Too much fee income from one client
When reliance on one client's fees threatens independence, what the IESBA's 2021 fee revisions changed, and how a firm works out each client's share.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
In a small firm, one client can quietly grow into a large slice of the year's income. It begins with a good relationship and a little more work each year: the audit, then the tax, then a restructuring, then the subsidiaries. Nobody decided that the firm would come to depend on that client. It simply happened.
That dependence is exactly what the IESBA Code worries about. A firm that cannot afford to lose a client may find it hard to tell that client no.
Why the fee share is a self-interest threat
The IESBA Code's conceptual framework sorts threats into five categories: self-interest, self-review, advocacy, familiarity and intimidation. Fee dependency is the plainest example of a self-interest threat. The firm's financial interest in keeping the client competes with its duty to report objectively.
The threat grows with the share. A client whose fees are a small part of the firm's revenue can be lost without lasting damage. A client whose fees pay several salaries is a different matter, and the client may well know it.
Small and growing practices are the most exposed. A two-partner firm in a regional town may have one anchor client that brought it into being, and a new practice may depend on its first large engagement for years. Neither situation is improper in itself. What matters is that the firm sees the dependence, evaluates it honestly and acts on what it finds.
The IESBA's strengthened fee provisions
In an April 2021 news release, the IESBA announced revisions to the non-assurance services and fee-related provisions of the International Code of Ethics for Professional Accountants, including the International Independence Standards. The release states that the revisions include strengthened provisions to address undue fee dependency on audit clients.
According to the same release, the revised provisions became effective for audits of financial statements for periods beginning on or after December 15, 2022, with early adoption permitted and encouraged.
The release summarises the changes; the detailed requirements and any thresholds are in the Code itself. Read the current text, and check how your own regulator or professional body has adopted it. In South Africa, Nigeria and Kenya the local code and its effective dates are the ones that bind the firm.
Public interest entities and fee transparency
The April 2021 revisions also include provisions to stimulate greater public transparency about fees paid by audit clients that are public interest entities, to help stakeholders judge auditor independence. For a firm with such clients, fee information is not purely internal; the people relying on the audit may need to see it.
Most small practices meet the public interest entity rules rarely. The self-interest threat from a dominant client applies to every firm.
Working out each client's share in Achekam
Achekam does not produce a fee-dependency report. What it does hold is the raw material. A firm's client invoices, receipts, credit notes and statements of account are kept in a receivables ledger on the server (Billing & Finance), and a statement of account can be downloaded as a PDF or e-mailed. Billing controls can require a second issuer above a set amount and approval of time before it is billed.
From that ledger, the firm works out each client's share itself: everything invoiced to the client and its related entities for the year, as a proportion of the firm's total fees for the same year. Do this at least annually, and again whenever a large new engagement is being quoted.
The Rate Cards & Realisation view fills in the other half of the picture. A firm can keep rate cards and see the age of unbilled work, realisation and recovery, with time that has no rate counted as unvalued rather than estimated. A client with a large amount of old unbilled time is a bigger dependency risk than its invoices suggest, because the firm is already carrying that client's work on credit. The link between unpaid fees and independence is explored in overdue fees and independence.
Safeguards, and when to step back
Once the share is known, apply the conceptual framework. Would a reasonable and informed third party think the firm's objectivity is at risk? If so, the firm eliminates the threat, reduces it with safeguards, or steps back.
Typical responses include:
- a review of the engagement by a partner or reviewer whose income does not depend on that client;
- reducing the non-audit work the firm does for the client;
- growing other income so the share falls over time, under a plan the partners can see;
- discussing the position openly with those charged with governance at the client;
- in the end, declining to seek reappointment.
Price pressure deserves the same scrutiny. A dominant client who pushes fees down can damage quality as well as independence, a theme taken up in audit fees and quality.
An annual fee review routine
- Export the year's invoices by client from the receivables ledger.
- Group related entities, such as a holding company and its subsidiaries or a trust and its trustees' companies, as one relationship.
- Work out each relationship's share of the firm's total fees.
- Flag every relationship above an internal level the partners have set with reference to the Code.
- Record the evaluation and the safeguard chosen for each flagged relationship.
- Check unbilled work and overdue balances for the same relationships.
The IESBA's April 2021 announcement of the revised non-assurance and fee provisions explains what changed in the Code and when it took effect.
Dependency is rarely a scandal and usually a drift. A firm that measures the drift once a year, and writes down what it decided, can show that its judgement was never for sale.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
