Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City
ESTABLISHING AND MAINTAINING AN ACCOUNTING PRACTICE
Accounting 152
PRACTICE OF PUBLIC ACCOUNTANCY
RA 9298 provides that the following forms of organization are allowed
for the practice of public accountancy:
A. Single practitioners (individual CPAs) or sole proprietorships
(firms).
B. Partnerships which could be general partnerships or limited
liability partnerships.
A sole proprietor or partnership of CPAs engaged in public accountancy
is known as a CPA firm or an audit firm. The corporation form of
organization in the practice of public accountancy is not allowed in the
Philippines. The SEC shall not register any corporation organized for
the practice of public accountancy.
CPA firms vary in size and form, from individual CPAs with few or no
staff members to large multi-national auditing firms with branches in
many parts of the world though the limited liability partnership (LLP)
form of organization has been adopted by most of the large audit firms.
This is because LLPs afford some protection for the personal assets of
the individual partners which other forms do not provide. The largest
CPA firms, in terms of number of personnel and in terms of revenues,
have operations in various parts of the world known as territories. These
firms usually have affiliations or correspondent firms in each country.
Biggest Audit Firms in the Philippines
Network Firms Correspondent Firm in the
Philippines
Sycip Gorres Velayo and
Ernst and Young, LLP
Company
PriceWaterhouseCoopers, LLP Isla Lipana and Company
Klynveld Peat Marwick Manabat Sanagustin and
Goerdeler (KPMG), LLP Company
Deloitte Touche Tohmatsu Navarro Amper and Company
Reyes Tacandong and
Mazars
Company
Grant Thornton, LLP Punongbayan and Araullo
BDO Alba Romeo and
BDO International
Company
ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY
Single practitioners, firms and partnerships must first obtain a certificate
of accreditation from the BOA before it can be allowed to practice
public accountancy. A minimum of 3 years meaningful experience in
any of the areas of public practice including taxation is required before
such a certificate can be obtained. What constitutes meaningful
experience is enumerated below.
Sector Meaningful experience
A. Significant involvement in general
accounting, tax administration and
budgeting.
B. Significant involvement in internal
auditing and liaison with external
Commerce and industry auditors.
C. Significant involvement in
representing his employer before
government agencies on tax and
matters related to accounting or any
other related functions.
D. At least 1 year as audit assistant.
E. At least 2 years as auditor in charge
Public Practice
of audit engagement covering full
audit functions of significant clients.
F. Significant involvement in general
accounting, tax administration and
budgeting.
Government
G. Significant involvement in internal
auditing and liaison with COA or
any other related functions.
Academe H. Teaching for at least 3 trimesters or
2 semesters subjects in either
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financial accounting, business law
and taxation, auditing problems,
auditing theory, management
services and financial management
provided that the accumulated
teaching experience on these
subjects shall not be less than 3
school years.
A certificate of accreditation is a certificate under seal, issued by the
PRC upon the recommendation by the BOA attesting that individual
CPAs, including the staff members thereof, firms, including the sole
proprietors and the staff members thereof and partnerships of CPAs
including the partners and the staff members thereof, are duly
accredited to practice public accountancy in the Philippines.
 RULES AND REGULATIONS FOR THE ACCREDITATION
OF CPAs FOR THE PRACTICE OF PUBLIC ACCOUNTANCY
Annex B of the IRR to RA 9298 provides guidance on the requirements
for accreditation of CPAs for the practice of public accountancy. The
following are the relevant provisions of said Annex:
A. The registration for accreditation shall be valid for a period of
3 years and may be renewed every 3 years on or before
September 30 on the year of expiry upon compliance of the
requirements provided in the IRR. The registration of
applicants approved during any month of the year shall expire
on December 31 on the third year following its approval.
For example, the application of registration of Ron and
Company CPAs was approved on July 31, 2012.
Consequently:
 The registration shall expire on December 31, 2014.
 The firm shall apply for renewal on or before
September 30, 2014.
 The renewal shall be for the for the 3 year period
beginning January 1, 2015.
 The next renewal shall be on or before September 30,
2017.
 The second renewal shall be for the next 3 year
period beginning January 1, 2018.
B. Individual CPAs, firms and partnerships shall not commence
public practice until a valid Certificate of Registration has
been issued to them.
