FTC Staff Comment Before the National Association of State Boards of Accountancy Concerning Proposed Rules on Contingent Fees, Commissions, Forecasts, Advertising, Solicitation, and Firm Names

UNITED STATES Of AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D,C 	20$80
June 	12,1987
William H. 	Van 	Rensselaer
Executive 	Director
National 	Association 	of 	State
Boards 	of Accountancy
545 	Fifth 	Avenue
New 	York, 	N.Y. 	10017-3698
Dear Mr. 	Van 	Rensselaer:
We 	are 	pleased 	to 	respond 	to 	your 	request 	for 	comments 	on 	the
May 	1987 	Exposure 	Draft 	of 	the Model 	Code 	of 	Professional
Conduct. 1 	In'this 	letter, 	we 	focus 	on 	the 	proposed 	rules
regarding .contingent 	fees, 	commissions, 	forecasts, 	advertising,
solicitation, 	and 	firm 	names.
We 	support 	the 	proposals 	in 	the 	Exposure 	Draft 	to 	eliminate
some 	of 	the 	restrictive 	aspects 	of the 	current 	rules. 	The
p~oposed changes 	would 	permit 	increased 	competition 	and 	would
benefit 	consumers 	by 	permitting 	accountants 	to 	provide 	services
that 	consumers 	want. 	We 	suggest, 	however, 	that 	some 	provisions 	in
the 	proposed 	rules 	may 	harm 	consumers 	by 	restraining 	price
competition 	among 	accountants 	and 	unnecessarily 	limiting 	the
dissemination 	of 	truthful 	information 	about 	accounting 	services.
As 	discussed 	in 	more 	detail 	below, 	we 	urge 	the 	National
Association 	of 	State 	Boards 	of Accountancy 	(NASBA) 	to 	amend 	its
proposed 	new Model 	Code 	so 	that 	accountants 	would 	be 	able 	to
(1) 	receive 	contingent 	fees 	and 	commissions 	when 	providing
nonattest 	services 	to 	attest 	clients; 	(2) 	vouch 	for 	the 	achiev-
ability 	of 	forecasts; 	and 	(3) 	use 	truthful, 	nondeceptive
advertising 	and 	solicitation. 	Adoption 	by 	NASBA's 	constituent
state 	boards 	of 	the 	new 	Code, 	including 	bur 	suggested 	amendments,
would 	permit 	accountants 	to 	provide more 	of 	the 	services 	that
consumers 	want 	without 	compromising 	the 	independence 	of
accountants 	who 	provide 	attest 	services.
1 	These 	comments 	represent 	the 	views 	of 	the 	Federal 	Trade
CC~missicn's Bureaus 	of 	Competition, 	Consumer 	Protection, 	and
Econc~ics and 	not 	necessarily 	those 	of 	the 	Commission 	itself. 	The
Cc~~ission has, 	however, 	voted 	to 	authorize 	us 	to 	submit 	these
comments 	for 	your 	consideration.

.,
Van 	Rensselaer 	-- 	2
Interest 	and 	Experience 	of the 	Federal 	Trade 	Commission
For more 	than 	a 	decade, 	the 	Commission 	staff has 	investigated
the 	effects 	of 	restrictions 	on 	the 	business 	practices 	of 	state-
licensed 	professionals, 	including 	accountants, 	dentists, 	lawyers,
physicians, 	nonphysician 	health 	care 	providers, 	and 	others. 	Our
goal 	has 	been 	to 	identify 	and 	recommend 	the 	removal 	of 	restric-
tions 	that 	prevent 	professionals 	from 	providing 	services 	that
consumers want 	if 	those 	restrictions 	do 	not 	provide 	countervailing
benefits. 	We 	believe 	that 	some 	of 	the 	rules 	in 	the 	current Model
Code 	-- 	and 	to 	a 	lesser 	extent, 	some 	of 	the 	proposals 	in 	the 	May
1987 	Exposure 	Draft 	-- 	will 	result 	in 	such 	adverse 	effects.
Contingent 	Fees 	and 	Commissions 	Received
Rules 	103 	and 	104 	in 	NASBA's 	current 	Model 	Code 2 	prohibit 	the
receipt 	of 	virtually 	all 	contingent 	fees 	and 	commissions 	for
attest 	and 	nonattest 	services. 3 	Thus, 	a 	consumer's 	choice 	of 	the
method 	o~ payment 	for 	accounting 	services 	is 	limited 	to 	hourly 	or
fixed 	fees. 	Consumers 	are 	prevente~~y these 	rules, 	for 	example,
from 	agreeing 	with 	an 	accountant 	that 	his 	fee 	for 	preparing 	a 	tax
return 	will 	be 	a 	percentage 	of 	the 	refund, 	if 	any, 	or 	that 	the
only 	fee 	for 	preparing 	a 	financial 	plan 	will 	be 	the 	commissions
received 	by 	the 	accountant 	if 	the 	client 	decides 	to 	purchase 	any
of 	the 	recommended 	investments.
For 	reasons 	discussed 	below, 	the 	current 	restrictions 	may
increase 	the 	cost 	to 	consumers, 	decrease 	the 	availability, 	and
eliminate 	an 	incentive 	to 	improve 	the 	quality 	of 	nonattest
accounting 	services. 	The 	restrictions 	on 	the 	use 	of 	contingent
2 	References 	to 	the 	current 	Model 	Code 	rules 	are 	to 	those
appea!ing 	in 	Accountancy 	L. 	Rep. 	(CCH) 	~~ 	1201-47 	(1987).
o 	A ncontingent 	fee" 	is 	defined 	in 	the 	current 	Code 	as 	a 	fee
for 	professional 	services 	that 	is 	contingent 	upon 	the 	findings 	or
results 	of 	such 	services.
A "commission" 	is 	defined 	in 	the 	current 	Code 	to 	include 	a
payment.to 	obtain 	a 	client 	or 	the 	receipt 	of 	a 	payment 	for 	a
referral 	to 	a 	client 	of 	products 	or 	services 	of 	others. 	The
receipt 	of 	such 	payments, 	as 	well 	as 	the 	receipt 	of 	profits 	from
his 	sale 	of 	products, 	is 	termed 	nother 	compensation n 	in 	the
Exposure 	Draft. 	Our 	discussion 	of 	commissions 	also 	applies 	to
such 	profits.
By 	"attest 	services" 	we 	mean 	an 	accountant's 	report 	that
states 	or 	implies 	assurance 	of 	the 	reliability 	of 	any 	financial
statements. 	Such 	services 	include 	audits 	and 	reviews. 	Nonattest
services 	include 	tax, 	management 	advisory, 	reimbursement, 	and
financial 	planning 	services, 	among 	others.

