Rule 502 - Advertising and Other Forms of Solicitation

A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, overreaching, or harassing conduct is prohibited.

Before 1978, Rule 502 prohibited advertising. Currently, a member is not prohibited from advertising or soliciting clients. The change in Rule 502 resulted from legal action taken by the Justice Department against a number of professional groups.

OBSERVATION: Members who are not in public practice are exempt from much of Rule 502.

Rule 503 - Commissions and Referral Fees

A. Prohibited Commissions

A member in public practice shall not for a commission recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission, when the member or the member’s firm also performs for that client:

(a) an audit or review of a financial statement; or

(b) a compilation of a financial statement when the member expects, or reasonably might expect, that a third party will use the financial statement and the member’s compilation report does not disclose a lack of independence; or

(c) an examination of prospective financial information.

This prohibition applies during the period in which the member is engaged to perform any of the services listed above and the period covered by any historical financial statements involved in such listed services.

B. Disclosure of Permitted Commissions

A member in public practice who is not prohibited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall disclose that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates.

C. Referral Fees

Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.

A CPA cannot receive a commission for recommending a client’s product or services if the CPA audits or reviews that client’s financial statements or examines that client’s prospective financial information. In addition, no commissions can be received when the CPA compiles a client’s financial statements if the CPA believes that a third party will rely on the statements, unless any lack of independence is disclosed in the compilation report.

OBSERVATION: When a CPA sells products that the CPA has title to directly to clients, this is not considered a commission. However, care should be exercised to ensure that the arrangement does not violate Rule 101 (Independence).

OBSERVATION: Rule 503 was amended on the basis of an agreement between the AICPA and the Federal Trade Commission. Some state boards of accountancy have decided not to enforce Rule 503. They take the position that commissions and fees should not be received or paid by the CPA for the referral of services. Each member should refer to the position taken by his or her particular state.

Rule 504 - Incompatible Occupations (Withdrawn)

The concept of incompatible occupations now is covered by Rule 101 (Independence).

Rule 505 - Form of Organization and Name

A member may practice public accounting only in a form of organization permitted by law or regulation whose characteristics conform to resolutions of Council.

A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization. Also, an owner surviving the death or withdrawal of all other owners may continue to practice under a name which includes the name of past owners for up to two years after becoming a sole practitioner.

A firm may not designate itself as “Members of the American Institute of Certified Public Accountants” unless all of its owners are members of the Institute.

Over the past several decades, the character of the practice of accounting has broadened to include a variety of activities that are beyond the scope of accounting. These activities include, among others, environmental auditing, executive recruitment, and the design of sophisticated computer systems that are not part of the client’s accounting system. With the expansion of the types of services provided by accounting firms, there is an obvious need to recruit personnel who do not have an accounting/auditing background. For many accounting firms, these nontraditional professionals are increasingly important to their growth and development. However, because of the rules adopted by the AICPA, a nontraditional professional, no matter how competent or important to the firm, could not be an owner of the firm.

The AICPA allows a CPA firm to be owned by non-CPAs if the form of ownership is sanctioned by the particular state and if the following guidelines are observed:

Fifty-one percent of the ownership (as measured by financial interest and voting rights) must be held by CPAs. A non-CPA owner must be actively engaged in providing services to clients of the firm, and that participation must be the principal occupation of the non-CPA.

A CPA must be ultimately responsible for all services provided by the firm that involve financial statement attestation, compilation services, and “other engagements governed by Statements on Accounting Standards or Statements on Standards for Accounting and Review Services.”

A non-CPA who becomes an owner after the adoption of the AICPA resolution must have a baccalaureate degree (after 2010, the individual must have completed 150 semester hours of education).

A non-CPA may not hold him or herself out as a CPA, but may be referred to as a(n) principal, owner, officer, member, shareholder or other title allowed by state law.

A non-CPA owner must observe the AICPA Code of Professional Conduct.

A non-CPA owner must complete the same number of CPE units as CPAs.

While the resolution allows for accounting firm ownership by non-CPAs, those individuals are not eligible for membership in the AICPA.

OBSERVATION: Each state is responsible for determining what forms of ownership may be used to practice public accounting; however, the AICPA notes that a practitioner can practice only in a business organization form that conforms to resolutions of the AICPA Council.