Question

Henry Owens, CPA works in a local accounting firm. He is the tax manager on a major client in the office. The firm prepares compiled financial statements for the client on a quarterly basis. The client was impacted by the BP oil spill off the Gulf coast, and the client would like to engage Henry to help the business prepare a claim for damages from BP. The client would like to pay Henry on a contingent fee basis where Henry and his firm would receive 15% of any amounts recovered in a settlement with BP. Henry would receive no fee unless amounts are recovered. Can Henry accept this engagement? Why or why not?

Answer 1

According to the Section 1.510 of the AICPA’s revised Code of Professional Conduct, CPAs in practice are not allowed to provide any professional services for a contingent fee when the member or the member’s firm either:

• performs an audit or review of a financial statement for the client or
• performs 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 or
• performs an examination of prospective financial information

In the given case client would like to pay Henry on a contingent fee basis. The firm in which Henry is employed prepares compiled financial statements for the client on a quarterly basis. SInce they are involved in activity of compilation of the financial statements, no engagements can be accepted from that client which pays the professional fees on contingent basis. Accepting the engagement would result in professional misconduct.