Chartered Accountants
Regulatory Board
Frequently Asked Questions
APB Ethical Standards - Fee Dependence
Last updated: 06/02/2016
Frequently Asked Questions
APB Ethical Standards - Fee Dependence
The APB guidance is not issued by the Chartered Accountants Regulatory Board or
Chartered Accountants Ireland and there is currently no "case precedent" to endorse the
positions outlined below. Whilst we make every effort to ensure that this content reflects the
most up-to-date position members should always refer to the current on-line version of the
APB guidance found on the website of the Financial Reporting Council before acting.
Please select the question to view the response.
1) Some of the partners in the audit firm are partners in another firm. The other firm
cannot be said to be under the control of the audit firm or its partners. Do we
consider the fee income charged by the network of both firms when assessing our
economic dependence or just the audit firm?
2) I audit parts of a group and offer non audit services to other parts of the group. Do
I have to add the fees together?
3) I am a part time Sole Practitioner – can I include the income I receive from non
accounting functions in my calculations for fee dependency?
4) Can we act for a client who regularly accounts for more than 10% of our fee and
occasionally accounts for more than 15%?
5) If I resign from my audit client whose fees for audit and non audit services have
exceeded 15% of my total fees my next largest audit would then be over 15% of
fees and so on. Can this be right?
1) Some of the partners in the audit firm are partners in another firm. The other firm
cannot be said to be under the control of the audit firm or its partners. Do we
consider the fee income charged by the network of both firms when assessing our
economic dependence or just the audit firm?
The Standard refers to fee income to the audit firm. Audit firm is defined in the glossary
as including network firm in the UK and Ireland "which are controlled by the audit firm or
its partners". The inclusion of the latter words in the definition was not intended to limit
the fee calculations needed in ES 4 (Revised).
It depends on whether the other firm is considered to be a network firm, which is not just
a question of control, but also of common ownership, management and the sharing of
resources. For example, another firm that has just 10 per cent of common partners and
no common management processes or resources is probably not a network firm.
However, another firm owned by 40 per cent of your partners and sharing a pool of staff
(and many clients) with your firm might well be within the definition of a network firm.
Where the other firm is part of the same network, if the audit engagement partner is not
one of the common partners, then consideration should also be given to whether the
profit share for the audit engagement partner of the client in question is influenced by the
profits of the whole network, or just of the audit firm (ES 4 (Revised) , paras 25 and 26).
Therefore you should consider all the audit and non audit services provided to the audit
client and its subsidiaries which you and any other UK and Irish network firms audit.
Thus the income to the network from audit and non audit services provided by the
network should not regularly exceed 10 per cent of network income in the case of a listed
entity and 15 per cent of network income in the case of an unlisted entity.
References:
APB Ethical Standards (Revised) Glossary of Terms
APB Ethical Standard (Revised) 4
Links:
The full APB guidance can be found at www.frc.org.uk/apb/publications/ethical.cfm
2) I audit parts of a group and offer non audit services to other parts of the group. Do
I have to add the fees together?
The guidance relating to the proportion of fees you can earn from one client applies to
the total fees for both audit and non-audit services for the client and any of its
subsidiaries that are audited by the firm1.You must therefore add into your calculations
the fees relating to the audit of any subsidiary of the audit client and fees from any other
services provided to those subsidiaries that are audited by you. Where you provide nonaudit services to the subsidiary but do not carry out its audit, those fees do not need to
be included in your calculations.
References:
1 APB Ethical Standard (Revised) 4, paras 25-37,
Links:
The full APB guidance can be found at www.frc.org.uk/apb/publications/ethical.cfm
3) I am a part time Sole Practitioner – can I include the income I receive from non
accounting functions in my calculations for fee dependency?
Yes. You can include income received from accounting or non accounting work where it
arises from an entity considered to be one of your UK or Irish network firms. A network
firm is an entity which is:



Controlled by the audit firm
Under common control, ownership or management
Otherwise affiliated or associated through use of common name, resources or
sharing of significant common professional resources
The APB includes a footnote to ES 4 (Revised) paragraph 25 confirming that as a sole
practitioner annual fee income includes any earned income that you receive. This is
because your firm (the sole practice) and you as an individual are effectively one and the
same. Monies received from pensions can also be considered as ‘earned income’ as
they arise from past earnings.
References:
APB Ethical Standards (Revised) - Glossary of Terms
Links:
The full APB guidance can be found at www.frc.org.uk/apb/publications/ethical.cfm
4) Can we act for a client who regularly accounts for more than 10% of our fee and
occasionally accounts for more than 15%?
Is the client a listed or non-listed entity? For a listed client the answer will be no.
Paragraph 25 of APB Ethical Standard (Revised) (ES) 4 states the firm should not
accept or continue the appointment where the fees for a listed entity client and its
subsidiaries regularly exceed 10% of the firm’s annual income.
For a non-listed entity, the annual fees should not regularly exceed 15% for audit and
non-audit services (paragraph 26 of ES 4 (Revised) ). Paragraphs 27 and 28 of ES 4
(Revised) discuss the effect of exceeding 15% (or 10% for listed entities) irregularly and
identifies certain factors which you would need to consider, e.g. the type of engagement
and the safeguards such as the disclosure of the situation to the Ethics Partner.
Your firm would be able to act for an unlisted client where the fees regularly exceed
10%, but fall below 15% if disclosure of this is made to the firm’s Ethics Partner, those
charged with governance and, in addition, the firm arrange for an external independent
quality review to be carried out before the finalisation of the audit report.
Further, the firm could claim the relief given in paragraph 5 of the ES-PASE (Revised)
(Provisions Available For Small Entities) and dispense with the need for an external
review if the client is a small entity (but other safeguards remain) See paragraph 4 of ESPASE (Revised) for a definition of what constitutes a ‘small entity’.
The predictability of the fees can play a part. If you are expecting fees to regularly
exceed 15% then you would be unable to meet with the requirements of paragraphs 27
and 28. If however it is a possibility rather than a probability you are likely to comply with
the guidance.
References:
APB Ethical Standard (Revised) 4
Links:
The full APB guidance can be found at www.frc.org.uk/apb/publications/ethical.cfm
5) If I resign from my audit client whose fees for audit and non audit services have
exceeded 15% of my total fees my next largest audit would then be over 15% of
fees and so on. Can this be right?
According to the APB ES 4 (Revised) , when the level of audit fees received from a
single audit client regularly exceeds 15% of a firm's total income for an unlisted entity
(and 10% for a listed company) the firm should not act as auditors of that entity and
should either resign as auditors or not stand for reappointment, as appropriate. Hence,
you are correct to say that the audit must be given up once the fees regularly exceed
15% and that there is not an option to continue acting as auditor and have an external
hot file review.
However, if the audit firm also provides non-audit services, the audit firm would have the
option to stop providing the non audit services and continue acting as auditor. This may
reduce the audit firm's economic dependency to below 15%. Alternatively you could
consider giving up the audit and continuing to provide the non audit services. In terms of
the domino effect, we recognise this may be a problem. We have raised this matter with
the APB in the past and will continue to do so in the future. It would be useful to have
examples of this domino effect to support our future discussions with the APB.
References:
APB Ethical Standard (Revised) 4
Links:
The full APB guidance can be found at www.frc.org.uk/apb/publications/ethical.cfm
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