FTC Staff Comment Before the Texas Senate Economic Development Committee Concerning S.B. 1269 to Restrict Competition Among Accountants

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Statement of
Charles 	W. 	Corddry 	III
Deputy Assistant 	Director
BUREAU OF COMPETITION
FEDERAL TRADE 	COMMISSION
Before
Economic 	Development Committee
Texas 	Senate
Austin, 	Texas
April 	10, 	1989
This 	statement 	represents 	the 	views 	of 	the 	staff 	of 	the 	Federal
Trade Commission's 	Bureau of 	Competition, 	and 	not 	necessarily
those 	of 	the 	Commission 	itself 	or of 	any 	individual 	Commissioner.

Statement 	To
Economic 	Development Committee
Texas 	Senate
April 	10, 	1989
I 	appreciate 	the 	opportunity to 	be 	here 	today 	to 	discuss 	the
restrictions 	on competition among 	accountants 	proposed 	in Texas
Senate 	Bill 	No. 	1269. 	This 	bill 	would 	amend 	the Texas 	Public
Accountancy Act 	of 	1979 	to 	prohibit 	accountants' 	use 	of 	referral
fees, 	contingent 	fees, 	and commissions.
My 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.
The 	Commission, 	however, 	recently considered 	the 	validity 	under
the 	federal 	antitrust 	laws 	of 	restrictions, 	similar 	to 	those
proposed 	in S.B. 	No. 	1269, 	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,

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lawyers, 	physicians 	and others. 	Our 	goal 	has 	been 	to 	identify
restrictions 	that 	harm consumers 	by 	reducing 	competition without
producing 	any co~ntervailing benefits, 	such as 	higher 	quality
services 	or enhanced consumer choice 	among 	service 	options. 	In
general, 	we 	have 	concluded that 	certain kinds 	of 	restrictions 	on
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. 1 	We 	believe 	this 	is 	true
of 	accountants, 	also.
S.B. 	No. 	1269 	appears 	intended 	to 	eliminate 	any 	potential
for 	conflicts 	of 	interest 	to 	arise 	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
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, 	Bffects 	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 Quality 	of Legal 	Services: 	The 	Case
for 	Legal 	Clinics, 	1979 	Am. 	B. 	Found. 	Research 	J. 	179 	(1979);
McChesney & Muris, 	The 	Effects 	of Advertising on 	the Quality 	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).
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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.
The Texas 	Board of 	Public 	Accountancy, 	several 	other 	state
boards 	of 	accountancy and the 	American 	Institute 	of 	Certified
Public 	Accountants 	have 	recently 	abandoned 	their 	prohibitions 	of
referral 	fees, 	contingent 	fees 	and commissions 	in 	favor 	of 	the
less 	restrictive 	alternatives 	of 	(1) 	requiring 	that 	referral 	fees
and 	commissions 	be 	disclosed, 	and 	(2) 	limiting 	accountants' 	use
of 	contingent 	fees 	and commissions 	to 	services 	for 	clients 	for
whom 	they do 	not 	provide 	attest 	services. 2 	The 	National
Association of 	State 	Boards 	of Accountancy 	has 	proposed 	a 	Model
Code 	for 	adoption by 	its 	member 	state 	boards 	of 	accountancy 	that
takes 	the 	same 	approach. 3
We 	believe 	that 	prohibiting 	the 	use 	of 	referral 	fees,
contingent 	fees 	and commissions 	by 	accountants 	would 	not 	be 	in
2 	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.
3 	Although many 	state 	accountancy 	boards 	still 	restrict
accountants' 	use 	of 	referral 	fees, 	contingent 	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
these 	kinds 	of 	competition. 	Only one 	state, 	Iowa, 	has 	statutory
prohibitions 	on 	referral 	fees, 	contingent 	fees 	and commissions.
The 	only other 	states 	that 	have 	statutory prohibitions 	are
California 	(prohibits 	referral 	fees 	and 	commissions) 	and 	Florida
(prohibits 	contingent 	fees).
