On May 21, 2004, U.S. Securities and Exchange Commission (SEC) Chief Accountant Donald T. Nicolaisen issued a letter clarifying the SEC's position that the receipt by an accounting firm of a contingent fee from an audit client impairs the auditor's independence with respect to that client. Accordingly, the SEC concluded that the use of contingent fees in tax matters for audit clients is prohibited.
In the past, accounting firms had relied on the language in American Institute of Certified Public Accountants (AICPA) Ethics Interpretation 302-1, which provided an exception to the prohibition of contingent fees in tax matters where the fee was determined based upon the results of judicial proceedings or the findings of governmental agencies. The AICPA had determined that this exception applied if it could be demonstrated that there was a reasonable expectation, at the time of the fee arrangement, that the matter would receive substantive consideration by a governmental agency.
Mr. Nicolaisen's letter was in response to a previous letter sent to Douglas Carmichael at the Public Company Accounting Oversight Board, from Bruce Webb, Chairman of the Professional Ethics Executive Committee for the AICPA and concluded that the SEC disagreed with the AICPA interpretation. Mr. Nicolaisen stated that "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. Accordingly, such fees impair an auditor's independence."
The SEC position does not impact the use of contingency fees by consulting firms and accounting firms engaged by non-audit clients.