IESBA Meeting on Fee Initiative in Athens, Greece 2018

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

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

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 • 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 Fee Dependency

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

14. 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. 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. 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. 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. 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. 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. 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. 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. 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. Findings and Recommended Way Forward Focus Area 3: Ratio of NAS to Audit Fees • 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, • Stakeholders generally consider that a high ratio of NAS fees to audit fees creates threats to independence.

27. 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. 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. Next Steps

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