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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. 	And 	the 	less 	restrictive
alternative 	of 	limiting the 	use 	of 	contingent 	fees 	and
commissions 	to 	nonattest 	clients 	is 	a 	preferable 	means 	of
ensuring 	that 	accountants 	remain 	independent 	when 	they provide
attest 	services.
Referral 	Fees
S.B. 	No. 	1269 	would prohibit 	accountants 	from 	paying
"compensation 	••• 	to 	solicit 	or 	secure 	a 	prospective 	client. n4
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
4 	S.B. 	No. 	1269, 	S 	l(a)(l).
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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
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. 	Referral 	fees
also 	provide 	an 	incentive 	that 	might 	encourage 	some 	accountants
to 	refer 	potential 	clients 	to 	other 	accountants 	who 	have 	greater
expertise 	in providing 	the 	particular 	services 	needed, 	and 	who
could presumably provide 	higher 	quality 	services. 	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 	of
serving each 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.
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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 	for 	them 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. 	The 	Texas
Board of 	Public Accountancy currently permits 	the 	use 	of 	referral
fees 	if 	they 	are 	disclosed. 5 	State 	accountancy boards 	in
Maryland, 	Oklahoma, 	and West 	Virginia, 	and 	the 	American 	Institute
of 	Certified Public 	Accountants 	also 	permit 	disclosed 	referral
5 	Rules 	of 	Texas 	State Board of 	Accountancy, 	Code 	of
Ethics, 	S 501.13.
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fees, 	and 	the 	National 	Association of 	State Boards 	of 	Accountancy
has 	proposed a 	Model Code 	permitting disclosed 	referral 	fees 	for
adoption by 	its 	member 	state 	boards 	of 	accountancy.6 	We
therefore 	believe 	that 	a 	ban on 	referral 	fees, 	as 	proposed 	in
S.B. 	No. 	1269, 	would 	be 	likely 	to 	result 	in 	a 	smaller 	net 	benefit
for 	consumers 	than would permitting 	accountants 	to 	use 	referral
fees, 	subject 	to 	an 	appropriate 	disclosure 	requirement.
Contingent 	Fees
S.B. 	No. 	1269 	would 	prohibit 	accountants 	from 	providing
services 	"for a 	fee 	that 	is 	contingent 	on the 	findings 	or 	results
of 	the 	services 	"7 	This 	provision would 	limit 	consumer
choice 	as 	to 	the 	method 	of 	paying 	for 	accounting 	services.
Consumers 	in Texas 	would be 	prevented 	from 	agreeing with 	an
accountant 	that 	the 	fee will 	be 	a 	percentage 	of 	any 	refund 	or
reLmbursement 	obtained. 	For 	example, 	businesses 	that 	need
accounting 	firms 	to 	review 	taxes 	paid 	in 	the 	past 	and 	file
amended 	returns 	to 	obtain 	any 	appropriate 	refunds 	would 	not 	be
able 	to 	make 	payment 	contingent 	upon 	the 	amount 	recovered.
6 	National 	Association of 	State Boards 	of 	Accountancy,
Model 	Code 	of 	Professional 	Conduct, 	Rule 	104 	(March 	1989). 	The
state 	accountancy boards 	in Maryland 	and West 	Virginia 	do 	not
have 	any restrictions 	on 	referral 	fees.
7 	S.B. 	No. 	1269, 	S 	1(a)(2). 	There 	are 	two 	exceptions:
services 	related 	to 	taxes, 	in which 	the 	findings 	are 	made 	by 	a
taxing 	authority; 	and 	services 	for 	which 	the 	amount 	of 	the 	fee 	is
indeterminable 	at 	the 	time 	the 	services 	are 	rendered 	because 	the
fee 	will 	be 	fixed 	by 	a 	public 	authority, 	including 	a 	court, 	or
other 	third party.
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State, 	county, 	or municipal 	hospitals 	that 	need 	an 	accounting
firm's 	assistance 	to 	obtain Medicare 	reimbursement 	from 	the
federal 	government, 	but 	are 	forced 	by budgetary constraints 	to
pay 	accounting 	fees 	out 	of 	any amount 	recovered, 	would 	have 	to
forego 	reimbursement.
