us-ftc-advocacy-filings-46ae592e488876cd69fabdee0d4f405b•FTC Staff Comment to the Hon. Jim Hill Concerning Oregon H.B. 2785 to Propose Certain Restrictions on Competition Among Accountants
FTC Staff Comment to the Hon. Jim Hill Concerning Oregon H.B. 2785 to Propose Certain Restrictions on Competition Among Accountants
us-ftc-advocacy-filings-46ae592e488876cd69fabdee0d4f405bFTC Staff Comment to the Hon. Jim Hill Concerning Oregon H.B. 2785 to Propose Certain Restrictions on Competition Among AccountantsAdvocacy Filing
j , ,, UNI1 :.V 51 ATES OF AMERICA FEDERAL TRADE COMMISS: JON WASHINGTON, D.C. 20580 BUREAU O~ COMPETITION Senator Jim Hill Oregon Senate Chair, Committee on Business, Housing and Finance 453-0 State Capitol Salem, Oregon 97310 Dear Sen. Hill: \'890073 COMMISSION AUTHORIZED May 19, 1989 We are pleased to respond to your request for our views on Oregon House Bill No. 2785, presently before the Oregon Senate; which proposes certain restrictions on competition among accountants. 1 This bill would prohibit accountants' use of referral fees and commissions. We believe that H.B. No. 2785 would reduce competition among accountants and restrict the dissemination to consumers of information about accounting services, thereby adversely affecting consumers' ability to obtain accounting services on terms they want. Interest and Experience of the Federal Trade Commission The Commission has recently considered the validity under the federal antitrust laws of restrictions, similar to those proposed in H.B. No. 2785, that had been imposed by a private group of accountants on its members. On March 28, 1989, the Commission announced that it had accepted for public comment, Commissioner Azcuenaga dissenting, a consent agreement in which the American Institute of Certified Public Accountants agreed not to impose similar restrictions on its members. Since the early 1970's, the Federal Trade Commission staff has been studying the effects of restrictions on the business practices of licensed professionals, including accountants, lawyers, physicians and others. Our goal has been to identify restrictions that harm consumers by reducing competition without producing any countervailing benefits, such as higher quality services or enhanced consumer choice among service options. In general, we have concluded that certain kinds of restrictions on 1 • These comments represent the views of the staff of the Federal Trade Commission's Bureau of Competition, and not necessarily those of the Commission itself or any individual Commissioner.
Senator Jim Hill Page 2 the ways in which professionals can market their services and set their prices are likely to lead to higher prices without offering any offsetting benefits to consumers. 2 We believe this is true of accountants, also. The PrQposed Legislation H.B. No. 2785 appears intended to eliminate any potential for conflicts of interest arising from accountants' financial arrangements with third parties that may affect their clients, or with their clients that may affect third parties. The avoidance of conflicts of interest is particularly important in the accounting profession because of the role accountants play in promoting the reliability of financial reporting. But restricting the dissemination of information about accounting services, and denying consumers pricing terms and service options that they want, may limit consumer choice more severely than is reasonably necessary to address potential conflicts of interest. There are less restrictive means of assuring the independence of auditors and the availability of objective financial advisors. Several state boards of accountancy and the American Institute of Certified Public Accountants have abandoned their prohibitions of referral fees and commissions. 3 Some have replaced them with the less restrictive alternatives of (1) requiring that referral fees and commissions be disclosed, and (2) limiting accountants' use of commissions to services for 2 Numerous reports and articles have addressed the effects that various restrictions on professionals have on market performance. See, e.g., Calvani, Langenfeld, and Shuford, Attorney Advertising and Competition at the Bar, 41 Vande L. Rev. 761 (1988): Jacobs et al., Improving Consumer Access to Legal Services: The Case for Removing Restrictions on Truthful Advertising, Cleveland Regional Office and Bureau of Economics, Federal Trade Commission (1984): Bond, Kwoka, Phelon, and Whitten, Effects of Restrictions on Advertising and Commercial Practice on the Professional: The Case of Optometry, Bureau of Economics, Federal Trade Commission (1980): Muris & McChesney, Advertising and the Price and Ouality of Legal Services: The Case for Legal Clinics, 1979 Am. B. Found. Research J. 179 (1979); McChesney & Muris , The Effects of Advertising on the Ouality of Legal Services, 65 A.B.A. J. 1503 (1979): Cady, Restricted Advertising and Competition: The Case of Retail Drugs (1976); Benham and Benham, Regulation Through the Professions: A Perspective on Information Control, 18 J.L. & Econ. 421 (1975). 3 Indeed, only two states, California and Iowa, have statutory prohibitions on referral fees and commissions.
