FTC order concerning restraints on CPAs.

ANNOUNCEMENT

As you may be aware, the American Institute of Certified Public Accountants ("AICPA") has entered into a consent agreement with the Federal Trade Commission that became final on August 9, 1990. The order issued pursuant to the consent agreement provides that AICPA may not interfere it its members wish to engage in any of the following activities:

(1) accepting contingent fess from nonattest clients;

(2) accepting disclosed commissions for products or services supplied by third parties to non-attest clients;

(3) engaging in advertising and soliciation;

(4) making or accepting disclosed payments for referring potential clients to a CPA; or

(5) using trade names.

The order allows AICPA to prohibit its members from accepting contingent fees for preparing original or amended tax returns or claims for tax refunds.

The order does not prevent AICPA from formulating reasonable ethical guidelines prohibiting solicitation, advertising or trade names that it reasonably believes would be false or deceptive within the meaning of Section 5 of the Federal Trade Commission Act.

In particular, without attempting to be all-inclusive, the agreement between AICPA and the Federal Trade Commission means that as long as its members do not engage in falsehood or deception, AICPA cannot prevent or discourage them from engaging in the following practices, among others:

(a) in-person solicitation of prospective clients;

(b) self-laudatory advertising;

(c) comparative advertising;

(d) testimonial or endorsement advertising;

(e) advertising that some members may believe is "undignified" or lacking in "good taste";

(f) assisting any state government that is not an attest client in claiming a Medicare refund pursuant to a contingent fee contract;

(g) preparing financial plans for nonattest clients for which members will be compensated by commissions from the sellers of products or services that such clients purchase;

(h) using trade names, such as "Suburban Tax Services";

(i) paying referral fees to marketing firms that assist members in soliciting potential clients; and

(j) offering clients a discount for referring a prospective client.

For more specific information, you should refer to the FTC order itself. A copy of the order is enclosed.

Philip B. Chenok President American Institute of Certified Public Accountants

Consent Agreement Between the American Institute of CPAs

and the Federal Trade Commission

UNITED STATES OF AMERICA 

BEFOR FEDERAL TRADE COMMISSION

COMMISSIONERS:

Janet D. Steiger, Chairman Terry Calvani Mary L. Azcuenaga Andrew J. Strenio, Jr. Deborah K. Owen

In the Matter of American Institute of Certified Public Accountants, a corporation.

DOCKET NO. C.3297 DECISION AND ORDER

The Federal Trade Commission having initiated an investigation of certain acts and practices of the respondent named in the caption hereof, and the respondent having been furnished thereafter with a copy of a draft of complaint which the Bureau of Competition proposed to present to the Commission for its consideration and which, if issued by the Commission, would charge respondent with violation of the Federal Trade Commission Act; and

The respondent, its attorney,a nd counsel for the Commission having hereafter executed an agreement containing a consent order, an admission by the respondent of all the jurisdictional facts set forth in the aforesaid draft of complaint, a statement that the signing of said agreement is for settlement purposes only and does not constitute an admission by respondent that the law has been violated has alleged in such complaint, and waivers and other provisions as required by the Commission's Rules; and

The Commission having thereafter considered the matter and having determined that it had reason to believe that the respondent has violated the said Act, and that complaint should issue stating its charges in that respect, and having thereupon accepted the executed consent agreement and placed such agreement on the public record for a period of sixty (60) days, and having duly considered the comments filed thereafter by interested persons pursuant to $S2.34 of its Rules, and having only duly considered the recommendations of its staff to modify the consent agreement pursuant to the comments received and the supplementall letter agreement executed by the respondent's counsel, now in further conformity with the procedure prescribed in $S2.34 of its Rules, the Commission hereby issues its complaint, maket the following jurisdictional findings and enters the following order, as modified;

1. Respondent American Institute of Certified Public Accountants is a corporation organized, existing and doing business under and by virtue of the laws of the District of Columbia, with its office and principal place of business located at 1211 Avenue of Americas, New York, New York 10036-8775.

2. The Federal Trade Commission has jurisdiction of the subject matter of this proceeding and of the respondent, and the proceeding is in the public interest.

