Attest fees and independence

By Laura Hay, CPA, CAE, OSCPA executive vice president

Recent professional standard-setting initiatives have focused on the delicate balance between attest fees and independence.

At its August 2023 meeting, the Professional Ethics Executive Committee (PEEC) of the AICPA approved new Interpretations to the Code of Professional Conduct and revisions to its Conceptual Framework for Independence related to fees. As part of PEEC’s convergence efforts, these new Interpretations build upon a recent project of the International Ethics Standards Board for Accountants (IESBA) related to fees, and a 2022 PEEC Interpretation related to unpaid Fees, requiring CPAs to evaluate independence related to fees on a principles basis.

Unpaid fees

CPAs are familiar with the threat of unpaid fees to independence; however, a prior bright-line test of fees greater than one year past-due is no longer the sole criterion. Revised Ethics Interpretation ET sec. 1.270.101, Unpaid Fees, effective Dec. 31, 2022, introduced a principles-based approach to better align the CPA’s assessment of independence with IESBA and SEC rules.

Factors to consider in evaluating whether threats to independence are at an acceptable level include:

• The significance of the unpaid fees to the covered member

• The length of time the fees have been due from the attest client

• The attest client’s agreement to pay the unpaid fees

• The covered member’s assessment of factors affecting the ability of the attest client to pay the fees

Threats to independence are at an acceptable level if, when the current-year attest report is issued, unpaid fees are both clearly insignificant to the covered member and relate to professional services provided less than one year prior to the issue date of the current-year attest report.

If unpaid fees are significant to the covered member and relate to professional services provided more than one year prior to the issue date of the current-year attest report, threats and safeguards should be evaluated. The Interpretation provides examples of safeguards that may be applied to reduce threats to an acceptable level, including suspending work for the client if necessary.

The Interpretation does not apply to unpaid fees from an attest client in bankruptcy.

Determining fees for an attest engagement

New Interpretation ET sec. 1.230.030, effective Jan. 1, 2025, seeks to prevent the determination of fees for an attest engagement being influenced by the provision of other services to that attest client. The Interpretation states that determining the fees for an attest engagement is a business decision that should consider the facts and circumstances relevant to that specific engagement, including the requirements of technical and professional standards.

The provision of other services to the attest client is not an appropriate consideration in determining the attest engagement fees, except that cost savings achieved from experience derived from providing other services may be considered.

Allowing the attest engagement fee to be influenced by the firm’s provision of other services to the attest client would present self-interest and undue influence threats that cannot be reduced to an acceptable level by the application of safeguards, thereby impairing independence.

Fee dependency

New Interpretation ET sec. 1.230.040, effective Jan. 1, 2025, addresses threats when fees from an attest client represent a large proportion of the fees of the firm. The dependence on that client and concern about losing the client would create a threat of self-interest or undue influence.

When total fees from an attest client represent or are likely to represent a large proportion of the total fees received by the firm for each of five consecutive years, independence would be impaired unless one of the following safeguards is applied:

• Prior to the attest report being issued for the fifth year, an appropriate reviewer who is not a member of the firm issuing the report reviews the fifth year’s attest work.

• After the attest report on the fifth year has been issued and before the sixth year’s attest report is issued, an appropriate reviewer who is not a member of the firm issuing the report reviews the fifth year’s attest work.

If total attest fees continue to represent a large proportion of total firm fees, one of these safeguards should be applied annually thereafter.

This concept was added to the Conceptual Framework for Independence (ET sec. 1.210.010) by inserting under selfinterest threat the example of relying excessively on fees from attest and nonattest services from a single attest client. Added to the examples of an undue influence threat is, “A large proportion of fees charged by the firm to an attest client is generated by providing nonattest services.”

A new paragraph was also added to Interpretation ET sec. 1.224.010, Client Affiliates, to clarify that fees from entities meeting the definition of affiliate are not required to be included when calculating the total fees generated from a financial statement client. However, if the covered member knows or has reason to believe that a relationship or circumstance involving any of the entities defined as an affiliate are relevant to the evaluation of fee dependency, the covered member should include the affiliate in identifying, evaluating and addressing threats related to fee dependency.

Early implementation of the changes effective Jan. 1, 2025 is allowed.

Laura Hay, CPA, CAE, is the executive vice president of The Ohio Society of CPAs and the staff liaison to the Accounting, Auditing, Professional Ethics Committee and Peer Review Committee. She can be reached at Lhay@ohiocpa.com or 614.321.2231