When overdue fees become an independence issue
When unpaid fees from an audit client threaten independence, and how a firm can track them, act before signing and record the safeguard it applied.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
An audit client that pays slowly is a commercial problem. An audit client that still owes last year's audit fee when this year's report is ready for signature is an independence problem. The longer a fee stays unpaid, the more the firm has a stake in the client's survival and in keeping it happy, which is exactly the pressure independence rules exist to prevent.
This article covers why overdue fees can look like a loan, how to watch what each audit client owes, agreeing payment before signing, how write-offs are handled and what to record.
Why unpaid fees can look like a loan
The independence standards treat significant overdue fees as a self-interest threat. A firm owed a material amount by an audit client may be reluctant to modify its opinion or raise difficult matters, because doing so could put payment at risk. The threat is greatest when a significant part of the fee is still unpaid when the following year's audit report is due to be issued.
The IESBA Code, on which most national codes for auditors are built, generally expects the firm to require payment of such fees before that report is issued. Where overdue fees remain unpaid, the firm should consider whether they might be equivalent to a loan to the client, which raises independence concerns of its own, and whether it is appropriate to be reappointed or to continue the engagement. South African registered auditors are bound by the IRBA Code of Professional Conduct, which sets out the code and the rules regarding improper conduct they must follow; Nigerian and Kenyan auditors should check the code of their own body.
Watching aged balances by client
A firm cannot act on overdue fees it does not see. In Achekam, a firm's client invoices, receipts, credit notes and statements of account are kept in a receivables ledger on the server, and a client's 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.
Unbilled work matters too. Rate cards show the age of unbilled work, realisation and recovery, with time that has no rate counted as unvalued. A large balance of unbilled audit time is tomorrow's receivable, and the same pressure applies once it is invoiced.
A practical routine for audit clients:
- At planning, pull the client's statement of account and note any balance from last year's audit still unpaid.
- At completion, check again before the report goes to the partner.
- Each month, for the firm as a whole, list audit clients with overdue balances and decide what to do about each.
Agreeing payment before signing
The cleanest safeguard is timing. Agree with the client, in the engagement letter, that earlier fees will be settled before the next report is signed, and hold to it.
Make paying easy. A firm can e-mail an invoice with a pay link through which its client pays by a gateway the firm has configured with its own keys, such as PayFast, Ozow, Peach Payments, Stripe, Paystack, Flutterwave, M-Pesa or Pesapal, or by EFT. Payment is recorded only from the gateway's verified notification, a status query or a person's capture, so the statement of account reflects money actually received.
Where a client genuinely cannot pay before signing, take it to a partner who is not on the engagement, to decide whether the threat can be brought to an acceptable level, for example through a secured payment plan, or whether the firm should hold its signature until the position is resolved. The commercial side is covered in chasing overdue fees.
Write-offs and their approval
Writing off an audit client's fee does not remove the threat, and it can create a new one: forgiving a debt is a benefit to the client, and it can look like a favour. Treat write-offs of audit fees with care.
For time not yet billed, Achekam's WIP Register lets a partner, manager or administrator write unbilled time up, down or off with a reason. Write-downs above the firm's threshold, 10% by default, and every write-off wait for approval by another partner. That second partner is well placed to ask whether the client is an audit client and whether the write-off affects independence. For a fee already invoiced, any amount the firm decides not to collect goes through the receivables ledger as a credit note, and deserves the same second look.
Recording the threat and the safeguard
When an audit client has significant overdue fees, the file should show:
- the amount overdue and its age at the date of the report;
- the evaluation of whether it is significant and whether it resembles a loan;
- the safeguard applied, such as payment received before signing, a secured payment plan or a review by another partner;
- the conclusion on whether the firm could sign, and whether to continue next year.
Achekam's independence records let staff log annual declarations and any interest, relationship or gift involving a client, and check whether someone has an active independence exception for that client. Use those records and the engagement file together, so a reviewer can see both the threat and how it was handled. Other threats that come from serving audit clients are covered in other services to an audit client.
Audit fees that stay current are a sign of a healthy relationship. Fees that do not are worth a conversation before the next report is signed, not after it.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
