Washington, D.C. (May 25, 2004) – In a recent letter, Securities and Exchange Commission chief accountant Donald Nicolaisen strongly rebuffed an argument that some accounting firms had been proposing to weaken auditor independence rules in the realm of contingent fees received for tax services provided to audit clients.

Firms are not allowed to charge audit clients contingent fees – whereby the firm is paid only on the successful attainment of a specified result, or paid an amount that is dependent on the scale of the result (for instance, a percentage of tax savings resulting from the sale of a tax shelter) – because this creates “a mutuality of interest” between the firm and its client, thus lessening its independence. An exception is made, however, in instances where the fee is established by a court or governmental entity “acting in the public interest.”

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