Van 	Rensselaer 	-- 	3
fees 	and 	commissions 	for 	nonattest 	services 	prevent 	consumers 	from
selecting a 	payment method 	under which the 	accountant would 	bear a
portion 	of 	an 	engagement's 	risk, 	in 	the 	sense 	that 	the 	amount 	the
accountant 	received 	would 	depend 	on 	how 	successful 	the 	accountant
is. 	This 	may 	restrict 	the 	ability 	of 	some 	consumers 	to 	obtain
desired 	accounting 	services 	and 	reduce 	the 	incentive 	of
accountants 	to 	provide 	higher 	quality 	services. 	These
restrictions 	may 	also 	raise 	consumers' 	costs 	by, 	for 	example,
eliminating 	the 	option 	of 	one-stop 	shopping 	for 	accounting
services. 	We 	have 	studied 	the 	accounting 	profession 	for 	several
years 4 	and 	have 	seen 	no 	evidence 	that 	these 	restrictions 	on
nonattest 	services 	enhance 	the 	quality 	of 	accounting 	services, 	nor
have 	we 	found 	any 	other 	persuasive 	justification 	for 	them.
Proposed 	Rules 	101(b) (3) 	and 	(4) 	would 	be 	less 	restrictive
than 	the 	current 	rules. 	They 	would 	prohibit 	the 	receipt 	of
contingent 	fees 	and 	commissions 	only with 	respect 	to 	clients 	for
whom 	the 	accountant 	also 	provides 	attest 	services. 	The 	proposed
rules, 	it' adopted, 	appear 	less 	likely 	to 	harm 	consumers 	than 	the
current ~ules, 	but 	continue 	to 	place 	unjustified 	restrictions 	on
accountants' 	ability 	to 	provide 	services 	demanded 	by 	consumers.
Ke 	therefore 	suggest 	that 	NASBA 	eliminate 	all 	restrictions 	on 	the
receipt 	of 	contingent 	fees 	and 	commissions 	for 	nonattest 	services.
As 	suggested 	above, 	contingent 	fees 	may 	benefit 	consumers 	in
a 	variety 	of 	ways. 	For 	example, 	a 	state 	government 	that 	desires
accountant 	assistance 	to 	obtain 	a 	Medicare 	refund 	from 	the 	federal
government 	may 	want 	to 	pay 	an 	accountant 	a 	percentage 	of 	the
recovery 	in 	return 	for 	his 	services. 	If 	the 	accountant 	is 	willing
to 	undertake 	the 	project 	on 	a 	contingent 	fee 	basis, 	this 	informs
the 	state 	that 	the 	accountant 	is 	reasonably 	confident 	the 	project
~il~ result 	in 	a 	significant 	refund. 	This 	arrangement 	also 	shifts
to 	the 	accountant 	a 	portion 	of 	the 	risk 	of 	the 	engagement, 	because
the 	accountant's 	fee 	will 	depend 	on 	the 	amount 	recovered. 	And
because 	the 	accountant 	will 	receive 	a 	payment 	that 	is 	dependent 	on
the 	success 	of 	his 	services, 	~, 	a 	greater 	fee 	if 	the 	claim
results 	in 	a 	larger 	Medicare 	refund, 	he 	has 	an 	incentive 	to
provide 	higher 	quality 	services. 5
4 	Beginning 	in 	the 	late 	19705, 	the 	Commission 	staff
conducted 	a 	number 	of 	nonpublic 	investigations 	of 	private
accounting 	associations 	and 	state 	accounting 	boards 	to 	determine
whether 	any 	of 	them 	have 	violated 	the 	Federal 	Trade 	Commission
Act. 	One 	of 	these 	investigations, 	involving 	restraints 	on
advertising 	and 	solicitation, 	resulted 	in 	a 	consent 	order, 	Rhode
Island 	Board 	of 	Accountancy, 	107 	F.T.C. 	293 	(1986). 	During 	these
investigations, 	the 	staff 	read 	thousands 	of 	documents 	and
i~~ervie~ed more 	than 	one 	hundred 	accountants.
5
e~~ical
hccountants 	would, 	of 	course, 	remain 	subject 	to 	legal 	and
restraints 	on 	engaging 	in 	fraud 	to 	secure 	a 	higher 	refund.

Van 	Rensselaer 	-- 	4
It may 	be most 	efficient 	for 	the 	accounting 	firm 	familiar
with 	a 	client's 	books 	and 	records 	by 	virtue 	of 	providing 	attest
services 	also 	to 	provide 	certain 	nonattest 	services 	to 	the 	same
client. 	But 	the 	benefit 	of 	this 	efficiency 	is 	lost 	if 	the 	client
insists 	that 	the 	nonattest 	services 	be 	provided 	on 	a 	contingent
fee 	basis. 	In 	that 	event, 	the 	current 	ban 	on 	contingent 	fees
would 	force 	the 	client 	to 	use 	less 	preferred 	providers 	who 	are 	not
accountants 	to 	perform 	services 	that 	the 	client's 	auditor 	could
. provide 	more 	efficiently. 	The 	duplication 	of 	effort 	is 	costly, 	as
is 	the 	use 	of 	less 	preferred 	providers, 	and would 	be 	likely 	to
result 	in 	a 	loss 	in 	consumer welfare. 	Eliminating 	the 	ban 	on
contingent 	fees 	should 	lead 	to 	lower 	consumer 	costs, 	higher
quality 	services, 	and 	greater 	availability 	of 	accounting 	services
to 	consumers.
Similar 	consumer 	benefits may 	result 	if 	accountants 	are
allo~ed to 	receive 	commissions, 	for 	example, 	on 	the 	sale 	of
financial 	products 	to 	clients. 	If 	a 	consumer 	desires 	an
accountant's 	assistance 	in 	preparing 	a 	financial 	plan, 	he 	may 	wish
to 	pay 	for 	it 	only 	if 	he 	concludes 	that 	it 	will 	be 	useful. 	If 	the
accountant 	is 	willing 	to 	undertake 	preparation 	of 	a 	plan 	in 	the
expectation 	of 	being 	compensated 	only 	through 	commissions 	on 	the
sale 	of 	investments" 	the 	accountant 	communicates 	the 	belief 	that
the 	plan 	will 	be 	useful 	to 	the 	client. 	He 	also 	shoulders 	the 	riSK
that 	the 	client 	will 	not 	be 	persuaded 	that 	the 	plan 	is 	useful.
Moreov~r, the 	better 	the 	financial 	plan 	(as 	measured 	by 	the
client's 	decision 	to 	implement 	its 	recommendations), 	the 	more
likely 	it 	is 	that 	the 	accountant 	will 	receive 	commissions. 	Thus,
the 	commission 	arrangement 	may 	motivate 	him 	to 	provide 	higher
quality 	services 	as 	well.
'If 	accountants 	can 	receive 	commissions, 	consumers 	may 	have 	an
additional 	benefit: 	the 	option 	of 	one-stop 	shopping 	for 	financial
planning 	services. 	Some 	clients 	may 	prefer 	to 	have 	one 	profes-
siona+ 	prepare 	and 	implement 	a 	financial 	plan 	by 	recommending 	and
purchasing 	investffients, 	rather 	than 	have 	an 	accountant 	prepare 	a
plan 	that 	must 	be 	inplemented 	by 	others, 	such 	as 	stockbrokers. 6
6 	Currently, 	accountants 	engaged 	in 	financial 	planning 	who
are 	restricted 	by 	the 	co~nission rule 	may 	provide 	consumers 	~ith a
financial 	plan 	only 	for 	a 	fixed 	or 	hourly 	fee. 	Such 	plans
generally 	provide 	only 	an 	outline 	of 	the 	steps 	to 	take 	to 	achieve
the 	client's 	goals: 	the 	recommendation 	of 	particular 	investments
is 	left 	to 	others, 	such 	as 	stockbrokers, 	who 	will 	receive
cOllimissions 	on 	the 	client's 	purchases. 	To 	obtain 	a 	broker's
recommendations 	most 	suitable 	to 	the 	plan, 	the 	client 	must
fa~iliarize the 	broker 	with 	the 	details 	of 	the 	client's 	situation
and 	~he plan. 	As 	further 	ass~rance that 	the 	recorr~endations are
appropriate, 	the 	client 	may 	d~cide to 	take 	the 	broker's
reco~?enda~ions back 	to 	the 	accountant 	for 	his 	review 	before