C. The application for registration shall be accomplished in the
form prescribed by the BOA, in triplicate and duly signed by
applicant CPA.
Rules on Names
D. In the case of an Individual CPAs, he shall do business under
his registered name with the BOA and the PRC and as printed
in his CPA certificate. For example:
Juan dela Cruz, CPA.
E. In the case of firms, they shall do business under their
respective duly registered and authorized firm name
appearing in the registration documents issued by the
Department of Trade and Industry or any other proper
government offices and such firm name shall include the real
name of the sole proprietor as printed in his CPA certificate or
other similar Firm names. For example:
Juan dela Cruz and Associates
F. In the case of partnerships, they shall do business under their
respective partnership names as indicated in their current
Articles of Partnership and certificates of registration issued
by the SEC if registered or under the partnership names as
indicated in their current Articles of Partnership if
unregistered or other similar partnership names. For example:
Sycip Gorres Velayo and Company
G. A CPA shall practice only under a name allowed by
Philippine laws and shall not include any fictitious name,
indicates specialization or is misleading as to the type of
organization.
H. A partner surviving the death or withdrawal of all the other
partners in a partnership may continue to practice under the
partnership name for a period of not more than 2 years after
becoming a sole proprietor, meaning, that on or before
 reaching the end of the 2 year period, the resulting sole
proprietor if he continues to practice under a proprietorship
form of organization, shall change the old partnership name to
an Individual CPA or firm name.
Limitations for Foreign CPAs
I. Under no circumstances shall the correspondent relationship,
membership or business dealings with foreign CPAs be a
scheme for the foreign CPAs to engage in the practice of
public accountancy in the Philippines who/which under the
present laws are limited to Filipino CPAs, except the
authorized foreign CPAs under Sections 34 and 35 of RA
9298.
J. The Individual CPA, firm or partnership of CPAs duly
registered under the IRR shall not have as its owner, sole
proprietor, partner or any staff thereof, any foreign CPA
unless he qualifies to practice in the Philippines under
Sections 34 and 35 RA 9298 or other relevant laws and
bilateral or multilateral agreement or treaties.
First-time Registrants and Quality Review
K. In the case of first time registrants, the application of
registration shall be accompanied with a sworn statement by
the individual CPA, sole proprietor of firm and managing
partner of the partnership stating that the individual CPA, sole
proprietor of the firm and all the partners of the Partnership
has/have at least 3 years of meaningful experience in any of
the areas of public practice including taxation as defined by
the IRR including an attachment containing a detailed
description of such work experience.
L. If the individual CPA, firm or partnership had undergone
quality assurance review by the BOA or its duly authorized
representatives, a certified copy of the report of such review
shall be attached to the application for registration.
Authentication and Accreditation
M. The BOA shall duly authenticate all applications for
registration received in proper form, and after having passed
upon such applications, shall recommend to the PRC the
approval or denial thereof not later than 60 days after the
receipt of the aforesaid applications in proper form.
N. The PRC shall upon favorable recommendation of the BOA,
issue to the applicant the corresponding Certificate of
Registration to practice public accountancy. Unless sooner
revoked, cancelled or withdrawn, said Certificate of
Registration shall be valid for 3 years shall be renewable
every 3 years upon payment of the required fees.
Death or Disability of an Individual CPA and Dissolution or
Liquidation of a Firm or Partnership of CPAs
O. The death or disability of an individual CPA or the dissolution
and liquidation of a firm or partnership of CPAs shall be
reported to the Board by any designated staff member of the
individual CPA, the sole practitioner (or any designated staff
member of the firm in case of the unavailability of the sole
practitioner) or managing partner of the partnership (or any
designated partner in case of the unavailability of the
managing partner) not later than 30 days from the date of such
death, dissolution or liquidation. The report shall be made in
the form of an affidavit in the case of an individual CPA or a
firm or by furnishing the BOA with a certified copy of the
dissolution or liquidation papers filed with the SEC in the
case of a partnership. Failure to notify the Board of such
death, dissolution or liquidation shall subject the designated
staff member of an individual CPA, sole proprietor or
designated staff member of the firm or managing partner or
designated partner of the partnership to penalties.
Fees and Penalties
P. Application for initial registration, renewal and request for
reinstatement, shall be subject to the fee of P1,000 or to such
an amount as the Commission may prescribe.
