Auditor Independence and Unpaid Fees
Regulators are increasingly concerned about auditors who have unpaid professional fees and the potential impact of unpaid fees on auditor independence. A recent discipline decision illustrates the implication of unpaid fees on audit independence.
In this case, the audit firm had been the auditors of a public company whose shares were delisted from the TSX. To regain listing on the TSX, the company was required to complete its outstanding 2010-2012 financial statements and obtain an audit opinion on those financial statements. In 2012, the company was able to raise funds to retain the auditors to complete its audit of the outstanding financial statements and to commence an audit of the 2013 fiscal year.
By the spring of 2014, the audits of the 2010 to 2013 financial statements were near completion. However, by this time the outstanding professional fees totalled approximately $163,000. Accordingly, the audit firm took the position they were unable to complete the audits and sign the audit reports without an arrangement being made with respect to the outstanding fees.
The corporation objected to the audit firm’s position, ceased all interactions with the audit firm, and filed a complaint with the Chartered Public Accountants of Alberta (“CPAA”). After an investigation by the Complaints Inquiry Committee (“CIC”) of the CPAA, the CIC issued the following charges:
- The audit firm failed to release audited financial statements prepared for the client for 2010-2013 fiscal year-ends due to delinquent or unpaid fees and fees in dispute with the client.
- The partner of the audit firm, acting alone or as a representative of the audit firm, failed to release audited financial statements prepared for the client for fiscal year-ends 2010-2013 due to delinquent or unpaid fees and fees in dispute with the client.
The charges proceeded to a Discipline Hearing. The expert retained by the CIC held that an audit firm had two options when faced with unpaid fees: it could conclude it was not independent and resign; or proceed to complete the audits.
The expert stated that, in this case, the audit firm should have completed the audits notwithstanding outstanding professional fees. The expert’s reasoning was based partially on the expert’s observation that the audits were substantially complete, with only minor procedures required before issuance of the financial statements and audit reports.
Contrastingly, the expert retained by the audit firm opined that:
- It was appropriate for the audit firm to conclude that there was a threat to their independence with outstanding professional fees of approximately $163,000.
- As long as an arrangement to pay professional fees may be reached, the audit firm could still be independent and could proceed to sign the audit reports. Absent any such arrangement, it would not be appropriate for the audit firm to sign the audit reports.
- Since an arrangement was not reached with respect to outstanding professional fees, it would have been unprofessional for the audit firm to sign the audit reports.
Ultimately, the Discipline Tribunal concluded that the audit firm was not guilty of the charges. The Discipline Tribunal noted that the outstanding fees were neither trivial nor inconsequential, which was agreed upon by both expert witnesses. Further, the Discipline Tribunal found that even if all other audit procedures had been completed up to the time of signing the various audit reports, the audit firm was correct in not signing the audit reports until the matter of outstanding fees with the client was resolved.
This decision of the Discipline Tribunal is consistent with a Discipline Tribunal decision in British Columbia which is described in the CPABC In Focus article by Chris Utley, “Unpaid Professional Fees Can Threaten Independence”. In that case, the British Columbia Professional Conduct Enquiry Committee held that, in the presence of significant unpaid professional fees, it was unprofessional for the audit firm to complete audit reports even if the firm had taken steps to mitigate the threat to their independence.
In this case, the audit firm could have done a better job in communicating with the client. It appeared that the client did not fully appreciate how unpaid professional fees could be a threat to auditor independence, nor did the client fully appreciate how it could constitute unprofessional conduct if the audit firm were to complete the audit reports in the face of significant unpaid fees.
Where there are significant unpaid fees from prior year’s engagements, this decision suggests that audit firms should:
- Arrange for payment of outstanding professional fees from prior year’s engagements, or make satisfactory arrangements for payment; and
- Be clear to the client that the audit firm is prohibited from issuing audit reports where there are significant outstanding professional fees from a prior year.
In this particular case, no appeal was filed by the CIC from the decision of the Discipline Tribunal.