Can a public accounting firm accept a contingent fee from a publicly held audit client without impairing independence?

A public accounting firm cannot accept a contingent fee from a publicly held audit client because doing so would impair the firm's independence. Independence is a fundamental principle in accounting that ensures that auditors remain objective and impartial in their assessments.

Accepting a contingent fee implies that the auditor's compensation is dependent on the results of their work, which could create a conflict of interest and compromise their ability to provide an unbiased opinion on the financial statements. For example, if an audit firm were to receive a fee based on the outcome of an audit, there might be an incentive to manipulate results or overlook findings that could impact the fee received. This situation fundamentally undermines the trust stakeholders place in the audit process.

Moreover, regulatory standards established by bodies such as the Public Company Accounting Oversight Board (PCAOB) and the American Institute of CPAs (AICPA) specifically outline the restrictions on contingent fees to promote the integrity of the audit function. These standards maintain that a clear line must exist between an auditor's professional responsibility and any personal financial interests.

Thus, the acceptance of contingent fees from publicly held audit clients is explicitly prohibited to uphold the independence and credibility of the audit process.