A contingent 	fee 	restriction 	helps 	to 	insulate 	established
accountants 	from 	competition. 	Offering 	to 	provide 	tax 	refund
services, 	for 	example, 	on a 	contingent 	fee 	basis 	may 	be 	an
attractive 	inducement 	to 	potential 	clients 	to 	purchase 	a
different 	accountant's 	services. 	Indeed, 	a 	contingent 	fee 	may 	be
the 	only 	basis 	on which a 	prospective client would 	hire 	a 	new
accountant 	to 	identify and 	pursue 	tax 	refund 	claims, 	when 	the 	tax
previously had 	been calculated by another 	accountant. 	And 	by
providing 	services 	to 	new 	client~ 	on 	a 	contingent 	fee 	basis, 	an
accountant 	may be 	able 	to 	demonstrate 	the 	quality of 	his 	services
and 	thus 	obtain 	additional 	business 	from 	those 	clients.
In 	addition 	to 	promoting competition among accountants,
contingent 	fees 	can directly benefit 	consumers 	in 	a 	variety of
ways. 	By 	indicating a 	willingness 	to 	undertake 	a 	project 	on 	a
contingent 	fee 	basis, 	an 	accountant 	informs 	the 	client 	that 	the
accountant 	is 	reasonably confident 	the 	project 	will 	succeed, 	for
the 	accountant's 	compensation depends 	upon 	success. 	A contingent
fee 	arrangement 	also 	shifts 	to 	an 	accountant 	a 	portion of 	the
risk 	of 	the 	project, 	because 	the 	accountant's 	fee 	will 	depend
upon 	the 	amount 	recovered. 	Finally, 	to 	the 	extent 	that 	the
likelihood of 	success 	increases 	as 	the 	quality of 	accounting
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services 	increases, 	a 	contingent 	fee 	may 	induce 	higher 	quality
services 	because 	the 	accountant's 	fee 	depends 	upon 	success.
Thus, 	a 	restriction on contingent 	fees 	would be 	likely 	to
insulate 	accountants 	from 	an 	important 	form 	of 	competition;
increase 	consumers' 	costs 	by 	reducing 	their 	information 	about 	the
likelihood of 	success 	of 	accounting 	services 	and 	restricting
their 	ability 	to 	share with 	accountants 	the 	risk 	of 	failure; 	and
eliminate 	an 	incentive 	for 	accountants 	to 	provide 	high 	quality
servic~s. 	The 	economic 	effects 	of 	this 	restriction 	are 	likely 	to
be 	higher priced and 	lower quality 	accounting 	services 	in Texas,
with 	reduced 	satisfaction of 	consumer 	needs 	and preferences.
Proponents 	of 	a 	ban on contingent 	fees 	argue 	that
prohibition of 	this 	method of 	paYment 	is 	necessary 	to 	preserve
accountants' 	independence 	and 	objectivity. 	Prohibiting
contingent 	fees 	with 	respect 	to 	attest 	services, 	and 	to 	clients
for 	whom 	an 	accountant 	prOVides 	attest 	services, 	may 	benefit
consumers 	by 	promoting 	auditors' 	independence 	and 	objectivity,
which 	are 	essential 	to 	the 	reliability of 	financial 	reporting.
But 	prohibiting contingent 	fees 	in connection with 	nonattest
services, 	such as 	Medicare 	reimbursement 	assistance 	and 	tax
refund 	assistance, 	provided 	to 	clients 	for 	whom 	an 	accountant
does 	no 	attest work, 	is 	unnecessary. 	In providing 	these
services, 	the 	profession, 	as 	well 	as 	third parties 	such 	as 	HHS
and 	the 	IRS, 	recognizes 	that 	accountants 	serve 	as 	advocates.
Certainly, 	a 	client 	hardly expects 	his 	tax 	accountant 	to 	be
"independent" 	or 	"objective," 	but 	rather expects 	his 	accountant
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to 	advocate 	his 	interests 	to 	the 	fullest 	extent 	possible 	under
the 	law.
