1. Update on Fees
Chishala Kateka, IESBA Member and Fees Working Group Chair
External Presenter, Prof. David Hay University of Auckland, New Zealand
IESBA Meeting
December 12-15, 2016

2. Overview of the Session
Receive final report on review of academic and other relevant literature commissioned
Receive update on regulatory responses within G20
Exchange views about next steps

3. Fees Initiative – Recap
Undertake fact-finding re relationship between fees charged by firms and threats to auditor independence and compliance with FPs
Review of academic literature and regulatory inspection findings
Understand regulatory responses in G20
Outreach to various stakeholders, including large firms and SMPs
Responsive to PIOB call to revisit issues on auditor independence from a broader perspective, including consideration of fee-related issues
Supported by CAG and other stakeholders

4. Areas of Focus – Recap
Any relationship between fees and threats to independence and compliance with FPs (or reasonable perceptions of such threats)?
Level of audit fees for individual audit engagements
Relative size of fees to the partner, office or the firm
(incl. extent to which partner remuneration depends
on fees from a particular client)
Ratio of NAS fees to audit fees paid by an audit client
Provision of audit services by a firm that also has
a significant NAS business

5. David Hay
Professor of Auditing, University of Auckland, New Zealand

6. Issues Level of audit fees Relative size of fees and dependence
Ratio of non-audit to audit fees
Audit services by firms that have non-audit service businesses

7. Overview Risks that are not confirmed by evidence
Risks that are confirmed by evidence
Risks where there is mixed evidence
There are each of these
Namely: not confirmed = loss leader
Confirmed = lower fees after a change of auditor; NAS and independence in appearance
Mixed evidence = competition in the market; high fees/dependence; NAS and independence of mind
Also no evidence = firms with NAS biz

8. Concerns Lower audit fees after switch
Non-audit services (NAS) and independence in appearance
Mixed results:
competition;
dependence;
NAS and independence of mind
NAS to non-audit clients

9. Issue 1: Level of audit fees
New engagements and low-balling

10. Issue 2: Relative size of fees and dependence
High fees and loss of independence – or risk
Partner income related to clients gained or lost, audit failures
Dependence at office or partner level

11. Issue 3: Ratio of non-audit to audit fees
Appearance of independence
Independence of mind
Generally
Current concerns

12. Issue 4: Audit services by firms that have non-audit service business
Audit firms that provide NAS to non-audit clients
Evidence of reduced quality
Evidence of reduced independence in appearance
Studies are unpublished

13. Additional issues
Other stakeholders
Processes implemented by firms

14. Research suggestions More comprehensive meta-analysis
Investigate mixed results
Dependence
Fees and inspection reports
Non-audit services around the world
Internal firm data
Publicizing results of this study

15. Issues Level of audit fees Relative size of fees and dependence
Ratio of non-audit to audit fees
Audit services by firms that have non-audit service businesses

16. Not all law or regulations may have been considered
Fees – G20 Benchmarking
WG undertook a review of laws and regulations relating to fees for about 11 jurisdictions, including EU
Not all law or regulations may have been considered
Information was gathered from key individuals
Findings summarized, key observations noted, but further analysis needed before forming final conclusions

