Restricted entity list checks to run before introducing a client for a referral reward

Why this check comes before every introduction

A restricted entity list is the firm's record of attest clients and related entities in which partners and staff may not hold financial interests. Searching it before a partner introduces a client to SourceX answers one question quickly: does the firm attest for this company or an affiliate? If the firm audits or reviews the company, the commissions rule takes the reward off the table; if the hit is an affiliate or a compilation engagement, the independence team decides.

The rule behind the check is the AICPA Code's Commissions and Referral Fees Rule (ET 1.520). A member in public practice may not accept a commission for recommending a product or service to a client when the member or the member's firm also performs an audit, review, certain compilations or an examination of prospective financial information for that client, and any commission or referral fee that is permitted must be disclosed to the client (AICPA Code of Professional Conduct). Two further layers can apply:

• SEC independence. Firms that audit SEC registrants answer to the SEC's own auditor-independence rules, a regime separate from the AICPA Code, as SEC staff correspondence with the AICPA's ethics committee reflects (SEC Office of the Chief Accountant letter, May 2004).
• State rules. State boards and statutes can differ from the Code and be stricter; the New Jersey Society of CPAs' overview of commissions and contingent fees shows one state's treatment.

The checklist

Before you search

• Get the company's exact legal name, plus trade names and former names.
• List its parent, subsidiaries and sister companies under common control, including a private equity owner's other portfolio companies if your independence policy treats them as affiliates.
• Note which partner holds the relationship and which service lines serve the client today.
• Hold any conversation with the owner about SourceX until the check is complete.

Search the list and the engagement system

• Search the restricted entity list for the company and every related entity, and save the dated result.
• Search the engagement or practice management system for current audit, review, compilation and prospective financial information engagements.
• Check proposals and unsigned engagement letters, since a pending attest engagement changes the answer.
• If the firm belongs to a network or runs separate attest and advisory entities, search the lists covering those entities too.
• Search SourceX's legal name to confirm the counterparty is not itself a restricted entity.

Apply the rules

• If the firm performs an audit, review, covered compilation or prospective financial information examination for the client, record that no reward will be accepted.
• If the client or an affiliate is an SEC registrant the firm audits, ask the independence team to apply SEC rules as well.
• Read the commissions and referral fee rule in every state where the engagement partner is licensed.
• Check the firm's own referral-fee policy, which may go further than both.

Decide and document

• Record the result, the date, who ran the search and who approved the outcome.
• Where a reward is permitted, prepare the written disclosure for the client before the introduction.
• Get the owner's approval to be introduced, and decide who in the firm registers it.
• Diary a second search before any reward is accepted.

How to use the results

Why a second search before payout matters

Rewards become payable only after the buyer pays and SourceX receives its fee. Between an introduction and any payment, the company works through qualification, a data inventory, pricing, buyer review, contracting and delivery, which can take months. Attest relationships can change in that time: a new audit engagement, a lender that starts requiring reviewed statements, or a merger that brings in a firm already auditing the company. The guide to what happens when a CPA firm acquires a fractional CFO firm shows how a deal can move a client onto a new restricted list on closing day.

For reference, the program terms are simple. Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company. Rewards become payable only after the buyer pays and SourceX receives its fee, and no reward is guaranteed. Any reward comes out of SourceX's share, leaving the company's licensing proceeds unchanged.

Red flags that stop the introduction

• The search was run from memory or from an outdated export of the list.
• A partner mentioned a reward to the owner before the check was done.
• The company's lender or investors rely on reviewed or audited statements the firm prepares, or is proposing to prepare.
• The introduction would be registered by a subcontractor or white-label provider who cannot see the firm's list; the subcontractor agreement guide covers who should register in that case.
• Two partners plan to register the same company. Credit attaches to one referrer only, the first valid one, and only if a verified company application follows within the attribution window.

A clean search says nothing about fit. Fit is a separate test: 50+ full-time employees at peak (contractors excluded), operations documented across several years, the right to license what the company holds and a sponsor authorized to sign. Run the company fit checker and read the who qualifies baseline.

This is general information, not legal, tax or financial advice. Confirm with your own counsel, tax adviser or professional body before acting.

Next step

Add this checklist to your firm's referral procedure, or to the approval packet described in the alliance program review guide. Once a client clears, register as a partner and share your referral link with the owner. For wider context, see referral opportunities for accountants and our look at CAS growth at Top 100 accounting firms.