Fees

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

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 • 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. 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)*

5. 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

6. 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

7. Proposed Changes to Section 410

8. Location of Proposed Changes • 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 • Facts and circumstances could influence level of fees charged or quoted to audit clients which might create a threat to independence

9. Nature and Level of Audit Fees 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. 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 410.7 A1 in Agenda Item 3-A.

12. 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[410.19 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 [410.11 A3 ] • Guidance to amount of audit fees to be disclosed, including group audit context (if not determined in laws and regulations) [410.11 A1 and A2]

14. 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. 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 R410.12 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 [410.17 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 410.19 A1 in Agenda Item 3-A.

21. 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. 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. Fee-dependency Proposed Changes for PIE Audit Clients (2)

24. Board views are sought on paragraphs R410.21 to R410.30 in Agenda Item 3-A.

25. Other Revisions and Conforming Amendments

26. Views sought on proposed revisions to • Section 270 - Pressure to Breach the FPs • Section 320 - Professional Appointments • Section 330 - Fees and Other Types of Remunerations • Section 400 - 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 www.ethicsboard.org