. 13:29-3.8 and 3.12 provide CPAs with tremendous opportunities but, at the same time, open up new areas of liability. Below are some key issues that the CPA needs to consider: 

  • Objectivity — Until now, our clients have turned to us for independent evaluation of products offered by investment advisors, stockbrokers, and insurance agents. Will we be viewed differently if we receive compensation from the sale of products?
  • Disclosure — The new rules provide that written disclosure be communicated to the non-attest client indicating how the CPA will be compensated. We must consider the effect these new fees will have on our existing compensation structure and the relationships we have so carefully cultivated with our clients.
  • Education and Training — Specialized additional training is needed to provide comprehensive financial planning. The PFS or ChFC designations indicate to our clients that we have training in financial planning.
  • Licenses — The CPA will need to be licensed with the National Association of Securities Dealers and registered with a broker/dealer to sell securities. To charge an investment management fee, the CPA will need to be a registered investment advisor. To sell insurance products, the CPA will have to be licensed by the state. These licenses require training and continuing education.
  • Due Diligence/Compliance — As CPAs, we have two basic alternatives to enter the PFP field, either a) provide all services in-house or b) develop an alliance with financial institutions/professionals. An in-house financial planning operation will require significant capital and time commitments. Forming an alliance is the easiest way to enter the PFP field. Whichever alternative is selected, due diligence and compliance with the laws will be critical to your survival in the PFP field.
  • Time Constraints — A venture into the PFP marketplace requires a time commitment to learn products, laws and most significantly, the time devoted to the client in developing and implementing a financial plan. We all need to assess whether we can make that commitment and, at the same time, maintain our accounting practices. 

FAQs

The following questions and answers are based on our understanding of the State Board rules as published on November 16, 1998, and have been prepared to help our members respond to the rules. They have not been reviewed or approved by the State Board of Accountancy, and the Board will not be bound by them. NJCPA members who want their questions about the rules answered by the State Board should address those questions, in writing, to the State Board at P.O. Box 45000, Newark, NJ 07101.
  • How do the new rules differ from the AICPA Code of Professional Conduct rules?

    There are substantive differences in two areas:

    1. The State Board rules do not allow commissions or contingent fees if the CPA performs, for the client, "...a compilation of a financial statement accompanied by a report..." The AICPA rules prohibit commissions or contingent fees if the CPA performs, for the client, "... 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." Accordingly, if a CPA is not independent of a client, performs a compilation, and discloses the lack of independence, he or she could receive a commission or contingent fee, from that client, under the AICPA rules, but could not receive such fees under the State Board rules.
    2. Both the State Board and the AICPA rules require disclosures to the person to whom the CPA recommends a product or service to which the commission relates. The State Board requires that the notification be: (a) in writing; (b) contemporaneously with or before the recommendation; and (c) signed and dated by the person who receives the referral. In contrast, the AICPA rule is silent about those three matters.
  • The proposed rule in November 1997 would have required written notifications by CPAs when they receive commissions. Is that still required?
    Yes. The new rule continues that requirement. The notification that the CPA is receiving a commission, performance fee, or referral fee must be: (a) in writing; (b) contemporaneously with or before the recommendation; and (c) signed and dated by the person who receives the referral. The requirements that the notification be in writing, and that it be signed and dated by the referee, go beyond the AICPA Code requirements, which only require that the CPA disclose the matter to the referee.
  • Are there any record-keeping requirements?
    There are no specific record-keeping requirements in the new rules, but the introductory material says, "The proposed rules require those licensees (who receive commissions, contingent fees, performance fees, and referral fees) to report the fees for tax purposes and to keep adequate records of the transactions." The rules require CPAs who receive commissions, performance fees, or referral fees to disclose that, in writing, to the client or referee. Obviously, CPAs will want to retain evidence that they complied with that rule, so they should retain copies of those notifications with the signatures of the clients/referees.
  • Can I accept a commission for investment advice, if I also perform a write-up or compilation engagement for that client, provided no report has been issued?
    The State Board rule prohibits commissions from clients for whom the member performs "...a compilation of a financial statement accompanied by a report." If there's no report (by the CPA), by inference there would be no prohibition. However, the AICPA's Statement on Standards for Accounting and Review Services (AR100.14) says, "Financial statements compiled...should be accompanied by a report stating that...," and an Interpretation thereto (AR 9100.07) says, "Section 100 requires the accountant to issue a report whenever he completes a compilation..." It, therefore, appears that without a report, there has been no completed compilation engagement, under AICPA standards.
  • If I'm not in public practice, do any of these new rules apply to me?
    All the prohibitions in the new rules run only to "licensees in public practice," with one exception. The rule on contingent fees requires all licensees who receive contingent fees to comply with applicable federal and state securities laws, rules, and registration requirements.
  • Do the new rules allow CPAs to obtain an investment advisor, broker/dealer, insurance, or other license and still practice public accounting?
    CPAs may obtain licenses to perform services outside the practice of public accountancy. Those CPAs who hold such licenses could receive commissions for those services, provided the commissions are not received from, and the services are not sold to, clients for whom the CPAs perform the disqualifying public accounting services. If you do not "practice public accounting," you could charge commissions for your services.
  • When would it be appropriate to work for a commission?
    As with contingent fees, the commission rule is expressed as a prohibition. When commissions are not prohibited, they are allowed. Receipt of commissions, performance fees, and referral fees are prohibited to licensees "in public practice" who perform audits, reviews or compilations of the client's financial statements accompanied by a report, or examine the client's prospective financial information. Members who are "in public practice" could charge commissions for any services, if the member does not perform one of the disqualifying services. Members not "in public practice" could charge commissions for any services. (The "Practice of Public Accounting" is defined in the Society's Code of Professional Conduct - Article VI, Section 2. It is not defined in the Board's Rules). Commissions could be received from clients for referring their products or services to third parties, or could be received from third parties for recommending products or services to clients.
  • If I performed an audit for a client last year, can I charge a contingent fee for other services this year?
    The prohibition period includes the period covered by any historical financial statements for which the CPA has performed "disqualifying services" - eg., audit, review, etc. The prohibition period also includes the period in which the CPA is engaged to perform any of the disqualifying services. An AICPA Ethics Interpretation (no. 101-1) states that "the period of a professional engagement ...lasts for the entire duration of the professional relationship, which could cover many periods ...[and] does not end with the issuance of a report and recommence with the signing of the following year's engagement." If the AICPA Interpretation applies, then an ongoing relationship with a client that results in periodic issuance of one of the disqualifying reports would prohibit the CPA from charging contingent fees to that client during the entire period of that ongoing relationship.
  • When would it be inappropriate to accept a contingent fee?
    In addition to the prohibition described above, contingent fees cannot be accepted from a client if the CPA, or the CPA's firm performs any of the following professional services for that client: (1) an audit or review of a financial statement; (2) a compilation of a financial statement accompanied by a report; or (3) an examination of prospective financial information.
  • Would I be able to accept a contingent fee for tax return preparation?
    The new rule states that, "A licensee in public practice shall not receive a contingent fee for preparing an original or amended tax return or claim for a tax refund for any client." The AICPA's Code of Professional Conduct contains a similar prohibition. An AICPA Interpretation provides examples of the application of this rule: see AICPA Professional Standards, Vol. 2, Section ET 302.02.
  • The old rules allowed CPAs to receive contingent fees for services for which fees are to be fixed by courts or other public authorities. Would contingent fees still be allowed in this circumstance?
    Yes. The new rule excludes this circumstance from the definition of contingent fees.
  • The old rules allowed CPAs to receive contingent fees for tax services in which the findings are those of the tax authorities and not the CPA. Would contingent fees still be allowed in this circumstance?
    Yes. The rule excludes this circumstances from the definition of contingent fees.