Q. Subject to review by the Commission and depending on the
gravity of the offense, the BOA shall suspend or revoke the
CPA Certificate, Certificate of Registration and professional
identification card of an Individual CPA, sole proprietor,
partner or staff member as the case maybe who commits any
act that is violative of the Code of Ethics for Professional
Accountants, Philippine Accountancy Act of 2004, the IRR to
RA 9298, the circulars, rules, regulations or resolutions of the
BOA, PRC, SEC or any other regulatory agency or any act
that does not comply with the professional, ethical and
technical standards required of the practice of public
accountancy, provided, that if the act or acts committed
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constitute a criminal offense punishable under RA 9298 and
its IRR or other existing penal laws, the party or parties
responsible shall be proceeded against criminally,
independent of any action herein provided.
Violations shall include, but shall not be limited to the
following acts by Individual CPAs, including staff members
thereof, firms, including the sole proprietors and staff
members thereof and partnerships of CPAs including the
partners and staff members thereof:
 Engaging in public accounting practice without first
registering with the BOA and PRC.
 Continuing to engage in the practice of public
accountancy after the expiration of the registration.
 Continuing to engage in the practice of public
accountancy after suspension, revocation, or
withdrawal of the registration.
 Giving any false information, data, statistics, reports
or other statement which tend to mislead, obstruct,
or obscure the registration of an individual CPA,
firm or partnership of CPAs.
 Giving any misrepresentation to the effect that
registration was secured when in truth and in fact, it
was not secured.
 Failure or refusal to undergo quality review.
 Failure to comply with the requirements on the
accomplishment of the application for registration,
including submission of required documents.
OTHER CONSIDERATIONS IN ESTABLISHING A CPA FIRM
Aside from obtaining the necessary permits and accreditation to be able
to practice public accountancy, there are some other important
considerations for the CPA.
A. Location and Work Environment
Most of the large CPA firms are centered in the Makati
business district. The CPA will have a business advantage in
maintaining an office in centers of Philippine business. A
major factor in deciding on the location is convenience, that
is, the accessibility of the CPA, the staff and the clients of the
CPA.
B. Technological Requirements
While the CPA firm would need relatively simple office
equipment, primarily word processing and printing equipment
and photocopy machines, investing on IT will help the CPA
gain an advantage over its competitors, particularly in the
areas of efficiency, effectiveness and risk management.
Equipment should be periodically inspected and repaired or
replaced as necessary. Disaster recovery plans and backup
facilities would reduce concerns about possible data loss.
C. Human Resources
The firm has to have a good policy on hiring, professional
development and advancement of its employees. The success
of a CPA firm depends largely on the competence and
performance of its employees. CPA firm personnel should be
trained with a combination of education and work experience.
The following are the training methods for personnel in CPA
firms:
 In house trainings – includes workshops on topics
such as audit procedures, audit report writing and
responsibilities for fraud and error.
 On the job training – under the guidance of a more
experienced auditor, newer audit staff are given the
chances to apply audit concepts, perform
increasingly complex audit procedures and develop
skills in communication and critical thinking.
 External training programs – includes attendance
at training programs and modules sponsored by
PICPA and other professional organizations such as
the ACPAPP.
D. Hierarchy or Personnel
The hierarchy of personnel in CPA firms has evolved through
the years but generally, each firm has four major positions as
follows: associate or junior associate, senior associate,
manager and sole proprietor or partner.
Position Nature of Work
Perform detailed audit work such as:
 Checking computations and
footings.
 Checking short and long
extensions.
 Tracing postings to the ledgers.
  Preparing reconciliations.
 Performing vouching and tracing
procedures.
 Preparing schedules and analyses
of accounts.
 Observing the physical count of
inventories.
Associates  Mailing confirmation requests and
(0 to 3 years) summarizing the results of
confirmation procedures.
 Quality control on audit
deliverables.
Performs more complex audit procedures
and:
 Usually draft and finalize the
audit program.
 Supervise associates and perform
review procedures on their work.
 Address minor accounting and
auditing issues with clients and
Senior
audit associates.
associates
 Directly responsible to the
(3 to 6 years)
manager or the partner
 Assemble working papers.
 Take charge of field work.
