Fact – How Fees Should Be Set
Fees should be based on:
- Skill and knowledge required;
- Training and experience of staff;
- Time spent;
- Degree of responsibility and urgency.
Fact – What is Not Allowed
Should not charge an unrealistically low fee (e.g. < RM500) if it lowers professional standards.
Audit fees must not be based on:
- Percentage of profit, or
- Contingency (e.g. “Only pay if you get a bank loan”).
Additional Point
Auditor may refuse reappointment if fees are unpaid for two consecutive years.
Example (Low Fee)
- Firm offers to do a full statutory audit for RM200, which is too low to cover proper work.
- This may pressure the firm to cut corners and is against By-Laws.
Example (Commission)
- A tax agent offers: “If you send all your audit clients to me, I’ll give you 10% commission of my fees.”
- The auditor cannot accept this commission under Section 330.
Contingent Fees vs Referral Fees or Commissions
1. Contingent Fees
A contingent fee is a fee that is dependent on a specific outcome or result.
The amount of the fee is based on:
- A percentage of a result (e.g. tax saved, claim amount, loan approved), or
- Whether a particular outcome is achieved (e.g. “no win, no fee”).
Example
An accountant agrees:
“My fee will be 10% of whatever tax I manage to save you this year.”
Or:
“If the bank approves your loan after I prepare the financial statements, then you pay me RM20,000; if not, you pay nothing.”
Ethical issue
- Creates a self-interest threat and bias, especially for audit and assurance engagements, because the accountant has a direct financial interest in the outcome of their work.
- For this reason, contingent fees are generally prohibited for audit/assurance clients under professional ethics.
2. Referral Fees or Commissions
A referral fee or commission is a fee received (or paid) for referring a client to another professional/service provider, or for accepting a client referred by another party.
It is not based on the outcome of the work, but on the act of referral or introduction.
Example
An audit firm refers a tax case to a tax specialist and receives a commission (e.g. RM1,000) for each client referred.
A financial planner pays the accountant a referral fee for sending clients to buy investment products.
Ethical issue
Creates self-interest and possibly advocacy or familiarity threats, because the accountant might recommend a service based on the fee, not on what is best for the client.
Usually allowed only with safeguards, such as:
- Full disclosure to the client of the referral fee/commission, and
- Ensuring objectivity and professional judgment are not compromised.
Key Differences (Short Exam Answer)
Contingent fees are fees whose amount depends on the outcome of the engagement (for example, based on a percentage of tax saved or claim amount), and they create a strong self-interest threat, so they are generally prohibited for audit and assurance services.
Referral fees or commissions are amounts paid or received for referring clients or services, not based on the engagement outcome, but on introductions; they may be permitted with safeguards such as full disclosure, but still create self-interest and possible advocacy threats.
Ethical conduct towards clients:
- Clearly agree the scope of work, responsibilities, and basis of fees with the client in advance (e.g. in an engagement letter).
- Charge fees that are fair and reasonable, reflecting the work, skill and responsibility involved.
- Avoid contingent fees where prohibited (especially for audit/assurance clients).
Factors that should be taken into consideration in determining the audit fees to the clients
When fixing audit fees, the auditor must follow MIA’s ethical expectations (no “cheap fee but low quality” and no contingent fees). In practice, these are the main factors to consider:
1. Time expected to be spent on the audit
- Estimated hours by partners, managers, seniors and juniors.
- More time → higher fee.
2. Complexity and nature of the client’s business
- Simple trading company vs group with subsidiaries, foreign operations, complex financial instruments, etc.
- Highly regulated industries (banking, insurance, listed companies) require more work.
3. Level of skill, experience and responsibility involved
- Work requiring more partner/manager involvement or specialist knowledge (IFRS, financial instruments, tax, IT systems) will attract higher fees.
4. Size and structure of the client
- Turnover, total assets, number of branches/locations, number of transactions.
- Multi-location clients or groups mean more audit teams and coordination.
5. Quality of accounting records and internal control
- Good systems and strong internal controls → less testing and time.
- Poor records, weak controls → more corrective work, more testing → higher fee.
6. Audit risk and degree of responsibility
- Higher engagement risk (e.g. going concern issues, history of misstatements, aggressive management) means more procedures and documentation.
- Higher risk → higher fee to reflect responsibility and potential exposure.
7. Use of experts and other services needed
- Need for valuation experts, IT specialists, tax experts, or component auditors.
- Travel costs, out-of-pocket expenses, and any special reports also affect fees.
9. Past experience and client behaviour
- Previous year’s cooperation, timeliness of information, and difficulty of the audit.
- Chronic delays, many adjustments, or last-minute changes justify higher fees.
Exam-style summary sentence (Short answer)
In determining audit fees, the auditor should consider the time expected on the engagement, the size and complexity of the client’s business, the level of skill and responsibility required, the quality of the client’s accounting records and internal controls, the degree of audit risk, the need for specialists or travel, and past experience with the client, while ensuring the fee is not contingent on results and is sufficient to perform the audit in accordance with professional standards.
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