SEC Accountant Strips Auditors of Tax Fees

Auditors can no longer use a loophole to claim contingency fees for their clients' tax savings.
Stephen TaubMay 25, 2004

The Securities and Exchange Commission’s top accountant issued an auditor-independence rules clarification that conflicts with the way accounting firms use the rules to justify charging audit clients contingent fees for tax advice, according to The Wall Street Journal.

The newspaper reported that in a letter fired off on Friday, SEC Chief Accountant Donald Nicolaisen rejected the firms’ interpretation. The timing is bad for the accounting firms, whose tax-shelter practices are being investigated by the Internal Revenue Service and the U.S. Attorney’s Office.

Here’s the crux of the dispute: Under contingent-fee deals, accounting firms charge clients a percentage of the amount of money they save as a result of the auditors’ advice. This can work out to millions of dollars for large corporations.

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To be sure, this arrangement is allowed for non-audit clients. But the SEC does not permit such arrangements between accounting firms and audit clients because they create mutual financial interests, the Journal explained.

There is, however, one exception concerning situations in which courts or government agencies reportedly determine the fees, the newspaper adds. And a number of accounting firms are trying to use this exception as a lucrative loophole.

The paper provided this example to explain the accounting firms’ argument: Say a fee is set at 30 percent of a client’s tax savings. That might look like a contingent fee. However, the act of submitting a tax return creates an expectation that the client might undergo a government audit, which could lead to a higher tax bill. As a result, the audit firm’s fee isn’t a contingent fee because it is the government that ultimately determines how big it will be.