The Texas 	Board of 	Public 	Accountancy,8 	the 	state
accountancy board 	in Oklahoma, 	the 	Model 	Code 	proposed by 	the
National 	Association of 	State 	Boards 	of 	Accountancy,9 	and 	the
American 	Institute 	of 	Certified Public 	Accountants 	permit
accountants 	to 	use 	contingent 	fees 	when 	they provide 	services 	to
a 	client 	for 	whom 	they 	are 	not 	also 	providing 	attest 	services. lO
The 	state 	accountancy boards 	in Massachusetts 	and 	South Dakota
also 	permit 	accountants 	to 	use 	contingent 	fees 	in 	some
circumstances.
We 	therefore 	believe 	that 	consumers 	are 	better 	served 	if
accountants 	are 	allowed 	to 	use 	contingent 	fees 	for 	services 	they
provide 	to 	clients 	for 	whom 	they do 	not 	provide 	attest 	services.
This 	less 	restrictive 	regulation of 	contingent 	fees 	appears
sufficient 	to 	protect 	consumers 	against 	conflicts 	of 	interest.
8 	Rules 	of 	Texas 	State Board of 	Accountancy, 	Code 	of
Ethics, 	S SOI.II(c)(4).
9 	National 	Association of 	State 	Boards 	of 	Accountancy,
Model 	Code of 	Professional 	Conduct, 	Rule 	101 	(b)(4) 	(March 	1989).
10 	The Texas 	Board permits 	accountants 	to 	use 	contingent
fees 	for 	nonattest 	services 	provided 	to 	an 	attest 	client, 	if 	the
amount 	of 	the 	contingent 	fee 	is 	not material 	with 	respect 	to 	the
total 	fees 	paid by 	the 	client.
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Co 	jssions
S.B. 	No. 	1269 	would 	prohibit 	accountants 	from 	receiving
"compensation 	for 	recommending or 	referring 	the 	product 	or
service 	of 	another 	person 	to 	a 	client 	.... "11 	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. 	The 	need 	for 	the 	restriction 	in 	the 	computer example
is 	particularly puzzling, 	since 	there 	is 	no 	restriction 	that
would prevent 	an 	accountant 	from 	buying 	and 	reselling 	computer
equipment 	to 	a 	client 	for 	a 	profit.
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
11 	S.B. 	No. 	1269, 	S 1(a)(3).
12

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 Texas 	consumers 	want 	to 	be
able 	to 	obtain commission-based 	financial 	planning 	services.
Some Texas 	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 Texas 	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 	to 	reduce 	their 	fees 	in 	response 	to
competition 	from 	accountants 	who 	provide 	commission-based
financial 	planning.
Direct 	consumer benefits, 	similar 	to 	those 	provided 	by
contingent 	fees, 	can 	result 	when 	accountants 	are 	allowed 	to
receive 	commissions 	on, 	for 	example, 	the 	sale 	of 	financial
products 	to 	clients. 	A consumer may 	desire 	an 	accountant's
assistance 	in preparing 	a 	financial 	plan, 	but wish 	to 	pay 	for 	it
only 	if 	he 	believes 	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, 	and 	the 	commission 	arrangement 	is 	disclosed 	to 	the
13

client, 	the 	accountant communicates 	to 	the 	client 	his 	belief 	that
the 	plan will 	be 	useful. 	Commissions 	also 	allow 	the 	accountant
to 	shoulder the 	risk 	that 	the 	client may 	not 	be 	persuaded 	the
plan 	is 	useful, 	since 	the 	accountant 	will 	not 	be 	compensated
unless 	the 	client 	decides 	to 	implement 	the 	plan. 	Moreover, 	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 	provides 	an 	incentive 	for 	the 	accountant 	to 	provide
higher 	quality 	services.
Consumers 	enjoy 	an 	additional 	benefit 	where 	accountants 	can
use 	commissions: 	the 	option 	of 	one-stop 	shopping 	for 	financial
planning 	services. 	Some consumers 	prefer 	to 	have 	their
accountant 	both prepare 	a 	financial 	plan 	and 	implement 	it 	by
recommending 	and 	arranging 	the 	purchase of 	investments. 	The 	ban
on 	accountants' 	receipt 	of 	commissions 	proposed 	in 	S.B. 	No. 	1269,
however, 	would prevent 	accountants 	who 	have 	prepared 	financial
plans 	from 	implementing them. 	Preparation of 	financial 	plans,
which 	generally provide 	an outline 	of 	the 	steps 	necessary 	to
achieve 	the 	client's 	goals, 	requires 	considerable 	research 	and
analysis. 	If 	accountants 	are 	prohibited 	from 	accepting
commissions, 	the 	only way 	they 	can be 	adequately compensated 	for
preparing 	financial 	plans 	is 	by charging a 	substantial 	fee.
