Can uncollected prior year fees impair your independence?
Answer: It depends. If a covered member has unpaid fees from an attest client for any previously rendered professional service provided more than one year before the date of the current-year report, he is not independent.
Section 1.230.010 (Unpaid Fees) of the Code of Professional Code states:
Threats to the covered member’s compliance with the “Independence Rule” would not be at an acceptable level and could not be reduced to an acceptable level by the application of safeguards if a covered member has unpaid fees from an attest client for any previously rendered professional service provided more than one year prior to the date of the current-year report (my bold). Accordingly, independence would be impaired. Unpaid fees include fees that are unbilled or a note receivable arising from such fees.
Applies to All Fees
Note that the rule states that independence is impaired if a covered member has unpaid fees from an attest client for any previously rendered professional service. Impairment exists when any prior year fee has not been paid, including tax or consulting work.
Billed or Unbilled Services
Also, the CPA should look back one year from the report date to see if billed or unbilled amounts exist. Here’s an example:
- The CPA provided tax services to ABC Company on April 25, 2015.
- The CPA billed for the tax services on June 1, 2015.
- ABC Company needs an audit report with a May 15, 2016, date.
- ABC Company has not paid the June 1, 2015, bill.
Is the CPA independent? If the audit report is dated May 15, 2016, the CPA is not independent.
Why? If we look back one year from the report date of May 15, 2016, we see that the April 25, 2015 work has not been paid. So an unpaid service for more than one year before the report date exists. If the CPA issues the May 15, 2016 report, he is in violation of the Code of Conduct.
How do you cure the independence impairment? ABC Company has to pay for the April 25, 2015 service.
An Odd Collection Procedure
Oddly, the potential impairment of independence may assist you in collecting past-due accounts. If the client needs the current year audit report, and the CPA can’t provide it to him without payment for the prior-year work, then the client may be willing to come up with the money.