17. Ethical Rules and Regulations in Local Jurisdictions
Fees – G20 Benchmarking
Ethical Rules and Regulations in Local Jurisdictions
Level of audit fees for individual audit engagements
Canada: RPC (36)
France: French Code of Ethics Article 31
Italy: Italian Law Article 10Italian Auditing Standard 5.8.4
UK: ES 4.1ES 4.2
4 jurisdictions have additional requirements re audit fees and pricing
Remaining jurisdictions are aligned to the Code
Key Observations
Qualified engagement team members assigned
Appropriate time devoted
Applicable assurance standards, guidelines and QC
procedures followed
Canada:
RPC (36) A member or firm shall not provide an assurance service for a fee that the member or firm knows is significantly lower than that charged by the predecessor member or firm, or contained in other proposals for the engagement, unless the member or firm can demonstrate:
(a) that qualified members of the firm have been assigned to the engagement and will devote the appropriate time to it; and
(b) that all applicable assurance standards, guidelines and quality control procedures have been followed.
France:
French Code of Ethics, Article 31 - remuneration shall be in relation to the procedures based on size, nature and complexity of the business
Italy:
Italian Law, Article 10 - the fee for the statutory audit is determined to ensure the quality and the reliability of the work
Italian Auditing Standard must be able to demonstrate that the fee for an audit is adequate to cover the assignment of appropriate time and qualified staff to the task and compliance with all auditing standards, guidelines and QC procedures
If a PIE, statutory auditor should discuss the basis for calculating the audit fee with the audit committee
UK:
ES The engagement partner shall be satisfied and able to demonstrate that the engagement has assigned to it sufficient partners and staff with appropriate time and skill to perform the engagement in accordance with all applicable Engagement and Ethical Standards, irrespective of the engagement fee to be charged.
ES Paragraph 4.1 is not intended to prescribe the approach to be taken by firms to the setting of engagement fees, but rather to emphasise that there are no circumstances where the amount of the engagement fee can justify any lack of appropriate resources or time taken to perform a proper engagement in accordance with applicable Engagement and Ethical Standards.

18. Ethical Rules and Regulations in Local Jurisdictions
Fees – G20 Benchmarking
Ethical Rules and Regulations in Local Jurisdictions
Relative size of fees
Australia: APES AUST
Brazil: CNSP-Resolution 321CMN-Resolution 3198
Germany: German Commercial Code 319(1)
3 countries have additional requirements regarding the relative size of audit fees
Remaining aligned to standards in the Code
Key Observations
Large proportion of total fees referred from one source
Total audit fees from audit client cannot be 25% or more of
total audit fees
Earned more than 15% in last 5 years from professional
activities at the client
Note: Some jurisdictions have disclosure req’ts in securities law re: disclosure of audit and NAS fees (CanadaUKUS)
Australia:
APES ; AUST when the total fees in respect of multiple Audit Clients referred from one source represent a large proportion of the total fees of the Firm expressing the audit opinions, the dependence on that source and concern about losing those clients creates a self-interest or intimidation threat
Brazil:
CNSP-Resolution 321 and CMN-Resolution 3198: Total audit fees (including expenses) from the audit client, including all related entities, cannot represent 25% or more of the total fees of the auditor in that year, regardless of safeguards
Germany:
German Commercial Code 319(1) – a PA is excluded from being auditor of a company that is capital market oriented if he in the last 5 years earned more than 15% from his professional activities or if the company being audited owes more than 25% of its shares

19. Ethical Rules and Regulations in Local Jurisdictions
Fees – G20 Benchmarking
Ethical Rules and Regulations in Local Jurisdictions
France: French Code of Ethics Article 32
Italy: Italian Auditing Standard
South Africa: South Africa King 3
UK: UK ES 4.3D, 4.4-5ES
EU: Regulation Art 4.2
Ratio of non-audit service fees to audit fees paid by an audit client
4 countries plus the EU Regulation have requirements regarding comparisons between non-audit service fees and audit fees paid by an audit client
No standards exist in the Code
Key Observations
Complete ban on NAS
Independent partner review of audit
work required if NAS fee exceeds audit fee
TCWG have active role in monitoring and approving
fees
70% cap on NAS fees for regulated PIEs
France:
French Code of Ethics, Article 32 – a statutory auditor may not receive any fee from the audited entity other than for the scope of the audit
Italy:
Italian Auditing Standard – Independence may be compromised if NAS becomes significant, factors to consider provided, and requires the firm to apply safeguards if NAS fee exceeds that of audit fee, an independent partner must review engagement work
South Africa:
South Africa King 3 – applicable to listed entities, requests those charged with governance to consider the nature and extent of NAS and to be accountable for monitoring the level of NAS fees verse Audit fees. The audit committee also approves the fees of the external audit firm.
UK:
UK ES – PIE audits need to be assessed for impact of NAS fees and impact of threats, safeguards should be discussed with TCWG, the ethics partner needs to be notified and firm policies and procedures applied
ES 4.3D (and 4.4 & 4.5): Fees for engagements shall not be influenced or determined by the provision of non-audit / additional services to an entity relevant to the engagement. [AD 25, ES 4.7]
4.4 The engagement fee ordinarily reflects the time spent, the skills and experience of the personnel performing the engagement in accordance with all the relevant requirements, and the competitive situation in the market. Paragraph 4.3D is intended to prevent any relationship between the
appropriate cost of the engagement and the actual or potential provision of non-audit / additional services.
4.5 Paragraph 4.3D is not intended to prohibit proper cost savings that can be achieved as a result of providing non-audit / additional services in accordance with Section 5 of this Ethical Standard to the entity, for example, where information gained through undertaking a non-audit service is referred to by audit staff when carrying out the audit of the financial statements.
EU Regulation Art % Cap on NAS for PIES in EU regulated markets.