8
Van 	Rensselaer 	-- 	5
In 	the 	course 	of 	preparing 	the 	plan, 	the 	accountant 	is 	likely 	to
become 	intimately 	familiar 	with 	the 	client's 	financial 	situation
and 	risk 	preferences. 	In 	fact, 	the 	accountant 	is 	likely 	to 	be
familiar 	already 	with 	the 	client's 	financial 	situation 	if 	the
accountant 	has 	performed 	other 	services 	for 	the 	client, 	such 	as
preparing 	his 	tax 	returns. 	This 	familiarization 	process 	can
require 	a 	substantial 	amount 	of 	the 	client's 	time 	and 	the
development 	of 	trust 	in 	the 	accountant, 	and 	these 	may 	be 	important
costs 	for 	the 	client. 	The 	benefits 	to 	the 	client 	of 	one-stop
shopping, 	the 	saving 	of 	time 	and 	effort 	to 	establish 	a
knowledgeable, 	trusting 	relationship, 	may 	be 	lost 	if 	the
commission 	restriction 	forces 	consumers 	to 	obtain 	financial
planning 	services 	either 	from 	nonaccountants 	or 	from 	their
accountants 	and 	one 	or more 	additional 	sellers 	of 	financial
products.
The 	Supreme 	Court 	and 	the 	Federal 	Trade 	COIT~ission have 	held
that 	it 	is 	illegal 	for 	competitors 	to 	agree 	to 	eliminate 	consumer
choice 	among 	pricing 	arrangements. 	The 	Commission 	found 	that 	the
American'Medical 	Association's 	e~hical rule 	requiring 	its 	mer.~ers .
to 	use 	only 	the 	"fee-for-service" 	method 	of 	compensation was
unlawful 	because 	it 	restricted 	competition 	and 	lacked 	any
procompetitive 	justification. 7 	The 	Commission 	reasoned 	that 	the
restriction, 	even 	w~thout a 	direct 	impact 	on 	price, 	precluded 	the
use 	of 	other 	more 	cost-efficient 	arrangements. 8 	The 	Court 	has
likewise 	condemned 	agreements 	among 	competitors 	to 	eliminate
credit, terms,9 	prohibit 	competitive 	bidding,10 	and 	set 	minimum
completing 	purchase 	of 	the 	investments. 	Some 	consumers 	may 	view
this 	accountant-stocKbroker-accountant 	process 	as 	too 	costly 	in
ter~s of 	time 	and 	effort.
7 	American 	1'~edical ..z..ssociation, 	94 	F.T.C. 	701, 	1015 	(1979),
aff'd, 	683 	F.2d 	443 	(2d 	Cir. 	1980), 	aff'd 	memo 	bv 	an 	ecrually
diviged 	court, 	455 	U.S. 	676 	(1982).
Id. 	at 	1016.
9 	Catalano, 	Inc. 	V. 	Target 	Sales, 	Inc~, 	446 	U.S. 	643 	(1980).
An 	agreement 	among 	competing 	wholesalers 	to 	eliminate 	giving
credit 	was 	"tantamount 	to 	an 	agreement 	to 	eliminate 	discounts
which 	thus 	falls 	squarely 	within 	the 	traditional 	per 	se 	rule
against 	price 	fixing." 	rd. 	at 	648. 	The 	Court 	noted 	that 	it 	had
held 	in 	FTC v. 	Cement 	Institute, 	333 	U.S. 	683 	(1948), 	that 	a
"horizontal 	agreement 	among 	competitors 	to 	use 	a 	specific method
of 	quoting 	prices 	may 	be 	unlawful." 	446 	U.S. 	at 	647-48.
10
St.ates,
Kational 	Society 	of 	Professional 	Engineers 	v. 	United
435 	C.S. 	679 	(1978).

11
Van 	Rensselaer 	-- 	6
fees. 11 	The 	principle 	of 	consumer 	sovereignty 	underlying 	these
decisions 	implies 	that 	the 	proponents 	of 	restrictions 	on 	consumer
choice 	should 	have 	the 	burden 	of 	showing why 	they 	are 	needed.
supporters 	of 	the 	restrictions 	may 	assert 	that 	the 	rules 	are
necessary 	to 	protect 	investors 	who may 	rely 	upon 	attest 	services,
but 	who 	are 	not 	parties 	to 	the 	agreements 	between 	accountants 	and
their 	clients. 	Their 	claim 	is 	that 	contingent 	fees 	and 	commis-
sions would 	impair the 	accountant's 	independence 	or 	at 	least 	the
appearance 	of 	his 	independence. 	We 	agree 	that 	an 	accountant
providing 	an 	attest 	service 	must 	be 	independent when 	performing
that 	service. 	We 	do 	not 	believe, 	however, 	that 	there 	is 	any
evidence 	that 	restrictions 	on 	contingent 	fees 	or 	commissions 	for
nonattest 	services 	provided 	to 	attest 	clients 	are 	necessary 	to
preserve 	such 	independence.
NASBA 	apparently 	recognizes 	that 	absolute 	independence 	is 	not
necessary 	to 	maintain 	the 	reliability 	of 	attest 	services. 	For
example, 	neither 	the 	current 	nor 	the 	proposed 	rules 	prohibit
accountants 	from 	providing 	nonattest 	services 	on 	a 	regular 	fee
basis 	for 	an 	attest 	client, 	regardless 	of 	the 	amount 	of 	such
services 	or 	the 	magnitude 	of 	the 	fees 	paid 	for 	them. 	Clearly,
however, 	excessive 	payments 	for 	such 	services 	-- 	or 	the 	need 	to
assess 	their 	utility 	in 	performing 	an 	audit 12 	-- 	could 	appear 	to
undermine 	independence. 	Moreover, 	neither 	the 	current 	nor 	the
proposed 	rules 	prohibit 	accountants 	from 	maintaining 	long-term
attest-client 	relationships 	that 	may 	also 	undermine 	the 	fact 	or
appearance 	of 	independence. 	The 	lack 	of 	necessity 	for 	absolute
independence 	is 	confirmed 	by 	the 	most 	recent 	report 	of 	the 	Public
Oversight 	Board, 	stating 	that, 	"there 	is 	no 	evidence 	that 	the
pe~formance of 	y~~S engagements 	[a 	nonattest 	service] 	has 	impai~ed
auditor 	independence 	or 	0~jectivity."13
~e 	do 	not 	believe 	that 	allowing 	contingent 	fees 	or
commissions 	for 	nonattest 	services 	will 	impair 	independence.
Assuming 	that 	a 	higher-than-normal 	fee 	for 	non attest 	services
might' motivate 	an 	accountant 	to 	engage 	in 	fraud 	in 	auditing 	a
client, 	the 	higher 	fee 	could 	be 	paid 	as 	easily 	under 	an 	hourly 	or
Goldfarb 	v. 	Virginia 	state 	Bar, 	421 	U.S. 	773 	(1975).
12 	For 	example, 	the 	auditor 	is 	required 	to 	assess 	the
reliability 	of 	the 	firm's 	financial 	control 	system 	that 	may 	have
been 	installed 	on 	the 	reco~~endation of 	the 	auditor's 	firm 	~hile
performing 	a 	nonattest 	engagement 	for 	the 	audit 	client.
13 	Public 	Ove~sigh~ Board, 	1985-86 	An~ual Report 	16. 	The
?~t2ic Ove~sight Boa~d is 	an 	organization 	established 	by 	the
A~e~ican Institute 	of 	Ce~tified Public 	Accountants 	(AICPA) 	and
~e!ied upon 	by 	the 	SEC 	to 	oversee 	peer 	review 	of 	the 	auditing
p~ocejures of 	AICPA 	mer.~e~ fi~.s that 	audit 	public 	co~poratio~s.