 Prepare the original draft of audit
report and audited financial
statements subject to review and
approval by the partner or
manager.
Perform audit procedures and
engagement management such as:
 Preparing the overall audit plan.
 Performing administrative work
for several concurrent
engagements.
 Settling major accounting or
auditing issues.
Managers
 Acting as a liaison between
(6 to 10 years)
partners and other team members.
 Directly supervising senior
associates.
 Reviewing working papers.
 Drafting the audit report for
review by the partner.
 Taking charge of training
programs.
Owners of the audit firm. They determine
the operating policies of the firm. In
addition, partners:
 Establish and maintain
relationship with clients.
 Discuss with clients the objective
and scope of the audit.
 Assume overall responsibility for
each engagement.
 Attend client’s meetings to
Partners answer questions that may arise in
(10+ years) connection with the audit
engagement or the audit report.
 Have the final say on accounting
or auditing issues encountered in
an engagement.
 Sign the audit reports and firm
correspondence.
 Approve the billings for fees to be
given to clients.
 Plan and review all phases of the
audit.
ADVERTISING AND PROMOTION FOR THE PRACTICE OF
ACCOUNTANCY IN THE PHILIPPINES (BOA Resolution No.
126, Series of 2008)
Though they have a responsibility to serve the public, CPA firms also
seek to earn profit for the sole proprietor and partners of the partnership.
This is also necessary to ensure the continuity of the CPA firm. To
maximize earnings, CPA firms need not only provide quality service
but also have as many clients as possible.
Generally, the CPA’s usual source of clients are referrals from various
parties such as members of civic and community associations where the
CPA actively participates, existing clients who received satisfactory
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service, other CPAs by active involvement in professional organizations
and other sources such as law firms. Aside from referrals, CPAs may
resort to the following:
A. Advertising – the communication to the public of information
as to the services or skills provided by professional
accountants in public practice with a view to procuring
professional business.
B. Publicity – the communication to the public of facts about a
professional accountant which are not designed for the
deliberate promotion of that professional accountant.
Solicitation, which refers to approaching a potential client for the
purpose of offering professional services, is not allowed in the
Philippines. Prior to the issuance of the BOA Resolution No. 126,
Series of 2008, advertising is also not allowed in the country. Reasons
for its prohibition include:
A. Advertising can lead to undue competition between and
among practitioners and thus may cause a decline in the
quality of service.
B. Advertising would encourage a more commercial approach
within the profession thus reducing client’s trust in CPAs and
also increasing the likelihood of CPAs neglecting their ethical
duties.
C. The cost of advertising would outweigh any savings which
might result from competition and it would be borne
ultimately by clients.
D. Small or new practitioners would be unlikely to have the
financial resources to match the advertising of larger or more
established practices.
The rationale behind the prohibition of advertising is to lend dignity to
the profession which, unlike ordinary services and merchandise, should
not be peddled in the marketplace through touting and self-laudatory
means.
However, recently, due to the expansion of services provided by the
professional accountants and the inclusion of a provision in the revised
Code of Ethics, advertising is now allowed to the extent that this
provides the public with necessary information about the sole
practitioners or professional partnerships and the services they offer to
their clients.
Relevant rules and regulations pertaining to advertising and promotion
for the practice of accountancy in the Philippines follow:
A. Generally, advertising in any medium are acceptable
provided:
 It has as its object the notification to the public or
such sectors of the public as are concerned, of
matters of fact in a manner that is not false,
misleading or deceptive.
 It is in good taste.
 It is professionally dignified.
 It avoids frequent repetition of, and any undue
prominence being given to the name of the
professional accountant in public practice
However, the following shall not be allowed:
 Discrediting, disparaging or attacking other firms or
CPA practitioners.
 Self-laudatory statements.
 Referring to, using or citing actual or purported
testimonials by third parties.
 Publishing and comparing fees with other CPAs or
CPA firms or comparing those services with those
provided by another firm or CPA practitioner.
 Giving too much emphasis on competitive
differences.
 Using words or phrases which are hard to define
and even more difficult to substantiate objectively.
 Publishing services in billboard (tarpaulin,
streamers, etc.) advertisements.
B. The use of the name of an international accounting firm
affiliation or correspondence other than a notation that it is a
member or correspondent firm of that foreign firm shall not
be allowed so as to imply that the foreign firm is practicing in
the Philippines.
