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North Carolina HB 462 contingent fee audits July 3, 2012

Many of you are probably curious why, after 25 years of compensating private audit firms on a contingent fee basis, would the legislature consider removing this arrow from the Assessor’s quiver. In its original language the approved House Bill 462 was entitled, “Study Business Opportunity & Franchise Sales” it had absolutely no relevance to local government audits whatsoever. But the Bill was altered by the Senate Commerce Committee (The practice of altering an approved Bill is affectionately referred to as “gutting” by members of the legislature). In this brief article you will hear an eyewitness account of the evolution of this Bill through from the vantage point of Jim Turner, CPA. Jim spent several days in Raleigh meeting with lawmakers in an attempt to debunk the urban legend about private auditors who were villainized by proponents of the Bill and labeled, “Pirates, Bounty Hunters and Sharks.” After a lengthy conversation with one legislator—the legislator looked at Jim with a straight face and said, “You don’t have a parrot on your shoulder after all.” That funny story accurately reflects the daunting task that we faced when we entered this battle four weeks ago.


Synopsis of HB 462
The genesis of this Bill began in the House Commerce Committee the primary sponsor was “Representative Unaware.” The House version of the Bill authorized the Legislative Research Commission to study the adequacy of current consumer protections for business opportunity and franchise sales in North Carolina. The Bill easily passed the House and was sent to the Senate Commerce Committee. “Senator Obstinate” was the primary sponsor of gutting HB 462 in the Commerce Committee. “Obstinate” tacked new language onto HB 462 that would prohibit local governments from engaging private audit firms whose compensation was contingent upon the results of an audit. It’s hard for me to imagine but the Commerce Committee wanted to regulate the market---despite the reality that, “The concept of Laissez–faire is one of the pillars of true capitalism." Moreover, the American Institute of Certified Public Accountants (AICPA) made this observation about contingency fees, “In the eyes of many, prohibitions against such fee arrangements are viewed as self-serving, anti-competitive and not in the public’s interest. In some cases, clients are not able to pay for services on an hourly basis, and actually prefer a contingent fee basis. In a free market system, the marketplace should dictate fee arrangements as long as they are disclosed to clients, unless there is an overriding public interest, which is the case for attest services.”


Sources tell me that the Big Cable Company, the Big Telephone Company and the Retail Merchant Association are the forces behind the prohibition of performance based compensation for property tax auditors. The Senate Commerce Committee must not have thought it was prudent to inform local governments that they might strip them of this compliance tool. You see they waited until 24 hours prior to the hearing before they shared their plans with local government. Ironically though proponents of the Bill, including Andy Ellen from the Retail Merchants Association, were prepared well in advance and he was provided ample time to villainize property tax auditors in front of the Commerce Committee. Despite the short notice one of the opponents of the Bill was scheduled to vet the impact on local government but the clock ran out on Kevin Leonard from the Association of County Commissioners---so the Senate Commerce Committee voted to prohibit contingency fee property tax audits solely upon the testimony of those taxpayers who would benefit from a reduction or elimination of property tax audits. The gutted Bill easily passed through the Senate Commerce Committee and headed to the Senate floor. That is where the battle began to intensify. Opponents of the Bill mobilized ground forces against the Goliath sized enemy (By one account the proponents had no-less than 47 lobbyists working for them.) We had a sling shot and they were using Bazookas. But we had something on our side that is much more powerful than any artillery---righteous indignation.


Despite mounting opposition the Bill was still sailing through the Senate like a schooner on the Albemarle Sound. But for proponents an unexpected shift in the winds of opinion occurred---“Senator Wise” had a novel idea, “Why don't we give local governments at least one year to prepare for the affects of this Bill?" Her amendment was seconded. It passed the Senate floor by the slimmest of margins 24-23. A colleague and I began to celebrate--we had a whole year to retool our business model. The next morning a former legislator and friend of mine contacted me with some disturbing news. He said Senate leadership decided to pull the Bill from final reading the night before and it was apparent that an effort was underway to whip those legislators in shape who voted for “Wise’s” amendment. Need I say more? During the next session “Senator Pliable” decided he had not properly understood the amendment so he rescinded his vote and requested a revote. You see in Raleigh if a play does not go your way you simply ask for a redo, for golfers reading this blog think mulligan. “Pliable” used his mulligan and it turned out favorable for proponents (they defeated amendment 4 which would have moved the effective date to July 1, 2013) so the Bill stayed on the Calendar this time and passed its final reading.