Van 	Rensselaer 	-- 	7
fixed 	fee 	arrangement 	as 	under 	a 	contingent 	fee 	or 	commission
arrangement. 	Thus, 	we 	have 	no 	reason 	to 	believe" that 	the 	payment
of 	contingent 	fees 	or 	receipt 	of 	commissions 	for 	nonattest
services 	would 	pose 	any 	additional 	risk 	to 	investors 	or 	others 	who
rely 	upon 	accountants' 	audits.
The 	proposed 	rules 	might 	also 	diminish 	rivalry 	among
accountants 	for 	both 	attest 	and 	nonattest 	business. 	Accountants
who 	provide 	attest 	services might 	refrain 	from 	competing 	to
provide 	nonattest 	services 	for 	a 	contingent 	fee 	or 	commission 	to
the 	same 	clients, 	because 	if 	they were 	awarded 	the 	engagement,
they 	would 	have 	to 	refrain 	from 	performing 	further 	attest
engagements. 	For 	similar 	reasons, 	accountants 	who 	provide
nonattest 	services 	for 	a 	contingent 	fee 	or 	commission 	might
refrain 	from 	competing 	to 	provide 	attest 	services 	to 	the 	same
clients. 	These 	losses 	in 	rivalry 	might 	result 	in 	reduced 	consumer
choice 	among 	alternative 	providers 	and 	an 	adverse 	effect 	on
consumer ,welfare.
In'sum, 	the 	proposed 	contingent 	fee 	and 	commission 	rules
appear 	less 	likely 	to 	harm 	consumers'than 	the 	existing 	rules. 	By
allowing 	accountants 	to 	provide 	more 	information 	and 	a 	broader
range 	of 	services, 	they 	will 	permit 	greater 	competition 	in 	the
provision 	of 	nonattest 	services. 	Nonetheless, 	the 	proposed 	rules
as 	presently 	written 	appear 	likely 	to 	continue 	restricting
consumer 	choice 	and 	competition 	among 	accountants 	without
providing 	any 	countervailing 	benefits. 14 	Therefore, 	we 	urge 	NASBA
to 	amend 	its 	rules 	to 	eliminate 	all 	restrictions 	on 	commissions
and 	contingent 	fees 	for 	nonattest 	services. 15
, .. 	-~ 	Ke 	recognize 	that 	the 	proposed 	Model 	Code 	includes 	a
provision 	permitting 	accountants 	to 	accept 	cOmP.issions 	or
contingent 	fees 	without 	impairing 	independence 	when 	those 	pay~e~ts
are 	Himmaterial 	in 	relation 	to 	the 	aggregate 	normally-recurring
feestcharged 	annually 	to 	the 	client 	for 	reports 	on 	financial
statements 	during 	the 	same 	time 	period." 	This 	exception 	to 	the
restriction 	suggests 	that 	contingent 	fees 	and 	co~~issions do 	not
inherently 	impair 	an 	accountant's 	independence, 	but 	only 	impair
independence 	if 	the 	pay~ents become 	a 	material 	part 	of 	the
aggregate 	fees. 	Yet 	the 	proposed Model 	Code 	does 	not 	prohibit
accountants 	from 	accepting 	hourly 	fees 	for 	nonattest 	services 	w~en
those 	fees 	are 	material 	in 	relation 	to 	aggregate 	fees 	paid 	for
attest 	engagements. 	If 	the 	latter 	does 	not 	impair 	independence,
it 	seems 	reasonable 	to 	conclude 	that 	contingent 	fees 	and
co~~issions for 	nonattest 	services 	will 	not 	i~pair independence
even 	if 	they 	become 	material 	in 	relation 	to 	aggregate 	attest 	fees.
1 -
-~ 	7he 	proposed 	Code 	of 	Professional 	Conduc~ would 	also
delete 	current 	Rule 	105, 	HIncoDpatible 	occupations," 	which
proscribes 	occupations 	impairing 	an 	accountant's 	independence

Van 	Rensselaer 	-- 	8
Pisclosure 	of 	the 	Receipt 	of 	Commissions
and 	the 	Payment 	of Referral 	Fees
Current 	Rule 	103 	prohibits 	accountants 	from 	receiving
commissions 	if 	their 	clients 	purchase 	recommended 	products 	and
services 	and 	from 	paying 	commissions 	to 	obtain 	clients. 	Proposed
Rule 	103 	would 	permit 	the 	receipt 	of 	commissions. 16 	Proposed
Rule 	104 	would 	permit 	the 	payment 	of 	commissions 	to 	obtain 	clients
(hereafter 	termed 	"referral 	fees"). 	Both 	proposed 	rules 	would
require 	accountants 	to 	disclose 	to 	their 	clients 	the 	receipt 	of
commissions 	and 	the 	payment 	of 	referral 	fees. 1 ? 	We 	support 	repeal
of 	the 	current 	rule, 	but 	suggest 	that 	disclosure 	requirements 	be
adopted 	only 	if 	NASBA 	concludes 	that, 	absent 	disclosure, 	consumers
are 	likely 	to 	be 	misled 	about 	the 	basis 	for 	recommendations 	or
referrals. 	In 	addition, 	we 	recommend 	that 	NASBA 	avoid 	imposing
unnecessary 	disclosure 	costs 	on 	accountants 	and 	consider 	whether
any 	disclosure 	requirement 	need 	be 	permanent.
Referral 	fees 	are 	likely 	to 	stimulate 	referrals, 	which
benefit 	consumers 	by 	making 	more 	information 	available 	to 	them 	and
reducing 	their 	cost 	of 	finding 	appropriate 	accountants. 1S 	Some
accountants 	have 	proposed 	paying 	referral 	fees 	to 	marketing 	firms
as 	a 	means 	of 	motivating 	them 	to 	disseminate 	information 	about 	the
accountants' 	services. 	Other 	accountants 	have 	proposed 	paying
referral 	fees 	in 	the 	form 	of 	rebates 	to 	their 	clients 	in 	return
for 	referring 	new 	clients.
objectivity. 	Our 	investigation 	indicates 	that 	state 	professional
regulatory 	boards 	and 	private 	professional 	associations 	have 	used
an 	Inco~patible Occupations 	rule 	to 	restrict 	accountants 	:rom
engaging 	in 	those 	occupations, 	such 	as 	financial 	planning, 	in
"v:~ich. pract i ti oners 	norrnally 	receive 	contingent 	fees 	or
commiEs ions. 	Because 	v;e 	bel ieve 	such 	payment 	arrangements 	are
generally 	proco~petitive, ~e 	support 	the 	repeal 	of 	the
Ince~?~~ible occupations 	rule.
16 	Proposed 	Rule 	103 	uses 	the 	term 	receipt 	of 	"other
compensation", 	which 	includes 	commissions, 	payments, 	and 	profits
for 	reco~mending, referring 	or 	selling 	products 	and 	services 	of
others. 	For 	simplicity, 	we 	use 	the 	term 	"commissions."
17 	In 	these 	co~~ents, we 	do 	not 	address 	the 	requirement 	that
the 	receipt 	of 	other 	compensation 	must 	be 	disclosed 	to 	nonclients,
nor 	do 	we 	address 	the 	differences 	in 	disclosure 	requirements 	for
those 	receiving 	ether 	co~pensation and 	those 	paying 	corr~issions.
13 	At 	pages 	~-5, 	suora, 	we 	discussed 	the 	consumer 	benefits
~i}:ely ~o 	result 	if 	accountants 	are 	able 	to 	receive 	co~~issions on
?rod~cts and 	services 	their 	clients 	buy.