ORDER

I.

IT IS ORDERED that for purposes of this order the following definitions shall apply:

A. "AICPA" means American Institute of Certified Public Accountants and its Board of Directors, Council, committees, task forces, officers, representatives, agents, employees successors, and assigns;

B. "Attest service" means providing (1) any audit, (2) any review of a financial statement, (3) any compilation of a financial statement when the certified public accountant ("CPA") expects, or reasonably might expect, that a third party will use the compilation and the CPAs does not disclose a lack of independence, and (4) any examination of prospective financial information;

C. "Audit" means an examination of financial statements of a person by a CPA, conducted in accordance with generally accepted auditing standards, to determine whether, in the CPA's opinion, the statements conform with generally accepted accounting principles or, if applicable, with another comprehensive basis of accounting;

D. "Commission" means compensation, except a referral fee, for recommending or referring any product or service to be supplied by another person;

E. "Compilation of a financial statement" means presenting in the form of a financial statement information that is the representation of any other person without the CPA's undertaking to express any assurance on the statement;

F. "Contingent fee" means 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;

G. "Disciplinary action" means revocation or suspension of, or refusal to grant, membership, or the imposition of a reprimand, probation, constructive comment, or any other penalty or condition;

H. "Examination of prospective financial information" means an evaluation by a CPA of (1) a forecast or projection, (2) the support underlying the assumptions in the forecast or projection, (3) whether the presentation of the forecast or projection is in conformity with AICPA presentation guidelines, and (4) whether the assumptions in the forecast or projection provide a reasonable basis for the forecast or projection;

I. "Forecast" means prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and changes in financial position or cash flows that are based on the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take;

J. "Person" means any natural person, corporation, partnership, unincorporated association, or other entity;

K. "Projection" means prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and changes in financial position or cash flows that are based on the responsible party's assumptions reflecting conditions it expects would exist and the course of action it expects would be taken given such hypothetical assumptions;

L. "Referral fee" means compensation for recommending or referring any service of a CPA to any person;

M. "Review" means to perform an inquiry and analytical procedures that permit a CPA to determine whether there is a reasonable basis for expressing limited assurance that there are no material modifications that should be made to financial statements in order for them to be in conformity with generally accepted accounting principles or, if applicable, with another comprehensive basis of accounting; and

N. "Trade name" means a name used to designate a business enterprise.

II.

IT IS FURTHER ORDERED that AICPA, directly, indirectly, or through any person or other device, in connection with its activities in or affecting commerce, as "commerce" is defined in Section 4 of the Federal Trade Commission Act, shall forthwith cease and desist from:

A. Restricting, regulating, impeding, declaring unethical, advising members against, or interfering with any of the following practices by any CPA:

1. The offering or rendering of professional services for, or the receipt of, a contingent fee by a CPA, provided that AICPA may prohibit the engaging to render or rendering by a CPA for a contingent fee: (a) of professional services for, or the receipt of such a fee from, any person for whom the CPA also performs attest services, during the period of the attest services engagement and the period covered by any historical financial statements involved in such attest services; and (b) for the preparation of original or amended tax returns or claims for tax refunds;

2. The offering or rendering of professional services for, or the receipt of, a disclosed commission by a CPA, provided that the engaging to render or rendering of professional services by a CPA for a commission for, or the receipt of a commission from, any person for whom the CPA also performs attest services may be prohibited by the AICPA during the period of the attest services engagement and the period covered by any historical financial statements involved in such attest services;

3. The payment or acceptance of any disclosed referral fee;

4. The solicitation of any potential client by any means, including direct solicitation;

5. Advertising, including, but not limited to:

(a) any self-laudatory or comparative claim;

(b) any testimonial or endorsement; and

(c) any advertisement not considered by AICPA to be professionally dignified or in good taste; and

6. The use of any trade name;

PROVIDED THAT nothing contained in this order shall prohibit AICPA from formulating, adopting, disseminating, and enforcing reasonable ethical guidelines governing the conduct of its members with respect to solicitation, advertising or trade names, including unsubstantiated representations, that AICPA reasonably believes would be false or deceptive within the meaning of Section 5 of the Federal Trade Commission Act;

