All about money; Commission, contingent, referral fees: know the rules.

• Author: Allen, Bruce C.
• Position: Governmentrelations

CalCPA members sometimes inquire about the legality of specific fee arrangements. Are commissions legal in California? What about contingent fees? The answer to those two questions is a qualified yes.

Commissions and contingent fees are acceptable--in specific circumstances--but referral fees are not acceptable unless the CPA is paying a fee for obtaining clients in conjunction with the purchase of an accounting practice.

What the Regs Say

Know the law and be careful about compensation arrangements. Sec. 5061 of the Business and Professions Code allows CPAs to accept commissions as compensation for services in specific circumstances as long as disclosure requirements are met.

Under the law, a CPA or public accountancy firm is not allowed to collect a commission for the sale of goods or services to a client, or in some instances to the officers and directors of the client, if the firm also performs an audit, a review of a financial statement, a compilation to be used by a third party where the lack of independence is not disclosed or an examination of prospective financial information.

Disclosure requirements are contained in Accountancy Regulation 56.

Full Disclosure

Other restrictions and conditions are included in CBA regulations 56.1-56.4. Basically, a CPA or a CPA firm that may receive a fee or commission must notify clients on firm letterhead prior to or at the time a recommendation of products or services is made that a fee or commission will be paid for the services and that the fee or commission may not be accepted solely for the referral of the client to the third party.

The disclosure must describe the products or services being recommended and identify the third party expected to provide the product and the business relationship with the CPA or CPA firm. A description of the fee or commission that may be received, including the dollar amount of the commission or fee, or the basis on which the payment will be computed, also must be included.

The disclosure is to be signed by the licensee and signed and dated by the client. The disclosure must be clear and conspicuous (in at least 12-point type) and must be retained by the licensee for a minimum of five years. The client also must receive a copy.

Where the products or services cannot be identified at the time of the initial disclosure, the information must be included in a supplemental disclosure within 30 days of receipt of the fee or commission.

To qualify as a commission rather...