Back to the House
Since the Senate had passed a gutted version of a House Bill there were two options for the House upon receipt of the Bill from the Senate;

1. Send the Bill to the House floor for a concurrence vote or

2. Assign it to a Committee for vetting.


Sensible leadership in the House decided it would be prudent for gutted HB 462 to be vetted. So the rules “Chairmen Representative Astute” sent the Bill to Committee. In the House most stakeholders were provided an opportunity to be heard. Kevin Leonard finally got his chance to vet the financial ramifications to Counties, Paul Meyer shared the negative impact this Bill would have on municipalities and Carteret County Assessor, Carl Tilghman articulated the merits of contingent fee contracts for the Assessor's. Proponents of the Bill continued to appeal to the emotions of the Legislators with more sensationalized stories about sharks, pirates and bounty hunters. Lobbyists for the prohibition of contingent fees did not provide any evidence that auditor malfeasance had ever occurred---instead they shared ghastly stories they had heard from taxpayers who owed additional taxes because they failed to report all of their property. In a nutshell the folks who underpaid their property taxes asserted that performance compensated auditors are too aggressive. “Representative Smart” recognized the holes in the proponents arguments so he spoke against the Bill based upon the lack of any credible evidence. He asked for a vote to table the motion and it was seconded. But it was too late-- propaganda by the proponents for the Bill had clouded the judgment of the 26 Representatives who voted to concur with the Senate Committee Substitute language banning contingent fees. The encouraging news was that 20 Representatives voted against concurrence and momentum was now shifting.


The conscientious House members recognized that something did not smell right. The only empirical study ever compiled on the subject contradicted what the proponents were espousing. Retired Forsyth County Assessor, Pete Rodda made a presentation at the 2011 IAAO conference on property tax audits in North Carolina. The results echoed that private auditors were less likely to discover additional taxes when their compensation was contingent upon the results of an audit and the average tax assessment was less for a contingent fee audit that it was for a flat fee or hourly based audit. Moreover, there has not been one single documented case of an auditor inflating assessments. The majority of the House members decided that the facts did not corroborate what the proponents of HB 462 were saying. They began to surmise that--- perhaps auditors don’t have parrots on their shoulders; these folks don’t appear to be bounty hunters, and we don’t see any dorsal fins on them----they pondered that maybe they are simply providing a much needed service to local governments?


The House decided to deliberate this Bill in Caucus (a fancy word for a private meeting). I was not privy to that colloquy so I am not going to speculate on what was said. But I do know that your voice was heard---the voice of reason. So I applaud you for reaching out to your legislators and sharing the truth with them. This battle would have been completely lost had it not been for you. Contingency fees audits would have ended on July 1, 2012 never to be heard from again. The good news though is that a compromise has been agreed to by parties on both sides of this issue.


This battle is far from over though. It is obvious that a few special interest groups are eager to hamstring property tax compliance in North Carolina by limiting the arrows in the quiver of the County Assessor. If proponents attempt to undermine any portion of their agreement with local government then another battle will need to be fought. And local government will need even more grass roots support than it garnered during this campaign. I am confident though that you will be prepared for this bigger battle if it arises because most of us agree that contingent fee property tax audits make good sense---only the taxpayers who underreport pay for the entire audit program. Nobody else pays a dime for it i.e. not homeowners, vehicle owners or the 60% of businesses who get it right the first time--- why would we want to do it any other way?


P.S. I want to thank Carl Tilghman, Pat Goddard, Stan Duncan, David Baker, Paul Meyer, Kevin Leonard, Kirk Boone, Former Senator Eddie Goodall and Team Deans for their tireless efforts in thwarting the efforts of proponents of this terrible legislation.


May God Bless You All,
Jim Turner, CPA