The Word of Caution and the Good News for Auditors:
The auditor is now required to ensure zero outstanding of audit fee before signing current year audit report as per the Revised Code of Ethics.
Legal Position as per Code of Ethics, 2019
Section 410.7 A1
- A self-interest threat might be created if a significant part of fees is not paid before the audit report for the following year is issued.
- It is generally expected that the firm will require payment of such fees before such audit report is issued.
- The requirements and application material set out in Section 511 with respect to “Loans and Guarantees with an Audit Client” might also apply to situations where such unpaid fees exist.
Section 410.8 R
When a significant part of fees due from an ‘audit client’ remains unpaid for a long time, the firm shall determine:
- Whether the overdue fees might be equivalent to a loan to the client; and
- Whether it is appropriate for the firm to be re-appointed or continue the audit engagement.
Section 511.4 R
A firm, a network firm, an audit team member, or any of that individual’s immediate family shall not make or guarantee a loan to an audit client unless the loan or guarantee is immaterial to:
- The firm, the network firm or the individual making the loan or guarantee, as applicable; and
- The client.
FAQs
Q1. What does ‘Audit’ referred above include?
- In simple words, here ‘Audit’ includes every engagement on which “Standards on Auditing (SAs)” and “Standards on Review Engagements (SREs)” apply.
- Therefore, Statutory Audits as well as Tax Audits under Income Tax Act, 1961 are included.
Q2. What does ‘Audit’ referred above exclude?
- Internal Audits
- Bank Concurrent Audits
- Stock Audits
- Certifications
- Due Diligence
Q3. What does ‘Audit Client’ referred above include?
- An entity in respect of which a firm conducts an audit or a review engagement.
- When the client is a listed entity, audit client will always include its related entities.
- When the client is not a listed entity, audit client includes those related entities over which the client has direct or indirect control.
Q4. How about if only Audit fee component of overall outstanding fees for previous years is received before signing of next audit report?
- Auditor may achieve compliance with section 410.7, but compliance of section 410.8 read with section 511.4 needs to be assessed.
- Section 410.8 requires Auditor to determine whether the overdue fees might be equivalent to a loan to the client, where a significant part of fees from an audit client remains unpaid for a long time.
- Section 511.4 prohibits an Auditor or Audit Firm to make or guarantee a loan to an Audit client, unless the amount is immaterial to both giver and receiver.
Q5. What are the safeguards or alternate course of actions in such situations?
Examples of actions prescribed under Code of Ethics, 2019 include:
- Obtaining partial payment of overdue fees.
- Having an appropriate reviewer, who did not take part in the audit engagement, review the work performed.
Q6. Does this provision really have any practical relevance?
- Undoubtedly yes!
In one of the Professional Misconduct cases dealt with, which involved SFIO investigation, SFIO highlighted and objected the continuation of audit engagement by the Auditor despite ‘unpaid outstanding audit and non-audit fees’ from audit client for long and held the Auditor to be a party to the fraud committed by the audit client, as the independence of auditor was already compromised due to continuation of audit year after year despite long outstanding unpaid fees.
Author Bio
sir, my audit fees of rs, 109000/-has not been paid for audit of accounting year 2
020-21,SAWANTWADI URBAN CREDIT CO OP BANK LTD, SAWANTWADI PIN 416510,and ,sice then next year’s audits are get done falsely saying that audit fees were paid. I do not know hou it was managed by next auditor. it was mandatory by Bank to make the payment of fees before getting audit reports from next auditor. what I should do for recovery of my statutory audit fees.
You can approach in writing to the bank HO or other Department making your appintment for recovery and the new auditor informing them of the misconduct on his part for accepting audit without ensuring the payment of previous auditor’s fees.
Kindly consider the following link and update information in the said article.
Link: https://www.icai.org/post.html?post_id=17723
Ethical Standards Board
The Institute of Chartered Accountants of India
7th September, 2021
Sub. : Continuing Audit in case of pending Fees of earlier year(s)
It has come to the notice of the Institute that certain messages are being circulated on social media and at other platforms that the continuing Auditor cannot sign the Audit Report if his professional fees from earlier years is pending.
In this regard, it is hereby clarified that the aforesaid position is NOT correct, and has NOT been circulated by the Institute.
The members may take note of the Announcement dt. 1.7.2020 on the Applicability of revised edition of Code of Ethics (making revised Code effective from 1.7.2020 except for certain deferred provisions) , appearing at the following link :- https://www.icai.org/post/applicability-revised-edition-code-of-ethics.
In this regard, the provisions of ‘Fees- Overdue” , appearing in Volume-I of Code of Ethics, appearing at paragraphs 410.7 A1 to paragraph R410.8, and effective from 1.7.2020, may be referred. The safeguards mentioned therein are required to be taken by the Auditor. There is no bar on signing the Audit Report in these circumstances.
The FAQ at s.no. 205 of “FAQs on Ethical issues”, publication of Ethical Standards Board, may also be referred at the following link :- https://resource.cdn.icai.org/63083esb51033.pdf
The members may take note of this, and comply accordingly.
Please refer the writeup again. Supporting legal provisions and their implications are sufficiently provided/ referred. While there is no explicit bar, yet the inference drawn by regulators and investigators has high implications. Litigation has its own cost and what we recommend to practicing CAs is to avoid any such act/ non-act which can lead to prima-facie belief of misconduct/ violation and may result in litigation. Accumulation of fees results in several meanings/ interpretations which all cannot be put to writing and made available in public domain by ICAI, including threats to independence. It is highly suggested to ensure receipt of audit component of overall fees before signing audit report of subsequent year.
What if the auditor doesn’t issue any invoice upto 3 years claiming books of account on cash basis
And then ask client to pay around Rs. 1 lac for 3 years fee?
Since previous years have already been passed, it is recommended to receive such Rs 1 Lakh audit fee before signing current year audit report.