Page 3 The approved Senator Jim Hill clients for whom they do not provide attest services. 4 National Association of State Boards of Accountancy has a Model Code for adoption by its member s;ate boards of accountancy that takes the same approach. We believe that prohibiting the use of referral fees and commissions by accountants would not be in the public interest. These prohibitions would be more restrictive of competition than is reasonably necessary to protect consumers against conflicts of interest. We believe that the less restrictive alternative of requiring that referral fees and commissions be disclosed is a preferable means of ensuring that consumers have sufficient information to protect themselves against conflicts of interest. Also, limiting the use of commissions to nonattest clients is a less restrictive, and therefore preferable, means of ensuring that accountants remain independent when they provide attest services. Referral Fees H.B. No. 2785 would prohibit accountants from paying "a commission to obtain a client." This provision would prevent accountants from using a potentially effective means of making consumers aware of their services. Some accountants, for example, would like to pay referral fees to marketing firms to disseminate information about their services. Other accountants would like to pay referral fees in the form of discounts to clients for referring new clients. We believe that referral fees, like expenditures for advertising, are likely to increase competition among accountants by increasing the dissemination of information about accounting services to consumers. By making more information about accountants available to consumers, referral fees may reduce consumers' costs of searching for accountants whose services are 4 By "attest services," we mean an accountant's report that states or implies some degree of assurance as to the reliability of any financial statement; such services include audits, reviews and some compilations. "Nonattest services" refers to all other services offered by accountants, including tax, management advisory, reimbursement, and financial planning services. 5 Although many state accountancy boards still restrict accountants' use of referral fees and commissions, these restrictions are subject to scrutiny under the antitrust laws unless the state legislature has clearly articulated and affirmatively expressed the intent to supplant competition of this nature.
Senator Jim Hill Page 4 appropriate to their particular needs. This in turn places competitive pressure on accountants to provide the services consumers want at prices they are willing to pay. Banning referral fees, therefore, may lead to increased prices and reduced quality of accounting services, with reduced satisfaction of consumer needs and preferences. Proponents of a ban on referral fees argue that accountants who pay them will have to increase their fees in order to pass on the cost of referral fees. We do not believe this is a valid concern. First, referral fees, like any marketing expenditure, are intended to build a larger client base and thus to reduce the cost of serving each client. To the extent that the cost per client can be reduced, accounting fees are likely to decline rather than to increase. Second, prohibiting the payment of referral fees is likely to cause accountants to use other, less efficient means of promoting their practices. To the extent that this happens, the cost of serving each client will be higher than it would with more efficient marketing methods, and accountants will therefore be likely to charge higher fees. Finally, if accountants refer clients to other accountants with greater expertise in the services desired, the time necessary to provide such services may be reduced, and accordingly the total fees may be lower. Supporters of a ban on referral fees also assert that such arrangements may deceive consumers. That is, the payment of a referral fee may provide the incentive for an inappropriate referral, not to the most appropriate accountant, but rather to the accountant who pays (or pays the highest) referral fees. The fact that a referral fee is paid may therefore be material to a consumer's assessment of the appropriateness of a referral, and withholding this material fact may amount to deception. A ban on referral fees, however, is more restrictive of competition than is reasonably necessary to prevent any deception that might otherwise occur. The less restrictive alternative of requiring disclosure of referral fee arrangements to consumers would enable them to make informed choices. If for any reason a consumer preferred to deal with an accountant who does not pay referral fees, disclosure would preserve that option. Accounting regulators increasingly appear to favor this approach. State accountancy boards in Maryland, Oklahoma, Texas, and West Virginia, and the American Institute of Certified Public Accountants permit disclosed referral fees, and the National Association of State Boards of Accountancy has approved a Model Code permitting disclosed referral fees for adoption by its
Senator Jim Hill Page 5 member state boards of accountancy.6 We therefore believe that a ban on referral fees, as proposed in H.B. No. 2785, would be likely to result in a smaller net benefit for consumers than would permitting accountants to use referral fees, subject to an appropriate disclo~ure requirement. Ca.missions H.B. No. 2785 would prohibit accountants from receiving "a commission for a referral to a client of products or services of others. M This restriction would prevent an accountant and his client from agreeing that the accountant's only compensation for preparing a financial plan will be the commissions received if the client decides to purchase any recommended investments. It would also prevent an accountant and client from agreeing that the accountant's only compensation for recommending necessary computer equipment and software comprising a financial reporting system will be the commissions paid on the sale of the computer products. A ban on commissions would inhibit competition among accountants. Since tax services constitute a substantial portion of the business of many accounting firms, activities aimed at securing tax business are an important means of competition among accountants. And because financial planning services may sometimes be supplied most efficiently if they are provided together with tax services, accountants can compete to obtain tax business by offering to provide financial planning services at little extra cost. However, under the bill's restriction on commissions, this might not be economically feasible. We have learned in the course of our investigation leading to the AICPA consent order that some consumers want to be able to obtain commission-based financial planning services. In states where accountants are permitted to accept commissions, some accountants have attracted new tax clients from other accountants by offering commission-based financial planning, and they now provide all of their new clients' financial planning, tax, and other accounting services. Other accountants believe that if they did not provide commission-based financial planning services, many of their existing clients would take their tax and other business to another accountant who would do so. As the use of commission-based financial planning increases, accountants who provide financial planning services on a fee basis may be forced 6 National Association of State Boards of Accountancy, Model Code of Professional Conduct, Rule 104 (April 1989). The state accountancy boards in Maryland and West Virginia do not have any restrictions on referral fees.