SEC Orders Accounting Firms To Disclose Contingency Payments

by Leroy Baker, Tax-News.com, New York

14 June 2004

America’s financial regulator, the Securities and Exchange Commission, is stepping up pressure on the accounting industry to stop charging contingency fees for handling the tax work of the companies they audit.

In a closed door meeting with the seven largest accounting firms last week, SEC Chief Accountant Donald Nicolaisen reportedly ordered that they make full disclosure of such arrangements to the company audit committees responsible for overseeing their work.

In addition, Nicolaisen warned the accounting firms that they may face investigations from the SEC relating to contingency fees, which are paid as a percentage of saved tax.

“Billing arrangements that are contingent are inappropriate and I would expect any such practice to cease,” said the Chief Accountant in a statement, stressing that “auditor independence is critical”

The SEC banned contingency fees in 2000 on the basis that such deals may create “mutual interest” between audit firms and their clients to an extent where investor confidence may be shaken.

The regulator has ruled that contingency fees are only permitted when either allowed by a court or based on the “findings of government agencies.”

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