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The FTC's restraints on the ethical practices of accountants.

The FTC's Restraints on the Ethical Practices of Accountants

It has been 10 months since the Federal Trade Commission (FTC) finalized the order in its complaint against the American Institute of Certified Public Accountants (AICPA) regarding restraints on the professional practices of CPAs. The FTC complaint charged that AICPA's code of ethics illegally restrained competition and deprived consumers of information about "the availability, price and quality of CPA services" in four respects: 1. It prevented members from

accepting work on a contingent fee

or commission basis for those

entities for whom the members

were not performing audit,

reviews and compilations. 2. It restricted the use of truthful,

nondescriptive advertising, such

as truthful claims in

comparative ads. 3. It restricted members'

solicitation of clients and the use of

referral fees. 4. It banned the use of nondeceptive

trade names, including ones that

indicate locations or types of

services available, such as

"Suburban Computer Service."

Following the FTC's final order, the NSPA Board of Governors approved revisions to its Code of Ethics and Rules of Professional Conduct to conform to the FTC's requirements. Much has already been written on the ethical restrictions on contingent fees (NSPA Code of Ethics, Article II) and on the ethical restrictions on acceptance of a commission (NSPA Code of Ethics, Article IX). For the convenience of the reader, revised Articles II and IX are reprinted here:


shall not offer or render a professional service for a contingent fee during any period where the professional service consists of an audit engagement, a review engagement or a compilation engagement, including the period of time covered by any historical financial statements involved while performing an audit, a review or a compilation engagement; further, a member shall not offer to accept or accept a contingent fee for the preparation of original or amended tax returns or claims for tax refunds.


shall not accept a commission from any person or client for whom the member offers or renders concurrently a professional service, where the professional service consists of an audit engagement or a review engagement (including the period of time covered by any historical financial statements involved while performing an audit or review engagement), nor accept a commission where the member performs a compilation of a financial statement when the member expects or reasonably might expect that a third party will use the financial statement and the member's compilation report or transmittal does not disclose a lack of independence.

So much for the permissible ethical rules on contingent fees and commissions. What about the other changes that were provided for in the FTC order?

According to the FTC order, an accounting society may not restrain its members from the use of truthful, nondeceptive advertising, solicitation or trade names. Pursuant to the order, an accounting society may not prohibit its members from advertising by using self-laudatory or competitive claims and testimonials or endorsements. Note that the member's advertisements must not be deceptive. The NSPA Code of Ethics continues to provide that a member of the Society shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading or deceptive. NSPA members are prohibited from making a representation that would be likely to cause a reasonable person to misunderstand or be deceived. Such representations are clearly deceptive and NSPA will not hesitate to initiate an ethical grievance against an offending member.

Pursuant to the FTC order an accounting society may not prohibit its members from making a direct solicitation of a potential client, so long as the member can substantiate his/her claims. Thus, an in-person uninvited solicitation of clients or non-clients may not be prohibited by an accounting society.

Similarly, the FTC order may be interpreted to provide that an accounting society may not prohibit member's advertisement from containing endorsements from clients, advertising specialization of services or using radio or television as an advertising media.

Under the FTC order an accounting society may not prohibit its members from the use of any trade name. However, a trade name, or a firm name, that misleads the public regarding the legal business form of the member is still prohibited. Thus, NSPA's Code of Ethics, Article XI, prohibits a member who is engaged in the practice of accounting as a sole proprietor from using a plural term in the name of the firm such as "and company" or "and associates." Those terms indicate a business form other than individual ownership. Hence, the use of such terms by a sole proprietor misleads the public with regard to the type of entity under which the member conducts his practice. Accordingly, NSPA members are prohibited from practicing under a firm name which is misleading as to the legal form of the entity.

Trade names that are fictitious but not misleading are permissible under the NSPA Rules of Professional Conduct, Interpretation of Rule XI. NSPA members who conduct their practice under a fictitious name should be certain to comply with state (or local) laws regarding the use of fictitious trade names. A further precaution to NSPA members who are licensed as CPAs or PAs is that the state accountancy law may prohibit the licensed accountant from using the trade name on opinions or attested statements.

Licensed accountants are regulated by state boards of accountancy as well as by their professional societies. The state board of accountancy, as an arm of the state government, may promulgate regulations that establish a system of ethical restraints that differ from those imposed by the FTC on the voluntary accounting society. In certain cases, the restraints issued by the board may pre-empt the FTC's order. In other cases, the effort by a board to pre-empt the FTC order may be meaningless. It all depends on the applicability of the doctrine of Parker v. Brown (317 U.S. 341) proclaimed by the U.S. Supreme Court in 1943.

Parker v. Brown was the case that created the so-called "state action immunity doctrine" whereby the action by a state government was exempted from the Sherman Antitrust Act under which the FTC gets its authority to litigate professional organizations whose code or rules are alleged to restrict competition. However, there are some instances where the board's regulations do not come within the purview of this doctrine because the board's action is not state action, despite the fact that the board is an administrative agency of the state. There are other instances where a board's regulations must be reviewed or approved by a legislative committee, and in those instances the state action immunity doctrine may very likely apply since the state action resulting in the regulation is legislative as well as administrative.

While the August 1990 FTC order permits accountants to practice with fewer ethical restraints by their professional society than was formerly the case, the licensed accountant should always remember that the final (but perhaps not conclusive) word on professional practices is that of the state board of accountancy.
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Article Details
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Title Annotation:Washington Comment; Federal Trade Commission
Author:Sager, William C.
Publication:The National Public Accountant
Article Type:column
Date:Jun 1, 1991
Previous Article:Time value of money.
Next Article:NSPA testimony on tax aspects of the budget.

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