A contingent fee is a form of compensation that is only paid when a specific objective has been achieved. For example, a contingent fee 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 the accountant conducts an examination of a client’s freight billings. However, placing the accountant firmly in the camp of the client, so that they both win when an outcome is achieved 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.
Given this independence problem, the AICPA Code of Conduct prohibits the performance of any professional services for a contingent fee under the following circumstances:
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.