Local governments in North Carolina will no longer be allowed to hire third-party auditors
on a contingency fee basis. The prohibition begins on July 1, 2013 and for now, extends only
until July 1, 2015.
Pros and Cons
Contingency fee arrangements have good points and bad points. It's good for municipalities because it allows them to potentially realize additional tax revenue without incurring any up-front costs.
However, it can be bad for taxpayers when private auditors arbitrarily inflate the numbers just to collect a higher contingency fee.
The North Carolina General Assembly and Governor Bev Purdue approved two new laws to address the potential conflict of interest involved with local governments hiring outside auditors with contingency fee contracts.
Senate Bill 462 details the contingency fee prohibitions and makes them effective July 1, 2012. Lawmakers later realized that there could be negative revenue implications to local governments, so they revised the timetable in Senate Bill 847 and made it effective for only two years. Specifically, SB 847 says:
"From July 1, 2013, until July 1, 2015, cities and counties shall not renew any contingency fee-based contracts for these services. From July 1, 2013, until July 1, 2015, cities and counties shall not assign further audits on a contingency fee basis to an auditing firm under a contract that meets all the following conditions: (i) the contract would have been prohibited under this act had the contract been entered into after July 1, 2013, and (ii) the contract allows the assignment of audits on a discretionary basis."
During the temporary prohibition on contingency fee contracts for tax audits, the General Assembly has agreed to further study the situation and determine whether a permanent ban should be imposed.