SEC Cracking Down on Contingency Fee, Independence

The U.S. Securities and Exchange Commission, acting to preserve auditor independence, is making sure the nation’s largest accounting firms are getting the message that accepting contingency fees for doing tax work for the companies they audit is not allowed.

SEC Chief Accountant Donald Nicolaisen held a private meeting last week with the seven largest firms and the American Institute of Certified Public Accountants where he reinforced the SEC’s position on the contingency fee issue. He ordered the firms to disclose any arrangements that may violate the rules to the company audit committees that oversee their work.

He went a step further by telling the firms they may face SEC enforcement investigations into the acceptance of contingency fees from companies they also audit, Bloomberg reported. The fees are paid to firms based on a percentage of tax savings the accounting firms help companies to achieve.

"Auditor independence is critical," Nicolaisen said in a statement disclosing the meeting. "Billing arrangements that are contingent are inappropriate and I would expect any such practice to cease."

Nicolaisen's warning underscores the SEC’s stepped up efforts to preserve auditor independence in the wake of accounting scandals at Enron Corp. and WorldCom Inc. In April, an SEC judge barred Ernst & Young LLP from accepting new public company audit clients for six months after finding the nation’s third largest accounting firm violated these very rules.

Nicolaisen also made it clear that firms should not follow AICPA guidance on this matter because it is incorrect. Bloomberg reported that the AICPA advised accounting firms they could accept the fees if a client's tax returns are reviewed by a government agency, including the Internal Revenue Service.

"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 client," Nicolaisen wrote.

In January 2003, the SEC passed rules prohibiting accounting firms from performing a number of consulting services for audit clients, Bloomberg reported, adding that the rules let firms provide tax advice to audit clients as long as it is pre-approved by the audit committee. Firms can enter into contingency fee agreements with non-audit clients for tax work.

Related News:

You may like these other stories...

By Cathy Stopyra and Todd SimmensUnderpayment interest, refund interest, and penalties charged to businesses are just a few of the considerations the IRS calculates when determining taxation for a given company. Though...
FASB mulling a revamped income statementDavid M. Katz of CFO wrote on Tuesday that the Financial Accounting Standards Board (FASB) is in the early stages of researching whether to launch a project aimed at improving and...
You have a big presentation forthcoming that might enable you to land a huge client for your firm. Are you sufficiently relaxed to be at your best? Let me offer a story and some observations that drive home a crucial point....

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.