Van 	Rensselaer 	-- 	9
supporters 	of 	the 	current 	prohibitions 	have 	argued 	that 	the
accountant 	to whom 	a 	client 	is 	referred 	will 	increase 	the 	total
price 	charged 	in 	order 	to 	recoup 	the 	referral 	fee. 	We.do 	not
believe 	this 	is 	a 	valid 	concern. 	First, 	accountants 	cannot 	raise
their 	prices 	without 	losing 	at 	least 	some 	clients 	who 	are 	price-
sensitive. 	Second, 	the 	accountant 	who 	pays 	referral 	fees 	has
evidently 	decided 	to 	incur 	costs 	to 	attract 	new 	clients. 	Prohib-
iting 	the 	payment 	of 	referral 	fees 	is 	not 	likely 	to 	prevent 	the
accountant 	from 	engaging 	in 	alternate 	forms 	of 	marketing 	that may
similarly 	affect 	his 	costs.1 9 	Third, 	if 	an 	accountant 	refers 	a
client to 	another 	accountant 	who 	has 	greater 	expertise 	concerning
the 	accounting 	project, 	the 	total 	cost 	of 	serving 	the 	client
(referral 	fee 	included) 	may 	be 	lower 	and 	may 	result 	in 	lower
charges 	to 	the 	client.
Supporters 	of 	the 	current 	ban 	also 	assert 	that 	the 	payment 	of
referral 	fees 	and 	the 	receipt 	of 	commissions 	can motivate
accountants 	to 	make 	inappropriate 	recorr~endations, referrals 	and
sales. 	Further, 	to 	the 	extent 	consumers 	are 	unaware 	that 	an
accountant's 	recommendation 	or 	referral 	could 	be 	influenced 	by
financial 	considerations, 	they 	arguably 	may 	be 	misled 	about 	the
appropriateness 	of 	the 	suggested 	course 	of 	action.
Consumers 	may 	in 	fact 	assume 	that 	accountants' 	recommen-
dations 	are 	based 	on 	objective 	analysis, 	uncolored 	by 	the 	receipt
of 	commissions 	that 	might 	influence 	those 	recommendations.
Accoun~ants now 	frequently 	advertise 	that 	they 	do 	no~ 	receive
commissions 	when 	clients 	pu~chase recommended 	products 	or
services. 	Consumers 	might 	view 	these 	recommendations 	differently
if 	they 	knew 	their 	accountants 	were 	receiving 	commissions 	on 	these
purchases. 	As 	some 	accountants 	begin 	to 	accept 	commissions,
accountants 	who 	do 	not 	accept 	such 	payments 	may 	stress 	this
difference 	in 	thei~ advertising. 	Thus, 	consumers 	are 	likely 	to
learn 	~hat some 	accountants' 	recommendations 	may 	be 	influenced 	by
the 	receipt 	of 	corr~issions. 	Over 	time, 	such 	advertising 	should
lead ~onsumers to 	inquire 	whether 	their 	accountants 	accept
commissions, 	if 	that 	fact 	is 	important.
Nonetheless, 	until 	consumers 	becoille 	aware 	that 	some
accountants 	accept 	~o~missions, there 	is 	a 	possibility 	of 	consumer
deception. 	This 	problem 	may 	be 	solved, 	as 	the 	Exposure 	Draft
proposes, 	not 	by 	prohibitin~ the 	receipt 	of 	pa)~ents but 	by
requiring 	their 	disclosure. 	We 	believe, 	however, 	that 	a 	perrnanen~
disclos~~e 	requirement 	is 	unnecessary. 	NASBA might 	wish 	to
consider 	requiring 	disclosure 	for 	a 	short 	period 	until 	consumers
19 	F~rther, 	if 	refer~al fees 	were 	less 	cost 	efficient 	than
othe~ ways 	of 	attracting 	clients, 	acco~ntants would 	be 	unlikely 	to
use 	them. 	A rule 	that 	has 	the 	effect 	of 	requiring 	substitution 	of
alternative 	marketing 	methods 	is 	likely 	to 	increase 	the
accountant's 	costs, 	not 	reduce 	the~.

Van 	Rensselaer 	-- 	10
become 	accustomed 	to 	the 	fact 	that 	some 	accountants 	receive
commissions. 	Further, 	it 	is 	important 	to minimize 	any 	unnecessary
costs 	of 	this 	mandated 	disclosure, 	and we 	therefore 	recommend
against 	the 	proposed 	requirement 	that 	an 	accountant 	disclose 	the
nature, 	source, 	and 	amount 	of 	commissions 	received. 	A consumer,
once 	alerted 	to 	the 	fact 	that 	an 	accountant 	will 	receive
commissions, 	is 	free 	to 	ask 	for 	additional 	information 	if 	that 	is
important 	to 	the 	consumer's 	decision.
Different 	considerations 	arise 	in 	determining 	whether 	to
mandate 	disclosure 	of 	the 	payment 	or 	receipt 	of 	referral 	fees.
Although 	current 	advertising 	by 	accountants 	stresses 	that 	they 	do
not 	receive 	commissions 	based 	on 	the 	purchase 	of 	products 	and
services, 	such 	advertising 	has 	not 	addressed 	the 	distinction
between 	those 	who 	do 	and 	who 	do 	not 	payor 	accept 	referral 	fees.
Thus, 	if 	consumers 	are 	unaware 	that 	some 	referrals 	may 	be 	based 	on
financial 	considerations, 	disclosure 	might 	be 	appropriate 	to
assure 	that 	consumers 	can 	assess 	referrals 	effectively. 	However,
because 	costs 	are 	associated 	with 	disclosure 	requirements, 	any
disclosure 	mandated 	by 	NASBA 	should 	be 	limited 	to 	the 	fact 	that
referral 	fees 	are 	paid 	or 	received.
In 	sum, 	we 	support 	the 	proposal 	to 	repeal 	the 	current 	rule
prohibiting 	accountants 	from 	paying 	referral 	fees 	and 	from
receiving 	commissions. 	If 	NASBA 	determines 	that 	disclosure 	should
be 	required, 	we 	suggest 	that 	it 	be 	limited 	to 	the 	fact 	that
commissions 	or 	referral 	fees 	are 	paid 	or 	accepted, 	and 	that 	care
be 	taken 	to 	avoid 	imposing 	any 	unnecessary 	costs 	on 	accountants.
Finally, 	we 	suggest 	that 	NASBA 	consider whether 	any 	disclosure
requirement 	need 	be 	permanent.
Forecasting
The 	Exposure 	Draft 	proposals, 	if 	adopted, 	apparently 	will
continue 	to 	prohibit 	accountants 	from 	vouching 	for 	the 	achiev-
ability 	of 	a 	forecast. 20 	Currently, 	an 	accountant's 	statement
that ne 	has 	examined 	a 	forecast 	prepared 	by 	someone 	else 	provides
some 	assurance 	of 	the 	forecast's 	reliability. 	If 	accountants 	were
20 	A forecast 	is 	a 	financial 	statement 	that 	presents 	an
entity's 	anticipated 	financial 	position, 	results 	of 	operations,
and 	changes 	in 	financial 	position. 	Although 	the 	Expos~re Draft
proposes 	deleting 	current 	Rule 	204, 	which 	expressly 	prohibits
acco~ntants from 	vouching 	for 	the 	achievability 	of 	a 	forecast, 	the
accompanying 	Corr~ent indicates 	that 	no 	substantive 	change 	is 	being
made 	in 	the 	prohibition. 	Forecasts 	are 	included 	within 	the 	new
definition 	of 	financial 	statements, 	and 	proposed 	Rule 	202
(~uditino Standards) 	re~~ires attesting 	accountants 	to 	comply 	wit~
"~rono~n~ernents having 	~enerally recognized 	authority." 	Ii 	1s 	o~r
~~derstanding that 	such 	"authority" 	prohibits 	accountants 	fro~
~cuc~i~; fo~ the 	achievability 	of 	a 	forecast.

