1. IESBA Meeting Athens, Greece June, 2018
Fees
Ian McPhee, IESBA Member
Working Group Chair
IESBA Meeting
Athens, Greece
June, 2018

2. Objectives of the Session
Presenting the WG’s final report on the fact finding activities
Ask the Board members view on the recommended way forward to the key focus areas
Decide on possible project proposal(s) and the next steps of the WG

3. Overview of Fee Initiative
Stakeholders concerns about fee-related matters
WG established in 2015
WG remit:
4 areas of focus
3 key fact finding activities

4. Areas of Focus Level of fees
Relative size of fees to partner/office/firm
Ratio of NAS to audit fees
Audit firms with significant NAS business

5. Fact-finding Activities
Summary of Academic research
Review conducted by Prof. David Hay, University of Auckland
Jurisdictional Benchmarking
Review of fee related standards and regulations of 11 G-20 country and the EU Regulation based on high level information on the areas of focus
Stakeholder outreach
Review of different groups of stakeholders' responses to Fees Questionnaire

6. Fact-finding Activities – Academic Research
Level of audit fees for individual audit engagements
Ethical issue: Low fees could impair professional competence and due care.
Ethical issue: Lowballing (professional competency and due care).
Some evidence in some circumstances shows associations between low fees and low quality
Fees are lower after a change of auditor
Mixed results on whether quality is lower

7. Fact-finding Activities – Academic Research
Relative size of fees to the partner, office or firm and the extent to which partner remuneration is dependent upon fees from a particular client Ethical issue: Professional competence and due care
Evidence generally that auditor independence is not reduced when there are high relative fees
But there is also some opposing evidence

8. Fact-finding Activities – Academic Research
Ratio of NAS fees to audit fees
Ethical issue: Objectivity, independence of mind and independence in appearance
Numerous studies find evidence of loss of independence in appearance
There is some evidence in some circumstances of reduced independence of mind

9. Fact-finding Activities – Academic Research
Provision of audit services by a firm that has a significant non-audit services business Ethical issue: Dependence
Some evidence but not much

10. Fact-finding Activities - Benchmarking
Some jurisdictions have specific provisions relating to low level of fees, particularly:
determination of level of fees
safeguards in the event that the audit fee is significantly lower than that charged by the predecessor
responsibility of the engagement partner
Level of
Fees

11. Fact-finding Activities - Benchmarking
Fee Dependency
Most jurisdictions are in line with the Code
Few have more stringent rules
Regarding the threshold to PIE clients
Having threshold for non-PIE clients

12. Fact-finding Activities - Benchmarking
Jurisdictional measures highlighted in the benchmarking relevant to dealing with the ratio of NAS to audit fees:
Fee cap for the provision of NAS to audit clients
Disclosure of fees
Pre-approval of services by TCWG
Ratio of
NAS

13. Fees Questionnaire – List of Respondents
Category of respondent
# 73
Investors 2
Those charged with governance (TCWG) 3
Regulators and audit oversight authorities 4
National standard setters
Accounting firms and individual professional accountants in public practice (PAPPs) 36
IFAC member bodies 16
Preparers and other professional accountants in business (PAIBs)
Public sector organizations 1
Others(Academics, internal auditors and other individuals) 7

14. Overview of Reponses – IFAC Member Bodies
Fees Questionnaire
Overview of Reponses – IFAC Member Bodies
Believe fee related issues could create threats to compliance with FPs and independence
Indicated some concerns related to low level of fees
Some jurisdictions indicated they have more stringent rules than those in the Code
Generally believe the Code has sufficient and appropriate provisions
Suggest the IESBA cooperate with professional bodies and regulators to promote better implementation and awareness raising

15. Overview of Reponses – National Standard Setters
Fees Questionnaire
Overview of Reponses – National Standard Setters
Concerns about downward pressure of fees
Include a ratio of NAS fees and audit fees in the Code as a factor when evaluating threats
Review whether threshold (15%) in the Code related to fee dependency of PIE audit clients is appropriate
Requirements on TCWG to approve all fees provisions
Role for regulators by regulating the extent of NAS fees and encourage TCWG not to simply accept the lowest audit fee quote

16. Overview of Reponses - Regulators
Fees Questionnaire
Overview of Reponses - Regulators
The Code’s current provisions and safeguards are not sufficient
Suggested re-evaluation of safeguards and further consideration of safeguards for SMPs
Based on its review of the fees provisions in the extant Code, IOSCO also suggested re-evaluation of the effectiveness of safeguards in the Code

17. Overview of Reponses - Firms
Fees Questionnaire
Overview of Reponses - Firms
Believe fee related issues could create threats to compliance with FPs and independence
Already have polices and procedures to deal with threats related to fees
Believe the Code establishes sufficient and appropriate provisions
Provide NAS to audit clients but generally do not apply additional prohibitions beyond the IESBA Code and national requirements
Believe that high revenue generated from non audit business would not impact firm’s compliance with fundamental principles and independence