Consumers 	would either 	have 	to 	forego 	using an 	accountant's
financial 	planning 	services 	or 	bear 	the 	cost 	of 	both 	financial
planning 	services 	and commissions 	on 	purchases 	of 	investments.
14

In 	addition, 	consumers 	would 	lose 	the 	convenience 	of 	dealing with
only one 	professional, 	which 	saves 	the 	time 	and 	effort 	that 	are
necessary 	to 	establish 	knowledgeable, 	trusting 	relationships 	with
multiple 	advisors.
The 	bill's 	restriction on commissions 	is 	thus 	likely 	to 	have
much 	the 	same effects 	on consumers 	as 	the 	contingent 	fee
restriction. 	The 	restriction 	would 	reduce 	competition among
accountants; 	increase 	consumer costs, 	because 	they would 	receive
less 	information about 	accounting 	services 	and 	assume 	greater
risks; 	and 	eliminate 	an 	incentive 	to 	provide 	higher 	quality
services. 	The 	result 	is 	likely 	to 	be 	an 	increase 	in 	the 	price
and 	a 	reduction 	in 	the 	quality of 	accounting 	services 	in Texas,
with 	a 	reduction 	in 	the 	satisfaction of 	consumer 	needs 	and
preferences.
Proponents 	of 	a 	ban on commissions 	raise 	the 	same 	argument
that 	they make 	against 	contingent 	fees, 	that 	is, 	prohibition 	is
necessary 	to 	preserve 	accountants' 	independence. 	Our views,
discussed earlier with 	respect 	to 	contingent 	fees, 	apply 	with
equal 	force 	to 	commissions 	-- 	independence 	concerns 	are 	met 	by
permitting 	accountants 	to 	receive 	commissions 	only 	for 	services
provided 	to 	nonattest 	clients. 	The 	Texas 	Board of 	Public
Accountancy,12 	the 	state board of 	accountancy 	in Oklahoma, 	the
Model 	Code 	proposed by 	the 	National 	Association of 	State 	Boards
12 	Rules 	of 	Texas 	State 	Board of 	Accountancy, 	Code 	of
Ethics, 	S 	501.11(c)(3).
15

of 	Accountancy,13 	and 	the 	American 	Institute of 	Certified 	Public
Accountants 	permit 	accountants 	to 	receive 	commissions 	in
connection with 	services 	provided to 	a 	client 	for 	whom 	the
accountant 	performs 	only 	nonattest 	services. 14 	The 	state
accountancy 	board 	in Maryland does 	not 	have 	any 	restriction on
commissions, 	and 	the 	state 	accountancy 	board 	in South 	Dakota
permits 	accountants 	to 	receive 	commissions 	in 	some 	circumstances.
It 	has 	also 	been 	argued 	that 	prohibiting 	the 	receipt 	of
commissions 	for 	recommending products 	or 	services 	to 	nonattest
clients 	is 	justified because 	commissions 	can create 	a 	conflict 	of
interest 	and 	loss 	of 	objectivity. 	The 	concern 	is 	that
accountants 	might 	recommend 	services 	or 	products 	that 	clients 	do
not 	need 	or 	that 	are 	less 	valuable 	to 	consumers 	than 	other
services 	or 	products 	that 	would produce 	lower commissions.
We 	believe 	that 	commissions 	need 	not 	be 	banned 	in order 	to
prevent 	such 	abuse. 	During 	the 	course 	of 	our 	investigation 	that
led 	to 	the AICPA consent 	order, 	we 	learned 	that 	accountants 	who
wish 	to 	respond 	to 	consumer demand 	for 	commission-based 	financial
planning 	services 	are 	likely 	to 	promote 	their 	services 	by
informing consumers 	that 	they 	receive 	commission~. 	We 	also
learned 	that 	accountants 	who 	provide 	financial 	planning 	services
13 	National 	Association of 	State 	Boards 	of 	Accountancy,
Model 	Code of 	Professional 	Conduct, 	Rule 	101(b)(3) 	(March 	1989).
