1. IESBA Meeting Nashville June 17-19, 2019
Fees
Ian McPhee, IESBA Member and
Task Force Chair
IESBA Meeting
Nashville
June 17-19, 2019

2. Objectives of the Session
Consider
The updated and new Task Force (TF) proposals;
A “first-read” of the proposed revisions to the Code
Obtain Board Members’ views to proposed changes to the Code in Agenda Item 3-A

3. Agenda Introduction Proposed changes to Section 410
Feedback from FoF, NSS and SMPC ETF
Proposed changes to Section 410
Level of Audit Fees
Fees for Services Other than Audit
Fee Dependency
Other changes and conforming amendments
Next Steps

4. Feedback from Forum of Firms (FoF)
Introduction
Feedback from Forum of Firms (FoF)
Support to approach taken re level of audit fees and resources, and to communicate compliance to TCWG
Recognition for PAIBs have an obligation to ensure that pressure on fees do not compromise audit fee
Concerns about public disclosure
Disclosure of audit fees, more a matter of corporate governance
Bias about encouragement of public disclosure
Concerns about “exit clause” at 15 % *(substantially > 15 % in the new proposal)*
Forum of Firms Meeting in April in Tokyo, Diane presented issues and the Task Force proposals. This version did not include the influence of non-audit fees to audit fees, and the communication of non audit fee relevant information to TCWG

5. Feedback from National Standard Setters (NSS)
Introduction
Feedback from National Standard Setters (NSS)
Signals that low-balling of audit fees is a real issue, questions if TF proposals could address it effectively
Different views to fee-dependency
Questions about appropriate of ratio (too high? too low?)
Is the period of 5 years before ending the engaging too long?
Questions whether PIE/non PIE distinction is appropriate
NSS on 13 May in Paris, Mike presented the direction of travel of the TF proposals, including influence of non audit services to audit fees

6. Feedback from SMPC Ethics Task Force
Introduction
Feedback from SMPC Ethics Task Force
Most comments related to fee-dependency:
Discussion on proper balance to thresholds and number of years
Especially in case of newly established firm
Question on appropriateness of safeguards for non-PIEs
Concerns about public disclosure on fee-dependency
Might raise anti-competition issues
Relevant information and applied safeguards are also necessary
Suggestion to differentiate between types of non-audit services
Call with SMPC Ethics Task Force, all issues included

7. Proposed Changes to Section 410

8. Location of Proposed Changes
Facts and circumstances could influence level of fees charged or quoted to audit clients which might create a threat to independence
Proposals aimed at addressing independence, so to be located in International Independence Standards (Part 4A, S410)
Conforming and consequential amendments anticipated to other sections in the Code
Reordering of S410

9. Nature and Level of Audit Fees
Guidance on the determination of audit fees [410.4 A1]
Require firms to be satisfied that audit fees quoted or charged shall not affect firm’s ability to perform the audit in accordance with professional standards [R410.5]
Include a reference to the firm’s and engagement partner’s responsibility in auditing standards re having appropriate resources to perform audit [410.5 A1]
Coordination with IAASB at staff level in relation to proposed ISQM 1 and ISA 220

10. Influence of Other Services to Audit Fees
Nature and Level of Audit Fees
Influence of Other Services to Audit Fees
Providing services other than audit to audit clients could influence the level of fees and might create a threat to independence
Quantum of total fees charged for audit client for all services is a business decision, however it cannot result in low-balling audit fees
Require firms to be satisfied that provision (possible provision) of services other than audit to audit client does not influence level of audit fees

11. Board views are sought on paragraphs 410. 3 A1 to 410
Board views are sought on paragraphs A1 to A1 in Agenda Item 3-A.

12. Auditor Communications to TCWG
Nature and Level of Audit Fees
Auditor Communications to TCWG
Existing requirement in ISA 260 (Revised) on communicating matters re independence to TCWG for listed entities vs TF proposal
Establish a meaningful discussion → Better assist TCWG to make judgments re resources and fees quoted
Extend and strengthen communication for PIE audit clients
Require firms to communicate to TCWG: [R410.19]
Compliance to req on level of fees, and
Other relevant information to audit fees
Guidance to fee-related information relevant to TCWG, and to timing of such communication [ A1 and A2]

13. Nature and Level of Audit Fees
Public Disclosure
TF considers national laws and regulations and information provided by audited entity as primary sources
TF proposal aims to establish responsibility to firms for transparency of audit fees for PIE audit clients, by
Obtain understanding of relevant laws and regulation [R410.10]
If not otherwise available, disclose audit fees in the audit report [R410.11]
Option for provision of other relevant information to enhance the reader’s understanding [ A3 ]
Guidance to amount of audit fees to be disclosed, including group audit context (if not determined in laws and regulations) [ A1 and A2]

14. Public Disclosure – Coordination with IAASB (1)
Nature and Level of Audit Fees
Public Disclosure – Coordination with IAASB (1)
Call with IAASB representatives (Joint IESBA-IAASB WG) on overlapping issues, particularly on disclosure in audit report
IAASB reps’ preliminary reactions:
IAASB is sensitive about disclosing information unrelated to audit in audit report
Question about balance re the level of detail in the discussion with TCWG vs limited disclosure of fee numbers in the audit report
Questions about how to reconcile approach in ISA 260 (Revised) which apply to listed entities vs. the proposals for the Code to apply to PIEs

15. Public Disclosure – Coordination with IAASB (2)
Nature and Level of Audit Fees
Public Disclosure – Coordination with IAASB (2)
Without any changes to ISAs, initial views that disclosure could be located under  “Other Reporting Responsibilities”
Important to differentiate fee disclosure from information related to auditor’s responsibilities under the ISAs ( under “Other matters” section)
At earliest, IAASB could consider Task Force’s proposals in September 2019
Next step is a more in-depth discussion after the June Board meeting

16. Board views are sought on paragraphs 410. 8 A1 to R410
Board views are sought on paragraphs A1 to R in Agenda Item 3-A.

17. Fees for Services Other than Audit
Scoping of proposals
Broader approach: fees for services other than audit (non-audit services), including fees for NAS
Proposals were developed in coordination with NAS TF
Two areas:
Transparency to fees for services other than audit
Ratio of fees

18. Nature and Level of Fees for Services Other than Audit
Ratio of Fees
TF proposes provisions on ratio of fees
To address threats created by generating large proportion of fees from providing services other than audit to audit client
Ratio calculated at firm level / only specific related entities included
For Non-PIEs – Threats & safeguards approach [ A1 to A3]
For PIEs – Requirement to reassess threats if certain threshold met (70 % ) [R410.19]
Not a “fee cap”  No specific requirement to end engagement

19. Nature and Level of Fees for Services Other than Audit
Transparency
ISA 260 (Revised) requires communication to TCWG about total fees, including fees for non-audit services for listed entities
TF proposals require communication to TCWG about fees for services other than audit to PIE audit clients on a case by case basis [R410.16]
Firm shall communicate fees charged by firm and network firms (same as ISA 260)
Fees charged to audit client and only to certain related entities (same as ISA 260)
TF proposal require communication to TCWG about ratio of fees at firm level, as part of the regular audit communication [R410.18]
TF considered requiring public disclosure of the ratio annually but favored disclosure only when ratio is > 70 % for 3 consecutive years

20. Board views are sought on paragraphs R410. 13 to 410
Board views are sought on paragraphs R to A1 in Agenda Item 3-A.

21. Proposed Changes to Non-PIE Audit Clients
Fee-dependency
Proposed Changes to Non-PIE Audit Clients
Project to review PIE definition – timing accelerated
Threshold to require firms to reassess threat at certain threshold
→ 30 % after 5 consecutive years
No requirement to discuss or disclose to TCWG
Determination of application of pre-issuance or post issuance review
No encouragement of public disclosure
No requirement to exit after defined period

22. Proposed Changes for PIE Audit Clients
Fee-dependency
Proposed Changes for PIE Audit Clients
Different approach for exceeding 15 % and for “substantially” exceeding 15 %
New terminology to emphasize the difference
Guidance to determine significance (30 % a signal but not bright line)
Introduction of certain actions even in first year if threshold met
Disclosure to TCWG
Public disclosure if fee dependency “substantial”
Only pre-issuance review as safeguard (no post-issuance review)
Resignation if fee dependency substantial for 5 consecutive years

23. Proposed Changes for PIE Audit Clients (2)
Fee-dependency
Proposed Changes for PIE Audit Clients (2)
In any given year
More than 1 year
More than 5 years
> 15 %
Disclose and discuss with TCWG
[+ PD if appropriate]
No add safeguards req’d
+ pre-issuance review
+ public disclosure
Substantially > 15 %
+ public disclosure (PD)
Exit

24. Board views are sought on paragraphs R410. 21 to R410
Board views are sought on paragraphs R to R in Agenda Item 3-A.

25. Other Revisions and Conforming Amendments

26. Views sought on proposed revisions to
Section Pressure to Breach the FPs
Section Professional Appointments
Section Fees and Other Types of Remunerations
Section Applying the CF to Independence for Audit and Review Engagements

27. Next Steps Task Force to meet early August
Discussion with CAG in September
“Second read” draft at September IESBA meeting
Important to align finalization of ED with NAS

28. Board views sought on next steps

29. The Ethics Board