20. Ethical Rules and Regulations in Local Jurisdictions
Fees – G20 Benchmarking
Ethical Rules and Regulations in Local Jurisdictions
Provision of audit services by a firm that also has significant NAS business
No jurisdictions have requirements regarding the provision of audit
services by firms with significant non-audit services businesses
No requirements exist in the Code

21. Preliminary WG Views WG Prelim Views about the G20 Benchmarking
G20 did not reveal any key Ethical gaps in the current code. However, it did reveal, that there are:
More rigorous disclosure and transparency regulations in certain jurisdictions, with respect to fees in comparison to the Code.
There are requirements in some local laws and regulation re CAPS on audit fees and total fees, some regulators are stricter than others. No CAPs in the Code.
Prelim Views about Gaps
Should the Code include requirements to encourage more open and transparent communications with TCWG, including about matters such as the level fees paid for NAS vs audit services. While this might definitely be an area in the Code that might benefit from further enhancement – should it be part of a Fees or NAS project?
WG Prelim Views about the Research
Objective was to determine linkages between fees charged by firms and threats to compliance with the fundamental principles and to independence. The outcome of the research, seem to raise more questions than answers, not in relation to the linkages themselves, but rather about the relevance of the research findings to the WG’s objective. Some of the specific areas in the paper that raise questions relate to:
1. Findings about the issue of market competition, overdue fees, and fees being too high. WG questions whether:
a) These matters are indicative of ethical issues that need to addressed.
b) There is sufficient evidence in the research to draw meaningful conclusions about what actions that should be taken;
c) The findings indicate a matter for IESBA to consider as part of a fees project.
2. Findings about the association between fees/audit quality and reduced independence. The WG is planning to get more insights about whether there is more specific evidence to further understand the actual or perceived issue that might exist.   
3. Findings relating to NAS fees. WG questions whether the issues relating to NAS fees be addressed in the Fees/ NAS section of the Code

22. Next Steps
WG to reflect on input provided by Board and report back at the March 2017 meeting with more specifics
WG to liaise with existing Safeguards TF to understand whether/ how some of the NAS findings have been taken into account as part of their work
Pending – Outreach to stakeholders (investors, TCWG, firms etc.,) to further understand their perspectives

23. Matters for IESBA Consideration
IESBA members are asked to exchange views about the findings identified from:
Prof. David Hay’s final research report; and
The WG’s G-20 benchmarking
Based on the final research report and the G20 benchmarking, do IESBA members believe that there is a need for a fee project? Is more research is needed to further understand specific issues first?
Note to Chishala - IEBSA to Section 330 of the proposed restructured code deals with fees and include several conforming amendments arising from the Safeguards project. See Agenda Item 3-B. The Structure of the Code was intended to clarified the Code.