ISCA’S RECOMMENDATIONS GARNER AUDIT COMMITTEE MEMBERS’ SUPPORT
The Institute of Singapore Chartered Accountants Ethics Committee (ISCA EC) received feedback indicating diversities in interpretations and practices in applying certain non-assurance services (NAS) and fee-related provisions in ISCA’s EP 100 Code of Professional Conduct and Ethics (EP 100). There was also no empirical evidence to ascertain what information is relevant to those charged with governance (TCWG) in assessing the independence of audit firms.
This article outlines findings from a survey conducted of audit committee members to obtain views on matters concerning auditor independence when providing NAS to audit clients and on certain recommendations to address NAS independence concerns.
EXISTING PRINCIPLES AND GUIDANCE ON NAS
There are existing principles and guidance in both EP 100 (Revised on 14 August 2020) and Companies Regulations relating to the proportion of NAS that an audit firm can provide as compared to the audit fees.
Paragraph SG410.4A1 of EP 100 (Revised on 14 August 2020) states:
Where an audit client is a listed entity or a public company and the amount of annual fees received for non-audit services compared to the total annual audit fees from the audit client is 50% or more, the firm shall disclose to those charged with governance of the audit client the fact that the total of such fees represents 50% or more of total annual audit fees received by the firm and discuss the safeguards it will apply to reduce the threat to an acceptable level. Examples of safeguards that could be considered and applied include: (a) Independent internal or external quality control reviews of the engagement, and (b) Consulting a third party, such as a professional regulatory body or other professional accountant, on key audit judgements.
The following is extracted from the Glossary of EP 100 (Revised on 14 August 2020):
An entity in respect of which a firm conducts an audit engagement. When the client is a listed entity, audit client will always include its related entities. When the audit client is not a listed entity, audit client includes those related entities over which the client has direct or indirect control.
An entity that has any of the following relationships with the client:
(a) An entity that has direct or indirect control over the client if the client is material to such entity;
(b) An entity with a direct financial interest in the client if that entity has significant influence over the client and the interest in the client is material to such entity;
(c) An entity over which the client has direct or indirect control;
(d) An entity in which the client, or an entity related to the client under (c) above, has a direct financial interest that gives it significant influence over such entity and the interest is material to the client and its related entity in (c), and
(e) An entity which is under common control with the client (sister entity) if the sister entity and the client are both material to the entity that controls both the client and sister entity.
The current wordings in paragraph SG410.4A of EP 100 (Revised on 14 August 2020) resulted in diversities in interpretations and practices in applying certain NAS and fee-related provisions in ISCA’s EP 100. There are also misalignments between SG410.4A and Regulation 12 of Companies Regulations.
Regulation 12 of Companies Regulations states:
For the purposes of section 206(1A) of the Companies Act, a review of the fees, expenses and emoluments of an auditor of a public company shall be undertaken if the total amount of the fees paid to the auditor for non-audit services in any financial year of the company exceeds 50% of the total amount of the fees paid to the auditor in that financial year.
OBTAINING VIEWS ON MATTERS CONCERNING AUDITOR INDEPENDENCE WHEN AUDIT FIRMS PROVIDE NAS TO AUDIT CLIENTS
To consider inputs across all stakeholders, ISCA EC formed a working group2 (ISCA NAS WG) to deep-dive into the local concerns in applying NAS and fee-related provisions in ISCA’s EP 100 and to recommend practices that are relevant and practical to strengthen auditor independence.
The ISCA NAS WG’s activities included:
- Performing research to understand and obtain an overview of the relevant NAS and fee-related provisions in United Kingdom and United States;
- Reaching out to stakeholders to obtain their perspectives about auditor independence relating to the provision of NAS;
- Deliberating feedback obtained from stakeholders, and
- Reporting feedback obtained and providing recommendations for ISCA EC’s consideration.
ISCA invited approximately 400 audit committee members to participate in the online survey to share their views regarding the recommendations as well as matters which impact auditor independence when offering NAS. The findings of this inaugural survey were unveiled at ISCA’s Practitioners Conference on 22 October 2020.
