All About Money: Commission, Contingent, Referral Fees: Know the Rules
by Bruce C. Allen
CalCPA members sometimes inquire about the legality of specific fee arrangements. Are commissions legal in California? What about contingent fees? The answer to those two questions is a qualified yes.
Commissions and contingent fees are acceptable—in specific circumstances—but referral fees are not acceptable unless the CPA is paying a fee for obtaining clients in conjunction with the purchase of an accounting practice.
What the Regs Say
Know the law and be careful about compensation arrangements. Sec. 5061 of the Business and Professions Code allows CPAs to accept commissions as compensation for services in specific circumstances as long as disclosure requirements are met.
Under the law, 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.
Other restrictions and conditions are included in CBA regulations 56.1-56.4. Basically, 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.
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, 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.
It is the responsibility of every CPA to understand and be in compliance with the statutes and regulations that govern the profession. They are available on the California Board of Accountancy website at www.dca.ca.gov/cba.
CPAs with questions related to commissions, commissions disclosures or potential referral fee arrangements are encouraged to study the law, consult with legal counsel and contact the CBA’s enforcement division at email@example.com.
Better to be safe than sorry.
Moving or Changing Firms? Let the CBA Know
If you move or change CPA firms, make sure that you notify the CBA of your new address. Every year, CPAs lose their licenses because they moved and failed to notify the board.
After being delinquent five years, licenses are terminated automatically. To check your address of record at the CBA, visit www.calcpa.org and click on “License Lookup” in the consumer’s section.
To ensure the privacy of your home address, you may use a P.O. box as your address of record.
May 13, 2008
Mark your calendars now for CPA Day at the Capitol, May 13, 2008 in Sacramento. We anticipate that several significant issues will be under consideration by the Legislature next year and legislators want to hear from their CPA constituents on issues impacting the profession.
We know your time is limited, but we appreciate you attending to help ensure that all of California is represented.
Our efforts are so much more effective when legislators or their staffs can sit face to face with someone—you—who is directly affected by an issue.
Please do not underestimate the importance of your presence.
Bruce C. Allen is CalCPA’s director of government relations.