14 	The Texas 	Board of 	Public 	Accountancy 	permits
accountants 	to 	receive 	commissions 	in connection with 	nonattest
services 	provided 	to 	an 	attest 	client, 	if 	the 	amount 	of 	the
commissions 	is 	not 	material 	with 	respect 	to 	the 	total 	fees 	from
the 	client.
16

on 	a 	fee 	basis 	are 	likely 	to 	inform consumers 	through 	their
advertising 	that 	fee-based 	financial 	planning 	is 	an 	alternative
to 	commission-based 	financial 	planning. 	Consumers 	are 	therefore
likely 	to 	become 	aware 	of 	their options 	and 	to 	question 	their
accountant 	about 	his 	method of 	compensation. 	Businesses 	that
purchase 	products 	recommended 	by 	accountants 	are 	likely 	to 	be
aware 	of 	their 	options. 	Thus, 	consumers 	who 	prefer 	to 	deal 	with
an 	accountant 	who 	does 	not 	accept 	commissions 	will 	have 	the
opportunity 	to 	do 	so.
The 	Texas 	Board of 	Accountancy 	requires 	accountants 	to
disclose, 	when they 	recommend 	products 	or 	services, 	that 	they
accept 	commissions 	from 	third 	parties. 15 	The 	state 	accountancy
board 	in 	Oklahoma 	and 	the 	National 	Association 	of 	State 	Boards 	of
Accountancy's 	proposed Model 	Cod~ take 	this 	approach 	as 	well. 16
This 	approach 	also 	affords 	consumers 	the 	opportunity 	to 	make 	an
informed choice between 	fee-based 	and commission-based 	financial
planning 	services.
15 	Rules 	of 	Texas 	State Board of Accountancy, 	Code 	of
Ethics, 	S 501.14.
16 	National 	Association of 	State 	Boards 	of 	Accountancy,
Model Code 	of 	Professional 	Conduct, 	Rule 	103 	(March 	1989).
Competition also 	provides 	a 	significant 	disincentive 	for
exploitive behavior 	by 	accountants. 	Since 	accountants 	depend
heavily on client 	referrals 	as 	a 	method of 	obtaining 	new 	business
and on 	repeat 	business 	from 	existing clients, 	there 	are 	strong
incentives 	for 	them 	to 	make 	appropriate 	recommendations 	to 	their
clients. 	State 	licensing board discipline 	and potential 	law
suits 	by 	injured clients 	provide 	further 	incentives 	to 	make
appropriate 	recommendations.
17

Accordingly, 	we 	believe 	that 	consumers 	would 	be 	better
served 	if 	accountants 	are 	permitted 	to 	use 	commissions 	in
connection with 	services 	provided 	to 	nonattest 	clients. 	If 	the
Committee 	believes 	mandatory disclosure 	is 	needed, 	it 	may want 	to
consider 	amending S.B. 	1269 	by adding 	an appropriate 	disclosure
requirement.
Conclusion
In 	summary, 	we 	believe 	that 	S.B. 	No. 	1269 	in 	its 	present
form 	would 	impose 	restrictions 	on competition among 	accountants
and on 	the 	dissemination 	to consumers 	of 	information 	about
accounting 	services 	that 	are 	likely 	to 	reduce 	consumers" 	ability
to 	obtain 	accounting 	services 	on 	terms 	they want, 	without
providing 	any countervailing benefits. 	The 	Committee may
therefore want 	to 	consider 	amending 	the 	bill 	so 	as 	to 	permit
accountants 	to 	pay 	referral 	fees, 	with 	appropriate 	disclosure,
and consumers 	to 	enjoy 	the 	benefits 	of 	using 	contingent 	fees 	and
appropriately disclosed commissions 	as 	methods 	of 	paYment 	for
accounting 	services.
18