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

2. 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

3. Introduction

4. 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

5. 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

6. 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

7. 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

8. Level of Audit Fees

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Fee Dependency

17. 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

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

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

20. 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)

21. 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

22. 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

23. 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

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

25. 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

26. 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]

27. Fee-related Safeguards

28. 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

29. 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