Tan Seng Choon, Chairman of the ISCA EC, said during his presentation at the conference, “As far as we know, this is the first such survey where we hear directly from directors on what they think about auditor independence vis-a-vis NAS. We want to see how best to reform EP 100 in relation to SG410.4A requirements and obtaining audit committee members’ feedback is important because they are the stakeholder group which will be using the NAS information in their assessment of auditor independence. It is a user-needs analysis.”
“We will be developing our recommendations for changes to NAS requirements and will put forward this to ACRA PAOC EC3 for its due consideration. Our overarching principle is to enhance public confidence in the profession and public trust, balanced with cost and practicality of implementation,” said Mr Tan.
Based on ISCA NAS WG’s recommendations, participants were surveyed on the following six areas:
- Scope of entities to be considered for communication of NAS to TCWG;
- Definition of “audit-related services”;
- Approach to trigger TCWG’s review and approval on provision of NAS;
- TCWG’s elevated approval on provision of NAS;
- TCWG’s pre-approval on provision of NAS;
- Communication to TCWG and public disclosure of audit fees.
The survey comprises 19 questions relating to matters concerning auditor independence and recommendations made by the ISCA NAS WG. The questions are grouped into six different areas to facilitate ease of understanding. The survey has a “skip logic” feature. Hence, depending on the individual responses, each respondent answered only applicable questions in the survey.
The participants of the survey were mostly directors (who are audit committee members) of Singapore-incorporated companies or organisations. Eighty-three per cent of the respondents are independent audit committee members of mainboard-listed companies on the Singapore Exchange (SGX) while the remaining 17% are independent audit committee members of Catalist-listed companies on SGX. The respondents have an average of 14 years of experience as a director.
SURVEY ANALYSES AND FINDINGS
This Survey of Directors was conducted from March to May 2020. From the survey results, it was observed that the majority of respondents supported the directional recommendations to address NAS-related concerns in EP 100.
Lee Fook Chiew, ISCA Chief Executive Officer, said, “The survey findings show that audit committee members of Singapore companies are supportive of ISCA’s recommendations to strengthen auditor independence in relation to the provision of non-assurance services. We will take the feedback into consideration when we work on enhancing the non-assurance services and fee-related provisions in ISCA’s Code of Professional Conduct and Ethics to address the diversity in the interpretation and application of such provisions.”
Scope of entities to be considered for communication of NAS to TCWG
Ninety-two per cent of the directors surveyed were of the view that information on NAS provided by network firms4 (of the audit firm) to upstream and sister entities5 is important but it is practically difficult for an audit firm to obtain such information.
Hence, to mitigate any perceived or real independence threats, ISCA NAS WG recommends an audit firm obtains a confirmation from each network firm, that the NAS fees earned by the network firm from the parent and sister entities of the audit client, do not exceed 1% of the network firm’s revenue. This was supported by 94% of the directors surveyed.
Should the NAS fees earned by the network firm from the parent and sister entities of the audit client exceed 1% of the network firm’s revenue, ISCA NAS WG recommends either of the following safeguards:
- A confirmation from the audit firm that there is no undue influence from its network firms on the audit firm for the execution of audit, or
- A confirmation from the audit firm’s ethics and independence partner (or equivalent) that there is no undue influence from its network firms on the audit firm for its execution of audit.
The above recommendation was supported by 94% of the respondents.
Definition of “audit-related services”
The Revised Ethical Standard 2019 issued by the UK Financial Reporting Council defines “audit-related services” as non-audit services that are largely carried out by members of the audit engagement team, and where the work is closely related to the work performed in the audit and the threats to auditor independence are clearly insignificant and, as a consequence, safeguards need not be applied.
ISCA NAS WG’s view is that services such as reporting required by laws and regulations, Economic Development Board grant certifications and agreed upon procedures on turnover rental would be considered as “audit-related services” as the work is (i) closely related to the work performed in the audit engagement and (ii) usually carried out by audit engagement team members who are required to comply with the independence requirements. Accordingly, ISCA NAS WG proposes to introduce the concept of “audit-related services” for application in Singapore.
