The success fee and the private dinner
You are a sole practitioner advising Cedar Heights Developments Ltd, a property developer, in a companies income tax audit covering 2021 and 2022. FIRS has issued a draft additional assessment of NGN 90m, largely by disallowing NGN 210m of 'project development costs' that the company treated as revenue deductions. The client's managing director offers you a fee of 15% of any reduction in the additional tax achieved, plus a bonus if the file is 'closed without a formal assessment'. He also asks you to attend a private dinner with the FIRS officer handling the case to 'explain the commercial realities'. Your current engagement letter is time-based and limited to 'review of correspondence and preparation of responses'. The client says the success fee will 'align incentives' and that other advisers do this.
1. Evaluate the ethical issues in the proposed fee arrangement and the dinner request.
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The proposal raises several threats to objectivity and professional behaviour.
- Contingent fee: a fee based on tax saved creates a self-interest threat. The adviser may be tempted to take aggressive positions or withhold a balanced view. The risk is greater because the work is audit representation, not ordinary tax planning.
- Bonus for no formal assessment: this is worse than a simple success fee. It rewards an outcome that may depend on the tax authority's discretion rather than on the technical merits, and could incentivise improper influence.
- Private dinner: meeting the case officer alone, outside the formal process, creates a risk of improper influence and a perception of impropriety. It may also breach the client's confidentiality expectations and the adviser's professional obligations.
- Scope mismatch: the existing engagement is time-based and limited to correspondence and responses. The proposed arrangement changes both the fee basis and the scope without a written variation.
- Precedent: the fact that 'other advisers do this' does not make it acceptable.
2. How should you respond to the client and structure the engagement, if you continue?
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Respond in writing. Explain that you can continue on a time-based or fixed fee for defined work, but you cannot accept a bonus for avoiding a formal assessment or any arrangement that rewards a particular outcome. If a success fee is considered at all, it should be limited to a genuine technical settlement and reviewed against the firm's policy; on these facts, the safer course is to decline it.
For the dinner, decline politely. Offer a normal meeting at FIRS offices with the client present, or a written submission. All communications should be documented and copied to the client.
If continuing, issue a new engagement letter covering: scope, deliverables, fee basis, client responsibilities, confidentiality, conflicts, and the right to withdraw if asked to act improperly. Confirm that advice will be based on the technical merits and that you will not make or imply threats or offers to the tax officer.
3. What if the client insists and threatens to go to another adviser?
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The client is free to seek other advice, but the practitioner should not compromise professional standards to retain the engagement. If the client insists on the bonus for avoiding assessment or on the private dinner, decline those elements clearly and, if the client will not proceed on an acceptable basis, withdraw.
On withdrawal: document the reasons, return client documents, and avoid disclosing confidential information beyond what is necessary. Do not criticise the client to FIRS. If there is a suspicion of an attempt to improperly influence a public officer, consider whether any reporting obligation arises and take legal or professional advice. The key point is that a fee or meeting arrangement that creates a risk of improper influence is not cured by client instructions.