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The ban on commissions and fees ... revisited.

It's been several years since we last wrote about the settlement between the American Institute of Certified Public Accountants (AICPA) and the Federal Trade Commission (FTC). To refresh your memory, the settlement stipulation between AICPA and FTC was finalized in August, 1989. For settlement purposes with FTC, AICPA agreed to cease and desist from actions and practices the FTC alleged to be anticompetitive. AICPA agreed to change its ethical rules on commissions and contingent fees to conform to the settlement stipulation.

In May, 1991, AICPA initiated changes in its Code of Ethics whereby its members were permitted to accept commissions and contingent fees but not in those instances where the member performs an audit, review or compilation engagement for the client, including the period of time covered by any historical financial statements involved while performing an audit, review or compilation engagement. In addition, members were prohibited from accepting contingent fees for the preparation of an original or amended tax return or a claim for a tax refund.

So far so good. The AICPA member can now ethically accept commissions and contingent fees on a wide variety of engagements for the client, but not when an audit, review or compilation service is performed.

Prior to the finalized AICPA/FTC agreement of August, 1989, five states permitted licensees of the state accountancy board to accept commissions. Those states were Texas, Oklahoma, South Dakota, Maryland and West Virginia. On the other hand, a number of states since 1989 have amended their accountancy laws to specifically prohibit a CPA or an LPA from accepting a commission under any circumstances.

As we have repeated on other occasions, it is one thing for the FTC to take on the AICPA, which is a voluntary membership professional association. It's another matter for the FTC to challenge a state accountancy board, whose regulations are approved by a legislative committee, thus invoking the state-action immunity doctrine whereby the FTC's antitrust enforcement powers become ineffective against the state agency.

Whether the state action immunity doctrine (first enunciated in the 1943 U.S. Supreme Court in the case of Parker v. Brown, 317 U.S. 341), applies to an accountancy board's regulations depends mostly on the extent of the state legislature's involvement. Parker v. Brown was the case that created the so-called state action immunity doctrine whereby the action by a state government was declared exempted from the Sherman Antitrust Act under which the FTC receives its authority to litigate professional organizations and societies whose code or rules are alleged to restrict competition.

There are numerous instances, however, where the board's regulations do not come within the purview of the state action immunity 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 such cases the state action immunity doctrine may very likely apply since the resulting state action is legislative as well as administrative.

As mentioned previously, a number of states have amended their accountancy laws since the AICPA/FTC settlement stipulation of August 1989 to specifically prohibit commissions (as contrasted with the five states that specifically permit the licensee to accept commissions). Since these prohibitions were the result of actions of the state legislature, the state action immunity doctrine would almost certainly apply and the FTC would probably not be successful in litigating with the particular state.

But, surprise! Who would you suspect is behind the movement to persuade the state legislatures to amend the accountancy law to prohibit commissions in any situation? If you guessed AICPA or the state CPA society, you go to the head of the class! The AICPA Council voted to assist state CPA societies seeking legislation to prohibit the acceptance or payment of all commissions by any CPA engaged in the practice of public accounting. Thus, the state CPA societies (encouraged by AICPA) are leading the fight to either preserve or strengthen state laws or state boards of accountancy rules prohibiting the acceptance or payment of commissions. As mentioned previously, when the state legislature acts, that action very likely comes within the scope of the state action immunity doctrine and is not subject to FTC challenge. Thus, what AICPA can not do directly, because of its settlement stipulation with the FTC, is being accomplished by the state CPA societies.

At this point it may be well to repeat the revisions NSPA made to its Code of Ethics and Rules of Professional Conduct in order to conform to the FTC's requirements. For the convenience of the reader, NSPA's Code of Ethics, Articles II and IX adopted January 1, 1991, provides as follows:

Article II

MEMBERS OF THIS SOCIETY 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.

Article IX

MEMBERS OF THIS SOCIETY 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.

Licensed accountants (CPAs, LPAs and RPAs) 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 issue regulations pursuant to statute that establish a system of ethical restraints that differ from those imposed by the FTC on the voluntary accounting society. When the board acts pursuant to a state law imposing the restraints, then the prohibitions imposed on the voluntary professional society by the FTC are pre-empted. Licensed accountants 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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Title Annotation:Washington Comment
Author:Sager, William H.
Publication:The National Public Accountant
Date:Feb 1, 1993
Words:1086
Previous Article:Social Security changes noted for 1993.
Next Article:The investment tax credit: a new - but not-so-new - idea.


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