C. No firm or CPA practitioner shall identify the name of a client
or items of a client’s business in advertising, public relations
or marketing material produced to promote his practice
provided that the client gives its written consent.
D. No firm or CPA practitioner shall use the term “accredited” or
any similar words or phrases calculated to convey the same
meaning if the claimed accreditation (BOA, SEC, BSP or IC)
has expired.
E. All advertisements must have proper review and approval in
writing by the risk management partner and managing partner
or their equivalents.
The following examples are illustrative of circumstances in which
publicity is acceptable and the matters to be considered in connection
herewith is subject always to the overriding requirements mentioned in
the preceding rules:
A. Appointments and Awards
It is in the interests of the public and the accountancy
profession that any appointment or other activity of a
professional accountant in a matter of national or local
importance, or the award of any distinction to a professional
accountant, should receive publicity and that membership of
the professional body should be mentioned. However, the
professional accountant should not make use of any of the
aforementioned appointments or activities for personal
professional advantage.
B. Professional Accountants Seeking Employment or
Professional Business
A professional accountant may inform interested parties
through any medium that a partnership or salaried
employment of an accountancy nature is being sought. The
professional accountant should not, however, publicize for
subcontract work in a manner which could be interpreted as
seeking to procure professional business. Publicity seeking
subcontract work may be acceptable if placed only in the
professional press and provided that neither the accountant’s
name, address or telephone number appears in the publicity.
A professional accountant may write a letter or make a direct
approach to another professional accountant when seeking
employment or professional business.
C. Directories
A professional accountant may be listed in a directory. Entries
should be limited to name, address, telephone number,
professional description and any other information necessary
to enable the user of the directory to make contact with the
person or organization to which the entry relates.
D. Books, Articles, Interviews, Lectures, Radio and
Television Appearances
Professional accountants who author books or articles on
professional subjects, may state their name and professional
qualifications and give the name of their organization but
shall not give any information as to the services that firm
provides. Similar provisions are applicable to participation by
a professional accountant in a lecture, interview or a radio or
television program on a professional subject. What
professional accountants write or say, however, should not be
promotional of themselves or their firm but should be an
objective professional view of the topic under consideration.
Professional accountants are responsible for using their best
endeavors to ensure that what ultimately goes before the
public complies with these requirements.
E. Training Courses, Seminars and Similar Events
A professional accountant may invite clients, staff or other
professional accountants to attend training courses or
seminars conducted for the assistance of staff. Other persons
should not be invited to attend such training courses or
seminars except in response to an unsolicited request. The
requirement should in no way prevent professional
accountants from providing training services to other
professional bodies, associations or educational institutions
which run courses for their members or the public. However,
undue prominence should not be given to the name of a
professional accountant in any booklets or documents issued
in connection therewith.
F. Booklets and Documents Containing Technical
Information
Booklets and other documents bearing the name of a
professional accountant and giving technical information for
the assistance of staff or clients may be issued to such persons
or to other professional accountants. Other persons should not
be issued with such booklets or documents except in response
to an unsolicited request.
G. Staff Recruitment
Genuine vacancies for staff may be communicated to the
public through any medium in which comparable staff
vacancies normally appear. The fact that a job specification
necessarily gives some detail as to one or more of the services
provided to clients by the professional accountant in public
practice is acceptable but it should not contain any
promotional element. There should not be any suggestion that
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the services offered are superior to those offered by other
professional accountants in public practice as a consequence
of size, associations, or for any other reason.
In publications such as those specifically directed to schools
and other places of education to inform students and
graduates of career opportunities in the profession, services
offered to the public may be described in a business-like way.
More latitude may also be permissible in a section of a
newspaper devoted to staff vacancies than would be allowed
if the vacancy appeared in a prominent position elsewhere in a
newspaper on the grounds that it would be most unlikely that
a potential client would use such media to select a
professional adviser.
H. Publicity on Behalf of Clients
A professional accountant in public practice may publicize on
behalf of clients, primarily for staff. However, the
professional accountant in public practice should ensure that
the emphasis in the publicity is directed towards the
objectives to be achieved for the client.
I. Brochures and Firm Directories
A professional accountant in public practice may issue to
clients or, in response to an unsolicited request, to a non-
client:
 A factual and objectively worded of the services
provided.
