Fees – Issues and Proposals Ian McPhee, IESBA Member and Task Force Chair IESBA Meeting New York March 11-13, 2018

Objectives of the Session Present Task Force’s (TF) proposals developed to address fee-related issues outlined in Fees Project Proposal; Obtain Board Members’ views on TF proposals; Obtain Board Members’ input to the issues for consideration

Introduction

Agenda Introduction Level of Audit Fees Fee Dependency Strengthened Provisions re Fees Quoted Provision re Engagement Partner Role of PAIB Enhanced Transparency Communication to TCWG Public Disclosure Fee Dependency PIE Audit Clients Non-PIE Audit Clients Fee-related Safeguards Next Steps

Activities Since December 2018 Meeting Introduction Activities Since December 2018 Meeting December – TF meeting in NYC Discussion on issues and the draft of TF proposals February – TF Teleconference Finalizing TF proposals and discussion on proposed changes March – IESBA CAG Discussion Discussion on TF proposals

Comments from CAG Representatives Introduction Comments from CAG Representatives General support to ensure appropriate resources to engagement and not determining appropriate level of fees Concerns re role of transparency Could raise issues of confidentiality Could contradict national laws and regulations on public disclosure Questions on the possible platform for disclosure by firms Suggestions re proposals to fee-dependency Reconsider market entry issues, especially in case of non-PIE clients Cautions about the burden created, especially to SMEs and SMPs

Project Timing 2019 Meetings March April/May June Sept Introduction Project Timing 2019 Meetings March IESBA CAG and IESBA Issues and draft of the proposed changes April/May IESBA NSS Forum of Firms June IESBA First read of proposed changes Sept Approval of Exposure Draft

Level of Audit Fees

Level of Audit Fees Quoted Focus on audit engagement → new requirement positioned in Part 4A TF aims to enhance audit quality by emphasizing the need for firms to ensure that appropriate resources are dedicated to audit engagements → do not aim to determine appropriate level of fees TF proposes: Firms to be satisfied that level of fees quoted do not affect their ability to perform the engagement in accordance with professional standard

Level of Audit Fees – Role of Engagement Partner TF reviewed responsibilities for setting up fees → coordinated with changes to auditing standards Proposed ISA 220 (Revised): EP determines if “sufficient and appropriate resources to perform the engagement are assigned or made available” TF proposes: Require EP to determine resources, in line with proposed ISA 220 (Revised), irrespective of level of fees quoted

Level of Audit Fees Role of PAIBs Suggestions to explore responsibility of TCWG re fees quoted → TF reviewed provisions in Code re PAIBs’ responsibility for fees Current provisions in Part 2 require PAIBs not to place pressure on others that would result in other individuals breaching FPs TF proposes: Include as an example to current provisions  pressure exerted by a PAIB on the firm re level of fees quoted

Enhanced Transparency Level of Audit Fees Enhanced Transparency TF reviewed: Transparency to TCWG → Enhanced communication Transparency to public → Information made public including by firms where necessary Suggestions to consider benefits and challenges of transparency to address perceptions related to level of fees TF believes transparency is important tool both for too high and too low audit fees

Level of Audit Fees Communication to TCWG Provisions in ISA 260 (Revised) for listed entities on communicating issues re independence to TCWG → including fees charged for audit and non-audit services TF aimed to reinforce communication to TCWG → better position TCWG to make decisions on fees quoted TF proposes: Both in case of PIE and non-PIE audit client → Communicate to TCWG that fees quoted allow firm to perform the engagement in accordance with professional standards

Public Disclosure TF proposes: Level of Audit Fees Public Disclosure TF proposes: Firm to take steps to ensure that audit fees are publicly disclosed, by Determine relevant national laws and regulations and whether the client is in compliance If client is not in compliance + disclosure is not prohibited by national laws and regulations → For PIE audit clients, firm is required to disclose audit fees → For non-PIE audit clients, firm is encouraged to disclose audit fees

Level of Audit Fees Public Disclosure Disclosure is required only for audits of general purpose f/s → not for audits of special purpose f/s and review engagements Disclosure required on a timely and accessible manner Grace period for 1 month after issuance of audit report No determined platform for disclosure (examples) Guidance to amount of fees to be disclosed

Fee Dependency

Fee Dependency - Issues TF reviewed provisions on ratio of total fees generated from an audit client to total fees (fee-dependency) At Firm level At Office level At Partner level TF proposes changes to fee-dependency only at firm level

Current Provisions for PIE Audit Clients Fee-dependency Current Provisions for PIE Audit Clients

Suggested Changes for PIE Audit Clients Fee-dependency Suggested Changes for PIE Audit Clients

Suggested Changes for PIE Audit Clients (1) Fee-dependency Suggested Changes for PIE Audit Clients (1) No changes suggested to threshold and to safeguards TF proposes: Require firms to disclose publically the fee- dependency and safeguards applied → Each year if fees > 15% until the firm is required to resign (after 5 years – see later)

Suggested Changes for PIE Audit Clients (2) Fee-dependency Suggested Changes for PIE Audit Clients (2) TF proposes: Changes to safeguards → Determine application of pre-issuance review as a safeguard, instead of post issuance review Provide guidance to determine the term “significant” in this context → Apply “RITP” test up to 30 percent

Suggested Changes for PIE Audit Clients (3) Fee-dependency Suggested Changes for PIE Audit Clients (3) TF’s approach is that after 5 yrs → safeguards cannot reduce threats created to acceptable level TF proposes: Cease to be the auditor if total fees from PIE audit client continue to exceed the threshold for 5 consecutive yrs

Suggested Changes for PIE Audit Clients (4) Fee-dependency Suggested Changes for PIE Audit Clients (4) TF also considered actions that could be taken after 1st year of engagement TF proposes: Option A: Encourage Option B: Require Firms to disclose and discuss the information with TCWG and discuss with TCWG the public disclosure after the 1st year → no application of specific safeguards included

Suggested Changes for non-PIE Audit Clients Fee-dependency Suggested Changes for non-PIE Audit Clients

Suggested Changes to non-PIE Audit Clients (1) Fee- dependency Suggested Changes to non-PIE Audit Clients (1) TF proposes: Require firm to disclose to TCWG and discuss whether safeguards could be applied if: Total fees from the client exceeds 30 % For Option A: 3 consecutive yrs Option B: 5 consecutive yrs

Suggested Changes to non-PIE Audit Clients (2) Fee-dependency Suggested Changes to non-PIE Audit Clients (2) TF considered the actions that could be taken after 1st year of engagement TF proposes: Option A: Encourage Firms to disclose and discuss with TCWG, including public disclosure after the 1st year Option B: Require Firms to disclose and discuss with TCWG, [public disclosure is not required]

Fee-related Safeguards

Fee-related Safeguards TF reviewed current safeguards related to level of fees and fee dependency → revised and restructured Code addresses most comments provided by regulators to fee-related safeguards of extant Code TF’s proposals provide further actions for PAPPs to address threats → TF proposes no changes to fee-related safeguards

Next Steps Outreach Coordination April - FOF Meeting May - IESBA NSS Meeting + obtain views from SMPC Coordination NAS TF on proposals to overlapping issues IAASB re Quality Management EDs and public disclosure