Contingent fee definition
/What is a Contingent Fee?
A contingent fee is a form of compensation that is only paid when a specific objective has been achieved. This is a problem in the accounting profession, because it places the accountant firmly in the camp of the client, since it does not give the accountant the appearance of independence. For example, if a client agrees to pay an auditor a $100,000 fee that is contingent on a clean audit opinion being used to obtain a bank loan, it is entirely likely that the auditor will actively assist the client in the production of a set of overly optimistic financial statements that a more independent auditor would have rejected.
Examples of Contingent Fees
As an example of a contingent fee, this arrangement could pay an accountant $50,000 when the business plan he constructs is used in the successful sale of securities by a client. Or, the arrangement might provide for the payment of half of all savings realized after an accountant conducts an examination of a client’s freight billings.
Contingent Fee Prohibitions for CPAs
Given the independence problem associated with contingent fees, the AICPA Code of Conduct prohibits the performance of any professional services for a contingent fee under the following circumstances:
In the performance of an audit or a review of the financial statements for a client;
In the performance of a compilation of a financial statement for which there is an accountant’s compilation report and the compilation report does not disclose a lack of independence;
In the performance of an examination of prospective financial information; or
In the preparation of a tax return, the amendment of a tax return, or the preparation of a claim for a tax refund.