Van 	Rensselaer 	-- 	11
allowed 	to 	vouch 	for 	the 	achievability 	of 	forecasts, 	some 	account-
ants 	might 	estimate, 	for 	example, 	the 	probability 	that 	a 	forecast
sales 	figure 	will 	be 	achieved. 	This 	type 	of vouching might
provide 	additional 	useful 	information 	to 	consumers 	who use
forecasts 	in making 	investment 	decisions. 21 	Thus, 	we 	urge 	NASBA
to 	adopt 	a 	rule 	permitting 	accountants 	to 	state 	nondeceptively
their 	beliefs 	about 	the 	achievability 	of 	forecasts.
Repealing 	the 	vouching 	prohibition 	appears 	likely 	to provide
investors with more 	information 	about 	the 	likelihood 	of 	achieving
the 	forecasted 	outcome, 	thereby 	enhancing 	the 	value 	of 	forecasts
to 	consumers. 	Because 	the 	future 	always 	entails 	some 	uncertainty,
prohibiting 	claims 	of 	100 	percent 	assurance 	about 	the 	future 	may
serve 	to 	eliminate 	false 	or misleading 	statements. 	The 	current
rule, 	however, 	appears 	to 	prohibit 	accountants 	not 	only 	from
stating with 	absolute 	certainty 	that 	a 	forecast 	will 	be 	achieved,
but 	also 	from 	providing 	truthful, 	nondeceptive 	information 	about
the 	likelihood 	that 	a 	forecast 	may 	be 	achieved. 	Examples 	of 	such
information 	include 	statements 	that 	there 	is 	an 	80 	percent
probability 	that 	a 	forecast 	will 	be 	achieved: 	that 	all 	the
assumptions 	in 	a 	forecast 	are 	sUfficiently 	conservative 	that 	an
accountant 	with 	a 	reputation 	for 	expertise 	in 	a 	particular
industry 	deems 	it 	more 	achievable 	than 	most 	that 	he 	has 	reviewed:
or 	that 	a 	part 	of 	a,forecast, 	such 	as 	one 	of 	its 	assumptions, 	is
likely 	to 	be 	achieved. 	In 	the 	absence 	of 	vouching, 	second 	best
and 	more 	costly 	methods 	of 	obtaining 	such 	information may 	have 	to
be 	used, 	and 	decisions 	are 	likely 	to 	be 	made 	on 	the 	basis 	of 	less
infor~mation or 	less 	reliable 	inforT.,ation, 	resulting 	in 	a 	misallo-
cation 	of 	society's 	resources 	and 	a 	loss 	in 	consumer welfare.
In 	the 	absence 	of 	vouching 	restrictions, 	accountants 	might
co~pete more 	vigorously 	among 	themselves 	by 	accepting 	greater
resp8nsibility 	for 	predicting 	the 	achievability 	of 	forecasts,
~hereby enhancing 	the 	usefulness 	of 	forecasts 	to 	consumers.
Existing 	restrictions 	cn 	vouching 	may 	have 	encouraged 	accountants
to 	mini~ize their 	personal 	responsibility 	for 	the 	reliability 	of
the 	forecasts 	they 	have 	reviewed. 	This 	lack 	of 	responsibility 	is
li}:€ly 	to 	result 	in 	lower 	quality 	forecasting 	and 	less 	investor
confidence 	in 	forecasts 	examined 	by 	accountants. 	Recognizing 	the
litigation 	risks 	and 	potential 	damage 	to 	their 	reputations,
accountants 	would 	have 	an 	incentive 	to 	accept 	greater 	responsi-
bility 	for 	a 	forecast 	only 	where 	the 	conservativeness 	of 	the
forecast 	warranted 	such 	risk-taking.
21 	lne 	current 	rule 	prohibits 	accountants 	from 	peru.itting
their 	na~es to 	be 	used 	in 	conjunction 	with 	any 	forecast 	in 	a
~anner that 	i~plies to 	the 	recipient 	of 	such 	forecasts 	that 	the
a=cou~tant vouches 	for 	the 	achievatili~y of 	the 	forecast. 	We 	are
not 	a~are of 	any 	evidence 	suggesting 	ttat 	the 	rule 	has 	been
a~Flied to 	prohibit 	an 	accountan~ from 	helping 	a 	client 	assess 	a
com~any's 	fcrecast.

Van 	Rensselaer 	-- 	12
Potential 	justifications 	for 	the 	current 	restrictions 	on
forecasting 	do 	not 	appear 	persuasive. 	One 	argument 	is 	that
forecasts 	already 	disclose 	sufficient 	information 	for 	investors 	to
evaluate 	achievability 	on 	their 	own, 	without 	advice 	from 	an
accountant 	or 	other 	expert. 	Accountants 	who 	have 	developed
industry 	expertise 	by 	reviewing 	many 	forecasts, 	however, 	may 	be 	in
a 	better 	position 	to 	assess 	achievability, 	and 	should 	not 	be
prevented 	from 	communicating 	their 	opinions. 	Another 	argument 	in
favor 	of 	the 	restriction 	might 	be 	based 	on 	the 	fear 	that 	some
accountants 	would 	vouch 	for 	forecasts 	that 	do 	not 	warrant 	much
confidence. 	This 	might 	discredit 	forecasting 	services, 	or 	even
all 	accounting 	services, 	in 	the 	pUblic's 	estimation. 	This,
however, 	does 	not 	appear 	likely because 	accounting 	firms 	would
bear 	substantial 	costs, 	including 	potential 	litigation 	losses 	and
a 	deterioration 	in 	their 	reputations, 	if 	they 	provided 	unreliable
forecasting 	services.
In 	sum, 	we 	believe 	that 	permitting 	accountants 	to 	vouch 	for
the 	achievability 	of 	forecasts 	is 	likely 	to 	increase 	the 	amount 	of
information 	available 	to 	consumers 	and 	improve 	the 	quality 	and
usefulness 	of 	forecasts. 	Accordingly, 	we 	urge 	NASBA 	to 	amend
proposed 	Rule 	202 	to 	permit 	accountants 	to 	state 	nondeceptively
their 	beliefs 	about ,the 	achievability 	of 	part 	or 	all 	of 	a
forecast.
Advertising 	and 	SOlicitation
Proposed 	Rule 	403 	would 	delete 	the 	provisions 	in 	NASBA's
current 	Rule 	403 	prohibiting 	testimonials, 	laudatory 	statements,
representations 	as 	to 	specialties, 	and 	current 	Rule 	40~
pro~ibiting in-person 	solicitation 	by 	accountants. 	Because
truthful, 	nondeceptive 	advertising 	and 	solicitation 	benefit
consumers, 	we 	support 	the 	proposed 	repeal 	of 	these 	restrictions.
We 	urge 	NASBA 	to 	modify 	its 	rules 	further, 	however, 	by 	deleting
the 	r~striction on 	com~unications using 	"coercion, 	duress,
co~pulsion, 	inti~idation, threats, 	overreaching, 	or 	vexatious 	or
harassing 	conduct."22 	.
The 	beneficial 	effects 	of 	advertising 	and 	SOlicitation 	are
~idely recognized. 	Truthful, 	nondeceptive 	messages 	communicate 	to
22 	Rule 	403 	in 	the 	Exposure 	Draft 	defines 	"false 	statements"
to 	include 	any 	claim 	that 	is 	likely 	to 	create 	false 	or 	unjustified
expectations 	of 	favorable 	results. 	On 	its 	face, 	this 	provision
appears 	to 	restrict 	only 	false 	or 	misleading 	clai~s. 	Other
professional 	self-regulatory 	entities, 	however, 	have 	interpreted
s:~ilar provisions 	broadly 	to 	prohi=it 	truthful, 	nondeceptive
a~ver~ising of 	inforT:,ation, 	such 	as 	past 	results, 	that 	may 	be
useful 	to 	consumers. 	he 	urge 	NAS3A 	to 	include 	in 	the 	Corr~ent to
t~is Rule 	a 	state~ent 	that 	it 	should 	not 	be 	so 	interpreted.