 A directory setting out names of partners, office
addresses and names and address of associated
firms and correspondents.
J. Stationery and Nameplates
Stationery of professional accountants in public practice
should be of an acceptable professional standard and comply
with the requirements of the law and of the member body
concerned as to names of partners, principals and others who
participate in the practice, use of professional descriptions and
designatory letters, cities or countries where the practice is
represented, logotypes and the likes. The designation of any
services provided by the practice as being specialist nature
should not be permitted. Similar provisions, where applicable,
should apply to nameplates.
K. Newspaper Announcements
Appropriate newspapers or magazines may be used to inform
the public of the establishment of a new practice, of changes
in the composition of a partnership of professional
accountants in public practice, or of any alteration in the
address of a practice. Such announcements should be limited
to a bare statement of facts and consideration given to the
appropriateness of the area of distribution of the newspaper or
magazine and number of insertions.
L. Inclusion of the Name of the Professional Accountant in
Public Practice in a Document Issued by a Client
When a client proposes to publish a report by a professional
accountant in public practice dealing with the client’s existing
business affairs or in connection with the establishment of a
new business venture, the professional accountant in public
practice should take steps to ensure that the context in which
the report is published is not such as might result in the public
being misled as to the nature and meaning of the report. In
these circumstances, the professional accountant in public
practice should advise the client that permission should first
be obtained before publication of the document.
Similar consideration should be given to other documents
proposed to be issued by a client containing the name of a
professional accountant in public practice acting in an
independent professional capacity. This does not preclude the
inclusion of the name of a professional accountant in public
practice in the annual report of a client.
When professional accountants in their private capacity are
associated with, or hold in, an organization, the organization
may use their name and professional status on stationery and
other documents. The professional accountant in public
practice should ensure that this information is not used in such
a way as might lead the public to believe that there is a
connection with organization in an independent professional
capacity.
M. Anniversaries
A professional accountant’s press and other media releases or
announcements or newspaper supplements, or other similar
publications, or other commemorative media, or the holding
 of media covered events undertaken only to commemorate
their anniversaries in public practice by informing the public
of their achievements or accomplishments in contributing
towards nation building and in international understanding,
goodwill, or relationship or enhancing the image or standards
of the accounting profession do not violate the rules on
advertising and solicitation provided that such announcements
or undertakings contains only factual matters without detailed
listing of services. Such undertaking should be done only
every five years of celebration.
N. Websites
A professional accountant may develop and maintain a web
site in the internet in such suitable length and style which may
also include announcements, press releases, publications and
such other necessary and factual information like firm’s
name, partners or principals’ name and brief description of
their educational attainment, brief listing of services, postal
address, telephone, fax and e-mail addresses. Such web site
should not contain self-laudatory statements designed to
solicit clients.
FEES AND BILLING CLIENTS
When entering negotiations regarding professional services, a CPA may
quote whatever fee deemed to be appropriate. The fact that a CPA may
quote a lower fee than another is not in itself unethical. What is
unethical is if the fees are too excessive or too low. In addition, there
would be a risk of a perception that the quality of work could be
impaired if fees are quoted too low.
Fees charged for assurance engagements should be a fair reflection of
the value of the work involved and should take into account, among
others:
A. The skills and knowledge required for the type of work
involved.
B. The level of training and experience of the persons
necessarily engaged on the work.
C. The time necessarily occupied by each person engaged on the
work.
D. The degree of responsibility and urgency that the work
entails.
Other factors to be considered are those influenced by legal, social and
economic conditions in the Philippines.
Methods of Billing Clients
The commonly used methods by CPA firms in determining professional
fees to be charged to its clients are the following:
A. Per diem basis – the charges are based on the actual time
spent at a rate depending on the experience and expertise of
the members of the engagement team This is also known as
actual time charges basis.
B. Flat or fixed fee basis – the client is billed a lump-sum but
all-inclusive, pre-arranged amount for the entire engagement.
C. Maximum fee basis – a combination of fixed fee and per
diem basis. The billing is similar to per diem basis subject to a
maximum limit as agreed between the practitioner and the
client.
D. Retainer fee basis – the client pays a uniform or fixed
monthly charge, plus additional fee annually, payable upon
submission of the audit report.
