The New Jersey State Board of Accountancy's rules governing commissions and contingent fees present both challenges and opportunities to the CPA profession.
The challenges presented by the rules allowing for the collection of commissions and contingent fees can be classified as external and internal. External challenges require interacting with third parties outside the CPA firm and client organizations, while internal challenges involve only the firm and its clients.
As to external challenges, some services that may result in commissions or contingent fees may require that a CPA obtain additional licenses. For example, advising clients about suitable investments may require that a CPA register as an investment advisor with the Securities and Exchange Commission or the New Jersey Bureau of Securities. Negotiating the purchase or sale of a business that includes real estate, on the other hand, may require that a CPA obtain a real estate broker's license. Some securities services may require that new separate legal entities be created. If a firm's services extend beyond standard accounting and tax services, its malpractice insurance policy also may have to be amended.
Under the rules, CPAs also are required to obtain a signed notification acknowledging disclosure of receipt of a commission, performance fee or referral fee from each entity to which they refer a client, each time they make a referral. Similarly, a firm's referral arrangements with financial institutions should be negotiated and memorialized in writing.
Internal challenges can be just as extensive and complex. An immediate concern will be to avoid or terminate disqualifying services for clients from whom commissions or contingent fees will be accepted. If a CPA currently performs an audit, review, or compilation of a client's financial statements and wants to charge commissions or contingent fees to that client, then the audit, review, and compilation services will have to be discontinued for that client.
If the services resulting in commissions and contingent fees are expected to be a significant part of the firm's practice, the firm may need to strategically redirect its recruiting and marketing efforts. For example, the firm may now need people with management consulting, negotiating and marketing skills, along with investment advisors and insurance specialists.
Depending on the extent of the changes to be undertaken by a firm, it also may be appropriate to consult with legal counsel, insurance agents, securities regulators or other officials before accepting commissions and contingent fees.
Definitions and Clarifications
The New Jersey State Board of Accountancy's regulations on commissions and contingent fees allow CPAs to collect such fees in certain circumstances, and prohibit them from accepting such payments in other situations.
Types of services for which a CPA might charge commissions or contingent fees are for investment referrals, sales of business and property, settlements of health care and tax claims, and referrals for mortgage loans and debt and equity financing.
A "contingent fee" is defined as 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." A contingent fee arrangement need not be "all or nothing" - it need only be limited to the result of the service. For example, if a CPA negotiates the terms of a lease for a client, and the fee is to be $1,000 if the rent is $5-$6 per square foot, or $2,000 if the rent is less than $5 per square foot-that is a contingent fee.
Please note that the regulations prohibit a contingent fee for preparing an original or amended tax return or claim for a tax refund for any client. The regulations also add that a fee is not "contingent," if it is "fixed by a court or other public authority" or is based on "the results of a judicial proceeding." For example, if a CPA performs services for a client in a bankruptcy proceeding and the judge awards a fee to the CPA, it is not a "contingent fee." The distinction is important, since CPAs in these situations would not be prohibited from performing an audit, review, or compilation for that client, as would be the case if they were accepting a commission or contingent fee.
The State Board's regulations do not specifically address the issue of how to define a client. The AICPA Ethics Division, however, has stated that "the client" should be interpreted to mean either an individual or, in the case of a business, the entity, and not the owners. If that definition is accepted by the State Board, a CPA would be allowed to perform an audit, or other disqualifying service, for a business and also charge commissions and contingent fees to the owners for services rendered to them personally.
The regulations do not define a "commission," but do define a "performance fee" as "compensation... on the basis of a share of the capital gains upon, or the capital appreciation of, the funds or any portion of the funds of a client." Apparently, if a CPA negotiated a fee as "X" percent of investments under management, that would be a performance fee. Under the State Board rules, receipt of a performance fee would be prohibited if the CPA performs an audit, review, compilation, or examination of prospective financial information for the client.
The Impact on the CPA
Regulations N.J.A.C. 13:29-3.8 and 3.12 provide CPAs with tremendous opportunities but, at the same time, open up new areas of liability. Below are some key issues that the CPA needs to consider:
- Objectivity — Until now, our clients have turned to us for independent evaluation of products offered by investment advisors, stockbrokers, and insurance agents. Will we be viewed differently if we receive compensation from the sale of products?
- Disclosure — The new rules provide that written disclosure be communicated to the non-attest client indicating how the CPA will be compensated. We must consider the effect these new fees will have on our existing compensation structure and the relationships we have so carefully cultivated with our clients.
- Education and Training — Specialized additional training is needed to provide comprehensive financial planning. The PFS or ChFC designations indicate to our clients that we have training in financial planning.
- Licenses — The CPA will need to be licensed with the National Association of Securities Dealers and registered with a broker/dealer to sell securities. To charge an investment management fee, the CPA will need to be a registered investment advisor. To sell insurance products, the CPA will have to be licensed by the state. These licenses require training and continuing education.
- Due Diligence/Compliance — As CPAs, we have two basic alternatives to enter the PFP field, either a) provide all services in-house or b) develop an alliance with financial institutions/professionals. An in-house financial planning operation will require significant capital and time commitments. Forming an alliance is the easiest way to enter the PFP field. Whichever alternative is selected, due diligence and compliance with the laws will be critical to your survival in the PFP field.
- Time Constraints — A venture into the PFP marketplace requires a time commitment to learn products, laws and most significantly, the time devoted to the client in developing and implementing a financial plan. We all need to assess whether we can make that commitment and, at the same time, maintain our accounting practices.
The following questions and answers are based on our understanding of the State Board rules as published on November 16, 1998, and have been prepared to help our members respond to the rules. They have not been reviewed or approved by the State Board of Accountancy, and the Board will not be bound by them. NJCPA members who want their questions about the rules answered by the State Board should address those questions, in writing, to the State Board at P.O. Box 45000, Newark, NJ 07101.