All (100%) of the directors surveyed supported developing the concept of “audit-related services” and 97% agreed to exclude “audit-related services” from the computation of the proportion of fees for services other than audit to audit fee.
Approach to trigger TCWG’s review and approval on provision of NAS
Some 91% of the directors surveyed supported having a threshold to trigger TCWG’s review of provision of NAS by the audit firm and 87% of the respondents viewed that the computation of such threshold should cover only controlled entities, that is, downstream entities of the audited entity.
TCWG’s elevated approval on provision of NAS
Only 44% of the directors supported the recommendation to have a higher threshold to trigger TCWG’s enhanced approval process. Those who were not supportive of this recommendation viewed that one threshold would be sufficient for monitoring and easier administration. They were also concerned that having another threshold could potentially lead to higher fees.
TCWG’s pre-approval on provision of NAS
It is important for the audit firm to have timely communication with TCWG regarding NAS. ISCA NAS WG noted that some NAS were only reviewed and approved by TCWG after the services were provided. To address such concerns, ISCA NAS WG recommends that audit firm should obtain pre-approval from TCWG on the provision of NAS, that is, audit firm to obtain concurrence from TCWG prior to the provision of NAS to audit client. Some 69% of the directors surveyed agreed with this recommendation.
For directors who supported audit firms obtaining pre-approval from TCWG, 91% of them agreed that such approval should be restricted to the audit client and its unlisted downstream entities.
With reference to SEC Regulation S-X (17 Code of Federal Regulations Part 210), ISCA NAS WG recommends that blanket approval, that is, consent given to an audit firm to carry out NAS without requiring approval from TCWG, should be applied for NAS that are recurring in nature, subject to certain threshold. If the NAS is not within the list of services for blanket approval, it is recommended for audit firm to initiate discussion with TCWG. All the directors surveyed supported this recommendation.
Communication to TCWG and public disclosure of audit fees
In January 2020, the International Ethics Standards Board for Accountants (IESBA) issued two exposure drafts (EDs) to strengthen the NAS and fee-related independence provisions of the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code).
- Proposed Revisions to the Non-Assurance Services Provisions of the Code (NAS ED), and
- Proposed Revisions to the Fee-Related Provisions of the Code (Fees ED).
The Fees ED proposed disclosure of the fee for the audit of the financial statements, comprising (i) fees paid or payable to the audit firm and network firms (of the audit firm), and (ii) actual or estimated fees paid or payable to other firms that have performed audit procedures on the engagement. This is to enable TCWG and the public to assess the independence of the audit firm.
Some 87% of the directors agreed that audit fees paid or payable to firms other than the audit firm and network firms (of the audit firm) should be disclosed to enable TCWG and the public to assess the independence of the firm.
The outcomes of the survey reflect support from directors on recommendations to address auditor independence when providing NAS to audit clients in three broad areas:
(1) Scope of entities to be considered for communication of NAS to TCWG
(2) Definition of “audit-related services”
(3) TCWG’s pre-approval on provision of NAS
ISCA has also highlighted the above key recommendations to IESBA for consideration in its revision of the International Code of Ethics for Professional Accountants.
You can read the “Survey of Directors” here.
Lim Ju May is Deputy Director, Alice Tan is Senior Manager, and Ng Shi Zhen is Manager, Technical, ISCA.
1 Equivalent to para SG290.219A of the Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities issued by the Accounting and Corporate Regulatory Authority (ACRA)
2 The ISCA NAS WG comprises Mr Tan Seng Choon (Chairman), Mr G. Arull, Associate Professor El’fred Boo, Ms Lorraine Chay Yeow Mei, Ms Caroline Lee, Mr Amos Ng, Ms Ong Bee Yen, Ms Sherry Quark, Ms Serene Teo, Ms Andrea Yap and Mr Gerald Yeo.
3 ACRA PAOC EC refers to the Ethics Sub-Committee of the ACRA Public Accountants Oversight Committee.
4 Network firm refers to a firm that belongs to a network.
5 Sister entity refers to an entity which is under common control with the audit client.