E. Out-of-pocket expenses – reimbursable expenses, in addition
to the professional fees, that are chargeable to the client, such
as traveling expenses and supplies.
Billing arrangements should be clearly defined, preferably in writing,
before the start of the engagement to help in avoiding misunderstanding
with respect to fees.
Contingent Fees
An assurance engagement should not be performed for a fee that is
contingent on the result of the assurance work or on items that are the
subject matter of the assurance engagement. A contingent fee is one
that is calculated on a predetermined basis relating to the outcome or
result of a transaction or the result of the work performed. Contingent
fees are an unacceptable billing arrangement because it impairs the
independence and objectivity of a professional accountant. Examples of
contingent fees include:
A. Fee based on a percentage of audited net income.
B. Fee based upon percentage of the acquisition price of another
company.
C. Fee based on the amount of taxes saved.
D. Tax preparation where the fee will be based on whether the
CPA signs the tax return prepared.
E. Fee based on amount of insurance settlement.
F. Fee is charged if loan is obtained or approved by the bank.
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G. No fee will be charged unless specific finding or result is
obtained.
The following fees are not considered to be contingent fees:
A. If fixed by a court or other public authority.
B. If determined based on the results of judicial or government
agency proceedings.
C. If authorized by statute.
D. If approved by a member body as generally accepted practice
for certain professional services.
Some reasons why the above are not considered contingent fees:
A. Fees fixed by courts and other public authority, although may
be uncertain in nature at that moment, are not known and
cannot be influenced by the auditor and the client.
B. Fees based on determination by taxing authorities are a matter
of judicial proceedings which do not involve third parties.
SARBANES-OXLEY ACT OF 2002
Also known as the “Public Company Accounting Reform and Investor
Protection Act” and SOX, the Sarbanes-Oxley Act of 2002 is a US
federal law that set new or enhanced standards for all US public
company boards, management and public accounting firms. The bill
was enacted as a reaction to a number of major corporate and
accounting scandals including those affecting Enron, Tyco International,
Adelphia, Peregrine Systems and WorldCom. These scandals, which
cost investors billions of dollars when the share prices of affected
companies collapsed, shook public confidence in the US’ securities
markets.
Significant provisions and major elements of the law include the
following:
A. Creation of an oversight board – the Public Company
Accounting Oversight Board (PCAOB) was created to
oversee the audit of public companies. This board sets
standards and rules for audit reports. All accounting firms that
audit public companies must register with the oversight board.
It also inspects, investigates and enforces compliance from
these registered firms.
B. Auditor independence – auditors now have a list of non-
audit services they cannot perform during an audit. SOX also
imposes a one year waiting period for audit firm employees
who leave and accounting firm to become an executive of a
former client. In addition, the former firm must wait one year
before performing any audit services for the new employer.
C. Corporate responsibility – senior executives must now take
individual responsibility for the accuracy and completeness of
corporate financial reports. The chief executive officer and
chief financial officer are required to certify and approve the
integrity of their company’s financial reports quarterly.
D. Greater financial disclosures – transactions and
relationships that are off balance sheet but that may affect
financial status now must be disclosed. Personal loans from a
corporation to its executives are now largely prohibited.
Annual reports must include a report stating that management
is responsible for the internal control structure and procedures
for financial reporting.
E. Conflict of interest disclosures for analysts – conflict of
interest disclosures now need to be made by research analysts
who make public appearances or offer research reports. These
disclosures need to contain certain information about the
company that is subject of the appearance or report. The
analyst has to report whether he holds any securities in the
company or received corporate compensation. Brokers and
dealers have to disclose if the public company is a client.
F. Corporate and criminal fraud accountability – altering,
destroying, concealing or falsifying records or documents
with the intent to influence a federal investigation or
bankruptcy case is subject to fines and up to 20 years
imprisonment. New audit workpapers must be retained for
five years. Any person who knowingly defrauds shareholders
of publicly traded companies is subject to fines or
imprisonment.
G. Corporate tax returns – the chief executive officer should
sign the company’s tax return.
H. Lawyer’s responsibilities – there are now minimum
standards of professional conduct for lawyers representing
public companies before the US SEC. These include a rule
requiring a lawyer to report securities violation to the chief
executive officer.
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