Fees Initiative

1. Fees Initiative IESBA Meeting New York March 12-14, 2018 Ian McPhee, IESBA Member, Fees Working Group Chair

2. Objectives of the Session • To receive a high level overview of the early responses to the November 2017 IESBA Fees Questionnaire • To receive IESBA CAG Representatives’ views on the Fees Questionnaire and the potential fees issues raised • To discuss and obtain the IESBA members’ views on the fee-related matters explored by the WG

3. Overview of Fees Questionnaire Questions about the level of fees charged • Level of fees as an ethics/independence issue • Sufficiency of current provisions of the IESBA Code • Policies and procedures of the firms • Whether regulatory requirements are more stringent than the IESBA Code • Issues identified from inspections and disciplinary investigations

4. Overview of Fees Questionnaire Questions about NAS fees sought to further understand: • Potential impact of high ratio of NAS fees to audit fees charged to audit and assurance clients • Potential impact of NAS fees or audit and assurance as high percentage of the firm’s revenue • Firm policies related to provision of NAS • Regulatory provisions relating to level of fees charged for (i) audit engagements; and (ii) NAS provided to an audit client

5. Preliminary Overview of Early Responses – Fee level Most of the firms stated • Level of fees could create threats to compliance with FPs and to independence • Put in place polices and procedures to deal with threats • Code establishes sufficient and appropriate provisions

6. Preliminary Overview of Early Responses – Fee level Two regulators: • Agreed that the level of fees, either low fees or high fee dependence from a client, could create threats to compliance with FPs and to independence. • Recognized their jurisdictions have more stringent ethics standards provisions than those in the Code relating to the level of fees charged by audit firms • Suggested that IESBA could review the appropriateness of the Code’s provisions One NSS was concerned about: • The downward fee pressure on the audit fee model in light of increasing auditing standards requirements without corresponding increase in audit fees.

7. Preliminary Overview of Early Responses – NAS • Most firms provide NAS to audit clients and, in addition to complying with the Code and regulatory requirements, do not apply extra prohibitions • No clear consensus from firms about whether • High ratio of NAS to audit fees creates threats to independence • NAS as high percentage of firm’s revenue impact the firm compliance with fundamental principles and professional competence and due care • One regulator believed that high ratio of NAS fees to assurance fees creates threats to compliance with the FP and to independence and NAS as a high percentage of a firm’s revenue also creates threats to compliance with the FP

8. Preliminary Overview of Early Responses – Investors • Believe that fee is a key factor to the engagement • State that the IESBA Code is sufficient, and support the provisions of the Code • Suggest disclosure of fees at all companies • Believe that investors should include consideration of level of fees charged by auditor when voting on • Election of audit committee chair and members • Ratification of the external auditor

9. Preliminary Overview of Early Responses – TCWG • State fees is only a factor among others at the appointment of auditor • There is no specific policy and procedure at organization level to ensure that auditor is not affected by the level of fees charged • Suggestions that • Compliance burden should be reduced • Give a role to audit standard setters to ensure that standards are appropriate for the risk

10. PIOB Feb 2018 Comments PIOB’s view on public interest issues relating to the fee initiative: “As shown in several researches, the share of revenue from consulting services is increasing in relation to those from audit. Accountancy firms may devote less, and lower quality, resources to audit activities if this trend continues. The level of fees in audit and in consulting, and relative revenue shares, should be looked into to ensure high quality audits. The PIOB believes there is sufficient concern among stakeholders that a comprehensive IESBA project on fees is justified in the next strategy cycle.”

11. Highlights from March 2018 CAG Discussion • General comments • No direct evidence provided during the CAG discussions • Questions about scope and deliverables re fees initiative • Low response rate from investor groups • Questions raised about whether low fees will impact audit quality • The “right” level of fees and ratio of NAS vs audit fees depends on a number of factors (e.g., nature of industry, maturity and structure of the market and expertise of the firm) • Anti-trust and anti-competition laws might govern levels of fees charged

12. Highlights from March 2018 CAG Discussion • Ratio of NAS fees vs audit fees “Business Model” • Nature of services provided and fees charged is more or less a business decision by firms • Impacted by changes in business models and advancing technologies • Fee Caps – Use of a specific percentage moves away from principle-based approach • IOSCO will provide its response in the next week or so

13. Timing and Anticipated Deliverables • In April 2018, WG to consider significant matters raised by respondents • In June 2018, IESBA to consider: • WG’s analysis of comments • WG’s final report and recommendations • Overlapping issues on Fees and NAS Initiatives identified • WGs plan to coordinate as appropriate

14. Matters for IESBA Consideration • IESBA members are asked to share views about • The matters raised by fees questionnaire respondents and the IESBA CAG representatives • Whether they there are specific fee related issues that need to be addressedand whether the Code should be revised to address them • Additional matters that require consideration by the WG during its April 2018 meeting • Any other relevant additional comments