Fees – Issues and Proposals

1. Fees – Issues and Proposals IESBA CAG Meeting New York March 4, 2018 Ian McPhee, IESBA Member and Task Force Chair

2. Agenda • Introduction • Level of Audit Fees • 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

3. Introduction

4. Introduction Activities Since September 2018 Meeting • October – SMPC and Forum of Firms Meeting • Update on the Project Scope • December – TF meeting in NYC • Discussion on issues and draft of proposals • December – IESBA Meeting • Update on TF’s approach and preliminary views • February – TF Teleconference • Finalizing TF’s proposals and discussion on proposed changes

5. Introduction Project Timing

6. Introduction Report Back Sept 2018 Fees Discussions • CAG is asked to note the Task Force’s responses summarized in para. 5 of Agenda Item F

7. Level of Audit Fees

8. Level of Audit Fees 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 the ability to perform the engagement in accordance with professional standard

9. Level of Audit Fees 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

10. 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 results 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

11. Level of Audit Fees Enhanced Transparency • TF reviewed: • Transparency to TCWG → Enhanced communication • Transparency to public → Information made public including by firms where necessary • Views on 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

12. 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: Communicate to TCWG that fees quoted allows firm to perform the engagement in accordance with professional standards

13. 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 not disclosed by audited entity • For PIE audit clients, firm is required to disclose audit fees • For non-PIE audit clients, firm is encouraged to disclose audit fees

14. Matters for Consideration Representatives’ views and inputs are requested on the TF proposals presented

15. Fee Dependency

16. Fee-dependency Current Provisions for PIE Audit Clients

17. Fee-dependency Suggested Changes for PIE Audit Clients

18. 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)

19. 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

20. 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

21. 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

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

23. 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

24. 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 Option B: Require Firms to disclose and discuss with TCWG [including public disclosure after the 1st year]

25. Matters for Consideration Representatives’ views and inputs are requested on the TF proposals presented

26. Fee-related Safeguards

27. 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