18. Overview of Responses – Investors
Fees Questionnaire
Overview of Responses – Investors
Fee is a key factor to driving scope and level of engagement and procedures performed by auditors
The Code’s provisions are sufficient
Believe that investors should include consideration of level of fees charged by audit firms, when voting on the election of audit committee chair and members and on ratification of the external auditor
Suggest adequate disclosure of fees by all entities, not just PIEs

19. Overview of Responses – TCWG
Fees Questionnaire
Overview of Responses – TCWG
Fee is only a factor among others when appointing auditors
No specific policy and procedure at their organizations to ensure that audit quality is not affected by the level of fee charged
Suggested to reduce the compliance burden by standard setters, legislators and other regulators
Suggested the impact of fees on audit quality is better addressed by audit standard setters to ensure standards are appropriate for the risk

20. IESBA-NSS 2018 Meeting
Key comments relating to:
Threshold for non-PIE clients on level of fees
Fee dependency at partner’s level
Anti-trust and anti-competition laws
Business model and nature of threats
Global leadership position on fees, NAS and PS
Overlap of fees and NAS initiatives

21. Enhancement of the Conceptual Framework
The New Code
Enhancement of the Conceptual Framework
Relevant fees provisions:
Parts 3, 4A and 4B (ss330, 410, 905 and 600)
Address level of fees and relative size of fees amongst other things
Safeguards have been reviewed and revised as part of the safeguards project

22. Focus Area 1: Level of Fees
Findings and Recommended Way Forward
Focus Area 1: Level of Fees
Fee pressure remains a challenge, notably for SMPs
Potential impact on both prof competence and audit quality
Fees setting depends on a range of factors
Some suggested minimal fee scales; others anti-competition
Recommended way forward
Strengthen the provisions in Part 3 relating to the level of fees
New provision on engagement partner responsibility
Consider if case for adding new roles to PAIB
Update January 2017 staff publication on fee pressure

23. Matters for Consideration
Views or reactions?

24. Focus Area 2: Relative Size of Fees
Findings and Recommended Way Forward
Focus Area 2: Relative Size of Fees
Addressed in Parts 4A and 4B of the new Code
Little evidence that:
changing the threshold (15%) of fees from PIE audit clients will reduce threats to Independence
There is need to enhance the Code relating to fee dependence relating to office or partner level
Recommended way forward
Consider whether there is a case for having a threshold for non-PIE client

25. Matters for Consideration
Views or reactions?

26. Focus Area 3: Ratio of NAS to Audit Fees
Findings and Recommended Way Forward
Focus Area 3: Ratio of NAS to Audit Fees
Stakeholders generally consider that a high ratio of NAS fees to audit fees creates threats to independence.
Indications of ‘independence in appearance’ being impaired
A range of possible options discussed by the WG, such as:
assessment of cumulative effect when providing multiple NAS to audit clients;
role of disclosure of fee-related information to stakeholders, including public disclosure;
communication with TCWG, including seeking pre-approval of NAS,

27. Focus Area 3: Ratio of NAS to Audit Fees
Findings and Recommended Way Forward
Focus Area 3: Ratio of NAS to Audit Fees
a cap on the level of fees for NAS in relation to audit fees, as a trigger to reassess the threats to independence;
a cap on the level of fees for NAS in relation to audit fees, considering whether caps should be set for both PIEs and non-PIEs;
Recommended way forward
Fees WG to share analysis with NAS WG so
these considerations can be taken into account there

28. Matters for Consideration
Views or reactions?

29. Focus Area 4: Significant NAS Business
Findings and Recommended Way Forward
Focus Area 4: Significant NAS Business
PIOB and regulatory community remain concerned about the growth of NAS businesses in firms
Recommended way forward
The business model concern cannot be addressed solely by IESBA
IESBA should discuss with IAASB how the standard settings boards might approach this issue
Some of the recommended actions, if taken by IESBA, might go part way in addressing the business model concerns

30. Matters for Consideration
Views or reactions?

31. Findings and Recommended Way Forward
Safeguards
IOSCO provided feedback on the safeguards in the extant Code and suggested enhancement to the Code to mitigate threats in relation to fees.
Recommended way forward
The relevant safeguards on fees in the Code be reviewed to determine the nature and extent of the enhancement to the Code required

32. Matters for Consideration
Views or reactions?

33. IESBA input to the recommended way forward
Next Steps
IESBA input to the recommended way forward
WG recommendations including project proposal (if appropriate) - September 2018 IESBA meeting

34. Matters for Consideration
Members are asked for any further comments on:
WG’s findings and recommended way forward, and
Merits of launching a standard-setting project(s) on fees