It is vital that the professional accountant be proactive in ensuring that sufficient safeguards are in place ahead of referral fees or commission being paid or received.
By Malesela Les Montja
Professional accountants are required to comply with the fundamental principles and apply the conceptual framework set out in the Code of Professional Conduct of the South African Institute of Chartered Accountants (Revised 2018) to identify, evaluate and address threats to those principles.
Clause 330.5A1 of the revised Code states that a self-interest threat to compliance with the principles of objectivity and professional competence and due care is created if a professional accountant pays or receives a referral fee or receives a commission relating to a client. Such referral fees or commissions include:
- A fee paid to another professional accountant for the purposes of obtaining new client work when the client continues as a client of the existing accountant but requires specialist services not offered by that professional accountant
- A fee received for referring a continuing client to another professional accountant or another expert where the existing accountant does not provide the specific professional service required by the client
- A commission received from a third party (for example a software vendor) in connection with the sale of goods or services to a client
Examples of actions that might be safeguards to address such a self-interest threat are:
- Obtaining an advance agreement upfront and in writing from the client for commission arrangements in connection with the sale by another party of goods or services to the client might address a self-interest threat
- Disclosing to clients, upfront and in writing any referral fees or commission arrangements paid to, or received from, another professional accountant or third party for recommending services or products might address a self-interest threat
It is clear from above that a professional accountant needs to consider the self-interest threat to his objectivity and professional competence and due care when either offering or receiving a referral fee or commission.
It is therefore vital that the professional accountant be proactive in ensuring that sufficient protection is in place ahead of any such referral fee or commission being paid or received.
In making or receiving a referral, a duty of care should arise. The extent of a duty of care varies according to the circumstances, including whether such fee was solicited or not. This is especially important for a professional accountant in public practice.
A professional accountant in public practice needs to consider this from the client’s or enquirer’s point of view and what their (client’s) expectations would be of what a professional accountant in public practice would be expected to know.
It is therefore vital that a professional accountant is certain that the service being referred thereto cannot or should not be provided by him or her. From a business development perspective, there also lies a risk that the client may also choose to eventually transfer all its business to the referred service provider and thus resulting in the professional accountant losing all his/her business from the client.
The reputational risk attached with such referral fee should be considered as well. It may not be the client’s desire that another service provider is recommended by a professional accountant without the client’s prior consent. The client is likely to wonder – what’s in it for you? (the professional accountant). Therefore, it is vital to get consent, upfront and in writing, when considering either referring a client to a third-party service provider or a third-party service provider to a client.
This is clearly not a matter of materiality insofar as amount of fee received by professional accountant for services rendered by him/herself compared to the fee being received for the referral to the third party.
Business is all about relationships and relationships are all about trust. Trust is therefore a cornerstone in any sector of business, and even so much more in financial services and advice.
The professional accountant should also be cognisant that a referral fee does not impose an advocacy threat to the principle of professional behaviour. This would entail the professional accountant advocating the client’s interest to the prospective service provider or conversely advocating the third-party service provider’s interest to the client for the sale of goods and services.
It is the duty of the professional accountant to ensure that such threats are either eliminated or reduced to an acceptable level. Alternatively, no such transaction (paying or receiving referral fees or commissions) should take place as failure to eliminate or reduce the threat will be a breach of the Code.
Malesela Les Montja CA(SA) is an Associate at the Debt Finance Division of Nedbank Corporate and Investment Banking