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.”


Some  had suggested that this exception might allow contingent fees to be charged on tax preparation, since the final amount charged would depend on the government’s acceptance, rejection or revision of the accounting firm’s work.


Nicolaisen refuted the position in a letter to Bruce Webb, chairman of the American Institute of CPAs’ Professional Ethics Executive Committee, who had raised the issue in a letter to Douglas Carmichael, the chief accountant of the Public Company Accounting Oversight Board.


“The fact that a government agency might challenge the amount of the client’s tax savings and thereby alter the final amount of the fee paid to the firm heightens, not lessens, the mutuality of interest between the firm and the client,” Nicolaisen wrote. “Accordingly, such fees impair an auditor’s independence.”


Nicolaisen also cast a stern eye on the charging of value-added or discretionary fees. “An audit committee should be aware that any agreement – from a direct contract provision to ‘a wink and a nod’ – that provides for possible additional payment … would be viewed as impairing the firm’s independence,” he wrote.


-- WebCPA staff

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