Van 	Rensselaer 	-- 	13
potential 	purchasers 	information 	about 	individuals 	or 	firms
offering 	the 	services 	that 	consumers 	want. 	Such 	information 	helps
consumers 	make 	purchase 	decisions 	that 	reflect 	their 	preferences
and 	promotes 	the 	efficient 	delivery 	of 	services. 	Empirical
evidence 	suggests 	that 	the 	removal 	of 	restrictions 	on 	information
dissemination 	will 	tend 	to 	enhance 	competition 	and 	lead 	to 	lower
prices. 23 	Although 	some 	have voiced 	concern 	that 	the 	dissemina-
tion 	of 	information 	through 	advertising 	or 	sOlicitation may 	lead
to 	lower 	quality 	services, 	the 	empirical 	evidence 	suggests 	that
the 	quality 	of 	services 	provided by 	firms 	that 	advertise 	is 	at
least 	as 	hi2h 	as, 	if 	not 	higher 	than, 	firms 	that 	do 	not
advertise. 2
Current Rule 	403 	prohibits 	the 	use 	of 	testimonials, 	laudatory
statements, 	and 	representations 	as 	to 	specialties 25 	and 	Rule 	404
prohibits 	direct 	solicitation 	by 	accountants. 	All 	these 	forms 	of
communication may 	provide 	truthful, 	nondeceptive 	information 	to
consumers. 	Advertising 	by 	means 	of 	testimonials 	has 	traditionally
been 	recpgnized 	by 	sellers 	of 	goods 	and 	services 	as 	an 	effective
means 	of- conveying 	information 	to 	consumers 	and 	attracting 	and
retaining 	consumer 	interest 	in 	the 	advertiser's 	message.
Laudatory 	statements 	also 	can 	communicate 	truthful, 	nondeceptive
information 	to 	consumers. 	Even 	if 	they 	are 	sUbjective, 	laudatory
statements 	about 	a 	professional's 	services 	are 	useful 	in
suggesting 	to 	consumers 	the 	attributes 	of 	his 	practice 	that 	he
considers 	most 	important. 	This 	may 	help 	consumers 	distinguish
among 	accountants 	and 	select 	one 	appropriate 	for 	their 	needs. 	A
representation 	as 	to 	one's 	specialty 	can 	convey 	truthful
information 	about 	an 	accountant's 	skills 	in 	a 	specific 	area.
There 	are 	ma~y ways 	to 	obtain 	expertise, 	and 	information 	that 	an
accountant 	has 	experience 	or 	training 	in 	a 	particular 	field 	is
clearly 	useful 	to 	consumers. 	In 	fact, 	the 	truthful 	use 	of 	the
teris 	"specialist" 	or 	"practice 	limited 	to" 	may 	be 	the 	most
~3 	Cleveland 	Regional 	Office 	and 	Bureau 	of 	Economics,
Federal 	Trade 	Commission, 	Improving 	Consumer 	Access 	to 	Legal
Services: 	The 	Case 	for 	Re~oving Restrictions 	on 	Truthful
Advertising 	(1984).
24 	Muris 	and 	McChesney, 	Advertisin~ and 	the 	Price 	and
Qualitv 	of 	Lecal 	Services: 	The 	Case 	for 	Leoal 	Clinics, 	1979 	hIT"
B. 	Found. 	Research 	J. 	179.
25 	The 	rule 	on 	its 	face 	does 	not 	appear 	to 	prohibit
truthful, 	nondeceptive 	representations 	as 	to 	specialization.
Current 	Rule 	403(F) 	defines 	as 	false 	a 	claim 	th~t states 	or
i~plies "that 	the 	licensee 	has 	received 	formal 	recognition 	as 	a
specialist 	in 	a~y 	aspect 	of 	the 	practice 	of 	pu=lic 	accounta~cy, if
~his is 	not 	the 	case." 	Some 	professional 	self-regulatory
en~ities, ho~ever, 	have 	interpreted 	si~ilar rules 	broadly 	to
prchibi~ tru~hful, 	nondeceptive 	claims 	of 	specialization.

Van 	Rensselaer 	-- 	14
efficient 	way 	to 	communicate 	this 	information, 	and 	we 	are 	aware 	of
no 	evidence 	that 	the 	truthful 	use 	of 	those 	terms 	in 	accounting 	is
likely 	to 	mislead 	consumers.
Finally, 	direct 	solicitation 	can 	also 	be 	effective 	in
disseminating 	truthful 	information 	to 	consumers. 	In-person
contacts 	can 	convey 	information 	about 	the 	availability 	and 	terms
of 	an 	accountant's 	services, 	and 	they 	serve 	the 	same 	function 	in
this 	respect 	as 	print 	advertising. 	We 	recognize 	that 	abuses 	may
sometimes 	result 	from 	in-person 	solicitation 	by 	professionals, 	but
that 	possibility does 	not 	justify 	a 	prohibition 	on 	all 	such
activity. 	After 	weighing 	the 	possible 	harms 	and 	benefits 	to
consumers 	of 	solicitation by 	physicians, 	the 	Federal 	Trade
Commission 	ordered 	the 	AY~ to 	eliminate 	its 	blanket 	ban 	on
solicitation 	because 	it 	was 	broader 	than 	reasonably 	necessary 	to
prevent 	any 	abuses 	in 	solicitation. 26
The 	Exposure 	Draft 	proposes 	to 	retain 	the 	current 	restriction
cn 	com~u~ications using 	Hcoercion, 	duress, 	compulsion,
intimidation, 	threats, 	overreaching, 	or vexatious 	or 	harassing
conduct. H 	~e 	certainly 	do 	not 	endorse 	abusive 	conduct, 	but we 	are
concerned 	that 	state 	boards 	may 	interpret 	these 	somewhat 	ambiguous
restrictions 	in 	an 	overly 	broad 	way 	to 	restrict 	truthful,
nondeceptive 	advertising 	or 	solicitation 	under 	circumstances 	that
pose 	no 	danger 	of 	harm 	to 	consumers. 	During 	our 	investigations 	of
the 	accounting 	profession, 	we 	have 	never 	found 	any 	evidence 	that
accountants 	have 	engaged 	in 	or 	are 	likely 	to 	engage 	in 	abusive
solicitation. 	It 	does 	not 	appear 	likely 	that 	accountants 	would
find 	abusive 	conduct 	to 	be 	an 	effective 	marketing 	device. 	In 	the
absence 	of 	evidence 	that 	accountants 	are 	likely 	to 	rely 	on
coercion, 	duress, 	or 	si~~lar abuses 	to 	obtain 	clients, 	we 	su~gest
that 	KASSA 	consider 	deleting 	the 	restriction 	on 	abusive
Co~",\.mication.
In 	short, 	we 	urge 	that 	NASBA 	repeal 	the 	current 	prohibitions
on 	the 	use 	of 	testimonials, 	laudatory 	statements, 	representations
as 	to 	specialization, 	and 	reconsider 	the 	need 	for 	a 	prohibition 	0:
abusive 	co~munications by 	accountants. 	Because 	false 	and
deceotive 	co~~unications would 	still 	be 	banned, 	these 	modi:ica-
tion; 	would 	permit 	prospective 	clients 	to 	obtain 	more 	information
than 	the 	existing 	rules 	allow, 	and 	should 	therefore 	assist
co~sumers in 	making 	more 	informed 	choices 	about 	accounting
services.
Firm 	Names
~e 	supp~rt prcposed 	Rule 	~o~ 	permitting 	the 	use 	of
26 	9~ 	F.T-C. 	at 	1003-11, 	103"7-38.

