ICAS responds to the IESBA Exposure Draft on Fees
Ann Buttery reports on the ICAS Ethics Board’s response to the IESBA Exposure Draft on Fees.
The ICAS Ethics Board has responded to the International Ethics Standards Board for Accountants (IESBA) Exposure Draft ‘Proposed Revisions to the Fee-Related Provisions of the Code’ in relation to proposed revisions to the International Independence Standards - Part 4 of the IESBA Code of Ethics - which apply to professional accountants in public practice when providing assurance services. Auditors in the UK have to comply with the Financial Reporting Council’s (FRC) Ethical Standard but the FRC closely monitors developments in the IESBA Code.
IESBA’s proposed revisions
IESBA’s Exposure Draft on Fees proposes revisions to the fee-related provisions of the IESBA Code of Ethics including:
- A requirement for the firm to determine, before the firm or network firm accepts an engagement, whether the threats to independence created by the fees proposed to an audit client are at an acceptable level.
- The introduction of a prohibition which states that firms should not allow the level of audit fee to be influenced by the provision by the firm, or a network firm, of services other than audit to the audit client.
- The introduction of fee dependency provisions for audit clients that are not public interest entities.
- A requirement that auditors of public interest entities (PIEs) cease to be the auditor if fee dependency on the audit client continues beyond five years, unless there is a compelling public interest reason for the auditor to continue with the engagement;
- Proposals for transparency of fee information to those charged with governance and the public to assist their judgements about auditor independence.
Overall, ICAS is generally supportive of IESBA’s proposals above and believes that the new provisions will be beneficial to users of the Code.
Fees - a self-interest threat
ICAS agrees with IESBA that a self-interest threat to independence is created, and an intimidation threat to independence might be created, when fees are negotiated with and paid by an audit client (or an assurance client). Our view is that when someone is paying you for the services you are providing there is a financial interest involved in that relationship, and therefore, by the very nature of this relationship, there is an inherent self-interest threat. There is also a public perception that, because auditors are paid by their clients, they might be beholden to those clients.
Proportion of Fees for Services Other than Audit to Audit Fee
ICAS believes that there could be more clarity in the application material in relation to the proportion of fees for services other than audit to the audit fee noting:
- There are no specific provisions proposed for PIEs. In contrast, the UK Financial Reporting Council’s (FRC) Ethical Standard has very detailed provisions as to what should be included within the calculation for PIEs in terms of the firm and its networks; the client and its related parties; and the services other than audit.
- IESBA states one of the factors to consider in evaluating the level of threat is “the ratio of fees for services other than audit to the audit fee”. However, we suggest a distinction could be made between “non-audit services” and “audit related services” where audit related services, such as reporting required by law or regulation, which are closely related to the work performed in the audit, are generally considered to pose insignificant threats to auditor independence.
- In relation to determining the level of fees charged by the firm or network firm to the audit client, it is not immediately clear to the user what related entities of the audit client are within the scope of both these provisions and the fee dependency provisions.
Fee dependency – audit clients that are not PIEs
IESBA proposes that when total fees from an audit client that is not a PIE exceed 30% of the firm’s total fee income for each of five consecutive years, the firm determine whether a review prior to, or after, the audit opinion being signed in the fifth year might be a safeguard.
ICAS believes that IESBA is generally heading in the right direction in relation to fee dependency, particularly as there are no fee dependency provisions in the extant Code for audit clients that are not PIEs; however, from a UK perspective, we suggest that IESBA’s proposed 30% limit on fees received from a non-PIE audit client could be lower. We also question whether a reasonable and informed third party would consider it appropriate that fee dependency can continue for a period of five years before the firm is required to determine whether a review might be a safeguard. We suggest that a threshold of 20% and three years may be more appropriate. This would still allow for proportionality as the provisions for audit clients that are non-PIEs are still less rigorous than the provisions for audit clients that are PIEs.
ICAS also recommends that it might be helpful for IESBA to clarify the exact nature of the “reviews” it envisages from the fifth year and whether, for example, there might be merit in an external independent quality review being undertaken.
Please note that ICAS Code of Ethics is substantively based on the IESBA Code; however, auditors undertaking an audit in the UK, and professional accountants undertaking other public interest assurance engagements in compliance with the engagement standards issued by the FRC, are required to comply with the requirements of the Financial Reporting Council's (FRC) Ethical Standard.
See ICAS' response to the IESBA Exposure Draft on Non-Assurance Services below: