On June 18, the International Ethics Standards Board for Accountants (IESBA or Board) discussed a Report from the Fees Working Group (WG). The Board's objective was to consider the WG's report on its fact-finding activities, including the widely commented on IESBA Fees Questionnaire, overview of relevant provisions of the G-20 jurisdictions, review of relevant academic research and stakeholder outreach. The WG's goal was to identify whether there is a relationship between fees and threats to compliance with the fundamental principles or to independence (or reasonable perceptions of such), and how threats might be addressed. The report focused on four (4) areas:
- Level of audit fees. There are concerns that very low fees could create threats to compliance with fundamental principles, which diminish audit quality. However, it is not practical for the IESBA Code to prescribe a specific level of "required" fees, due (in part) to anti-competitive laws in various jurisdictions (including in the U.S.). Some respondents to the fees questionnaire suggested the Board consider the role of those charged with governance in appointment decisions. The WG suggested the Board consider strengthening the Code and update the January 2017 staff publication on fee pressure.
- Fee dependency. The WG found alignment between the rules used in the G-20 and EU countries addressing fee dependency on a Public Interest Entity (PIE) audit client at the partner and office levels, and as a percentage of a firm's total revenue. The WG suggested that the IESBA enhance the application material in the code on this subject, and consider whether there should be a threshold for non-PIE audit clients. (R410.4 in the 2018 version of the code requires firms to take certain actions when fees from a PIE audit client exceed 15% of total fees received by the firm for two (2) consecutive years.)
- Ratio of nonaudit services fees to audit fees. Responses from the fees questionnaire supported the perception that a high ratio of nonaudit services fees to audit fees creates threats to independence, particularly in appearance. The WG suggested that the Non-Assurance Services Working Group consider this issue in connection with their larger project to assess non-assurance services and consider: the role of disclosure of fee-related information, enhancing communications with those charged with governance, and a possible cap on level of fees for nonaudit services that would trigger re-evaluation of threats to independence.
- Firm business models. Some stakeholders and the Public Interest Oversight Board are concerned about potential threats to audit quality and compliance with fundamental principles due to the business models of firms, particularly the larger firms. The WG found no clear evidence in academic research linking firms' provision of nonaudit services to threats to compliance with the IESBA Code or standards or regulations. The WG suggested the Board discuss with the IAASB (International Auditing and Assurance Standards Board) how they might coordinate their efforts in addressing the issue.
The Report also addressed fee-related safeguards and whether the IESBA should establish a project on fees.
The IESBA generally agreed with the WG's suggestions. The Board decided to initiate a project on fee-related matters and plans to consider the scope of that project at its September 2018 meeting. In regards to the business model issue (bullet 4 above), the issue will not be included in the fees draft project proposal. Rather, that issue is being deferred for further IESBA consideration in connection with the Board’s proposed Strategy and Work Plan for 2019-2023. The Board also asked the WG to coordinate its work on non-audit services fee-related issues (3rd bullet above) with the IESBA's Non-Assurance Services Working Group.