Van 	Rensselaer 	-- 	15
nondeceptive 	trade 	names. 27 	Such 	names 	can 	efficiently 	convey
truthful, 	nondeceptive 	information 	about 	a 	firm, 	including 	its
location, 	fields 	of 	practice, 	and 	other 	characteristics 	that 	may
be 	useful 	to 	consumers. 	For 	example, 	the 	name 	wGeorgetown
Financial 	Planners w informs 	consumers 	that 	the 	firm 	is 	located 	in
Georgetown 	and 	that 	it 	specializes 	in 	financial 	planning 	services.
Based 	on 	our 	accountant 	investigations, 	we 	believe 	that
information 	about 	a 	firm's 	specialty 	is 	particularly 	useful 	to
consumers. 	We 	are 	aware 	of 	no 	justification 	for 	prohibiting 	all
trade 	names.
Supporters 	of 	a 	ban 	on 	trade 	names 	may 	argue 	that 	they 	are
deceptive. 	We 	agree 	that 	deception 	should 	be 	prohibited, 	but
trade 	names 	are 	not 	inherently misleading 	as 	to 	the 	identity 	of or
services 	provided 	by 	an 	accounting 	firm. 	Like 	any 	other 	name 	used
in 	trade, 	an 	accounting 	firm 	name 	identifies 	the 	firm 	and 	comes 	to
be 	associated 	with 	the 	services 	that 	the 	firm 	offers. 	As 	the
Comment 	to 	the 	proposed 	rule 	states, 	trade 	names 	convey 	no 	less
information 	to 	consumers 	about 	the 	identity 	of 	the 	accountant 	who
will 	actually 	provide 	the 	services 	than 	do 	firm 	names 	that 	contain
the 	names 	of 	deceased 	partners, 	such 	as 	Arthur 	Anderson, 	or 	firm
names 	that 	do 	not 	list 	the 	names 	of 	all 	accounting 	practitioners
within 	the 	firm.
The 	use 	of 	a 	name 	that 	informs 	consumers 	of 	a 	firm's
location, 	specialty, 	or 	other 	characteristics 	of 	its 	practice 	is 	a
form 	of 	advertising. 	The 	United 	States 	Supreme 	Court 	has 	ruled
that 	regulation 	0: 	advertising 	is 	permissible 	if 	the 	advertising
is 	inherer.~ly misleading 	or 	the 	record 	indicates 	that 	the
advertising 	has, 	in 	fact, 	been 	misleading. 28 	On 	the 	other 	hand,
the 	Court 	has 	also 	made 	clear 	that 	states 	may 	not 	absolutely
p~ohibit the 	disse~ination of 	information 	merely 	because 	it 	has
the ·potential 	to 	be 	misleading, 	if 	it 	could 	also 	be 	presented 	in
non-~isleading ways, 	and 	that 	adve~tising restrictions 	Hnay 	be 	n~
broader 	than 	reasor.ably 	necessary 	to 	prevent 	deception. H29 	The
Court' observed 	that, 	in 	an 	earlier 	decision, 	it 	had 	allowed 	Tehas
to 	prohibit 	optometrists 	from 	practicing 	under 	trade 	names 30
because 	the 	record 	contained 	evidence 	0: 	a 	Hconsiderable 	history
in 	Tehas 	of 	deception 	and 	abuse H 	through 	such 	na~es.31 	In 	the
27 	By 	Htrade 	names H we 	mean 	firm 	names 	other 	than 	the 	names
of 	c~rrent or 	for~er partners 	or 	shareholders. 	Some 	state
acco~nting boards 	refer 	to 	such 	trade 	names 	as 	Hfictitious H names.
28
29
30
See, 	In 	re 	R.M.J., 	~55 U.S. 	191, 	202-203 	(1982).
Ia. 	at 	2J3.
r~iej~an v. 	Rogers, 	440 	V.S. 	1 	(1979).
31 	455 	D.S. 	at 	202.

Van 	Rensselaer 	-- 	16
Texas 	decision, 	however, 	the 	Court 	did 	not 	hold 	that 	trade 	names
were 	inherently misleading. 	It 	simply 	addressed 	the 	constitu-
tionality 	of 	the 	Texas 	law, 	not 	whether 	it 	was 	the 	best means 	of
protecting 	consumers. 	We 	are 	not 	aware 	of 	any 	evidence 	indicating
that 	accountants 	have 	used 	or would 	be 	likely 	to 	use 	deceptive
names. 	Thus, 	we 	support 	the 	Exposure 	Draft's 	proposed 	rule 	that
allows 	the 	use 	of 	nondeceptive 	trade 	names.
Conclusion
The 	new Model 	Code 	of 	Professional 	Conduct, 	if 	adopted 	by
state 	accounting 	boards 	as 	set 	forth 	in 	the 	May 	1987 	Exposure
Draft, 	would 	benefit 	consumers 	by. relaxing 	restrictions 	in 	the
current Model 	Code. 	Nonetheless, 	certain 	provisions 	appearing 	in
the 	new 	Code, 	if 	adopted 	without 	further 	revision 	by 	the 	state
boards, 	appear 	likely 	to 	reduce 	consumers' 	ability 	to 	obtain 	the
accounting 	services 	they 	want. 	These 	objectionable 	provisions
impose 	unnecessary 	restrictions 	on 	price 	competition 	and 	on 	the
dissemination 	of 	information 	about 	accounting 	services. 	We 	urge
NASBA 	t~· revise 	its 	proposed 	new Model 	Code 	by 	amending
(1) 	Proposed 	Rule 	101 	to 	permit 	contingent 	fees 	and 	commissions
for 	nonattest 	services 	provided 	to 	attest 	clients, 	(2) 	Proposed
Rules 	103 	and 	104 	to 	limit 	disclosure 	of 	the 	receipt 	of 	commis-
sions 	and 	the 	payment 	of 	referral 	fees, 	if 	any 	disclosure 	is
deemed 	necessary, 	to 	the 	fact 	of 	receipt 	or the 	fact 	of 	payment,
and 	(3) 	Proposed 	Rule 	202 	to 	permit vouching 	for 	the 	achievability
of 	forecasts. 	We 	also 	suggest 	that 	NASBA 	reconsider 	the 	need 	for
a 	prohibition 	of 	abusive 	co~~unications by 	accountants 	and 	that 	it
consider 	whether 	any 	disclosure 	requirement 	need 	be 	permanent.
We 	hope 	that 	this 	letter will 	be 	of 	assistance 	in 	identifying
rules 	that 	may 	restrict 	competition 	and 	limit 	consumer 	choice, 	and
~e 	appreciate 	having 	had 	the 	opportunity 	to 	present 	these 	views.
f
Sincerely 	yours,
7te~ -"ermanrector