Fee caps and the black list leading audit firms to review how they tender for contracts
Since the introduction of new auditing rules throughout Europe, many auditing firms are now reviewing how they tender for contracts. Under the new rules large listed companies are required to tender their audit contracts once every ten years. The new audit reforms were introduced to generate more competition between audit firms. Already following these new measures there have been a lot of audit contracts changing hands.
Also introduced was the decision to cap the fees companies can pay their auditors and prohibit the provision of certain services that auditors also provide. It is these issues that are causing the problem on auditors tendering strategies. The new audit reforms have imposed a 70% cap on fees generated by firms for non-audit work, while certainnon-audit services, such as tax advice have been banned altogether. The fee cap will be calculated based on the average of fees paid in the last three consecutive financial years for the statutory audit.
Read more about the introduction of the new audit reforms in our previous blog New EU Audit reforms passed in European parliament
The reason for prohibiting some services is to limit conflicts of interest in instances where auditors are involved in decisions impacting the way companies are managed and, coupled with the fee cap, could open up non-audit opportunities to other firms.
This could result in audit firms having to pass up some great work in order to retain their position as auditors. The most popular and in demand non-audit work in termsof fees generated is tax advice and tax compliance work.
Under the EU’s so-called black list, prohibited non-audit services include tax services relating to the preparation of tax forms, payroll tax, customs duties, identification of tax incentives unless required by law, support regarding tax inspections and provision of tax advice. Also banned is work related to the design and implantation of internal controls of risk management procedures associated with the preparation of financial information; valuation services and legal services.
Nevertheless, the prohibition of tax work that is as lucrative for auditors as it is important for their clients, is leading firms and company audit committees to take a step back and reconsider whether the audit, or tax, work is most valuable to each party.
With the increased frequency at which audit contracts will come onto to the market means that firms will have to look closely at services they already provide to prospective audit clients.
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