B. Taking or threatening to take formal or informal disciplinary action, or conducting any investigation or inquiry, applying standards in violation of this order;

C. Adopting or maintaining any rule, regulation, interpretation, ethical ruling, concept, policy or course of conduct that is in violation of this order;

D. Inducing, urging, encouraging, or assisting any association of accountants to engage in any act that would violate this order if done by AICPA provided, however, that nothing in this order shall prohibit AICPA from soliciting action by any federal, state or local governmental entity; and

E. Applying or interpreting any other language contained in the Code of Professional Conduct or its successors in a manner that would violate this order;

PROVIDED THAT this order shall not prohibit AICPA from:

(a) suspending membership in AICPA if:

i. a member's certificate as a CPA or license or permit to practice as such or to practice public accounting is suspended as a disciplinary measure by any governmental entity;

ii. a member's registration as an investment adviser is suspended by the SEC;

iii. a member's registration as a broker-dealer is suspended by the SEC or by any state agency acting pursuant to any applicable state law or regulation relating to the issuance, registration, purchase or sale of securities; or

iv. a member is suspended from practicing before the IRS, but any such suspension by AICPA shall terminate upon reinstatement of any such certificate, license, permit, registration, or authorization to practice; or

(b) terminating membership in AICPA if:

i. a member's certificate as a CPA or license or permit to practice as such or to practice public accounting is revoked, withdrawn or canceled as a disciplinary measure by any governmental entity;

ii. a member's registration as an investment adviser is revoked by the SEC;

iii. a member's registration as a broker-dealer is revoked by the SEC or by any state agency acting pursuant to any applicable state law or regulation relating to the issuance, registration, purchase or sale of securities;

iv. a member is subject to a final judgment of conviction for criminal fraud or for a crime punishable by imprisonment for more than one year; or

v. a member is disbarred from practicing before the IRS.

III.

IT IS FURTHER ORDERED that AICPA shall:

A. Distribute a copy of this order and an announcement in the form shown above, within thirty (30) days after this order becomes final, to all personnel, agents, or representatives of AICPA having responsibilities with respect to the subject matter of this order and secure from each such person a signed statement acknowledging receipt of this order and said announcement;

B. Distribute by mail a copy of this order and an announcement in the form shown above, within thirty (30) days after this order becomes final, to each of its members and to each state society of certified public accountants;

C. Publish this order and an announcement in the form shown above, within sixty (60) days after this order becomes final, in an issue of the Journal of Accountancy, AICPA's monthly journal, or in any successor publication, in the same type size normally used for articles which are published in the Journal of Accountancy or in any successor publication;

D. Within ninety (90) days after this order becomes final, publish and distribute to all members of AICPA and to all personnel, agents, or representatives of AICPA having responsibilities with respect to the subject matter of this order revised versions of AICPA's Code of Professional Conduct, Bylaws, concepts of professional ethics, interpretations, ethical rulings, or other policy statements or guidelines of AICPA which (1) delete any material that is inconsistent with Part II of this order and (2) otherwise comply with this order;

E. File with the Federal Trade Commission within sixty (60) days after this order becomes final, one (1) year after this order becomes final, and at such other times as the Federal Trade Commission may by written notice to AICPA request, a report in writing setting forth in detail the manner and form in which it has complied and is complying with this order;

F. For a period of five (5) years after this order becomes final, maintain and make available to the Federal Trade Commission staff for inspection and copying, upon reasonable notice, records adequate to describe in detail any action taken in connection with any activity covered by Parts II and III of this order, including any written communications and any summaries of oral communications, and any disciplinary action; and

G. Notify the Federal Trade Commission at least thirty (30) days prior to any proposed changes in AICPA, such as dissolution or reorganization resulting in the emergence of a successor corporation or association, or any other change in the corporation or association which may affect compliance obligations arising out of this order.

By the Commission. Commissioners Azcuenaga and Owen dissented.

Donald S. Clark Secretary

Issued: July 26, 1990