Technical helpsheet on limits set by the FRC Ethical Standard on the proportion of total fee income that can be earned from an audit client – often referred to as ‘fee dependence’.
Change of name
Prior to February 2021, this helpsheet was called Fee percentage limits.
This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members determine whether or not they can continue to act for audited entities whose fees have exceeded the limits set out in the FRC Ethical Standard.
The FRC Ethical Standard 2019 became effective on 15 March 2020. This helpsheet addresses the requirements of FRC Ethical Standard 2019.
Section 4 of the FRC Ethical Standard sets limits on the proportion of total fee income that can be earned from an audited entity. These percentage limits are often referred to as ‘fee dependence’. Whether or not the limits can be exceeded depends on the specific circumstances and the type of audited entity. Detailed guidance can be found in paragraphs 4.22 to 4.34.
Public Interest Entities (PIEs) or other listed entities
If the audited entity is a PIE or other listed entity the fee dependence level is set at 5%. Where fees receivable from the entity and its subsidiaries regularly exceed 5% of the firm’s annual fee income, but fall below 10% the firm may determine it is possible to continue to act subject to:
- disclosure to the firm’s Ethics Partner / Function;
- disclosure to those charged with governance (including the audit committee if there is one); and
- discussion with the Ethics Partner / Function and those charged with governance of the threats and whether safeguards are needed to eliminate or reduce these to a level where independence would not be compromised (FRC Ethical Standard paragraph 4.27).
However if the audited entity is a PIE or other listed entity the total annual fees for audit and non-audit services should not regularly exceed 10% of the firm’s annual fee income (FRC Ethical Standard paragraph 4.23). If it is anticipated that fees will exceed this limit the appointment should not be accepted or continued.
For non-listed entities that are not PIEs the fee dependence limit is 10%. Where fees for the entity and its subsidiaries regularly exceed 10% of the firm’s annual fee income, but fall below 15%, the firm may determine it is possible to continue to act subject to:
- disclosure to the firm’s Ethics Partner / Function;
- disclosure to those charged with governance; and
- completion of an external independent quality control review prior to the finalisation of the audit report (FRC Ethical Standard paragraph 4.31).
However the total annual fees for audit and non-audit services should not regularly exceed 15% of the firm’s annual fee income (FRC Ethical Standard paragraph 4.24). If it is anticipated that fees will exceed this limit the appointment should not be accepted or continued.
The following table summarises the fee dependence levels as discussed above.
Type of client
Further steps needed
Unacceptable if regular
Public interest entity or other listed entity
Not more than 5%
More than 5% but not exceeding 10%
Not more than 10%
More than 10% but not exceeding 15%
What is the firm's annual fee income?
The annual fee income is the total billed by the firm for the provision of services but excludes income where the firm acts as agent for another party (e.g. if the firm is a subcontractor).
A firm’s annual fee income will also include the fee income of network firms in the UK and Ireland which are controlled by the firm or its partners. A network firm is defined as any entity which is part of a larger structure that is aimed at co-operation and which is:
(i) Controlled by the firm; or
(ii) Under common control, ownership or management; or
(iii) Part of a larger structure that is clearly aimed at profit or cost sharing; or
(iv) Otherwise affiliated or associated through use of common quality control policies and procedures, common business strategy, use of a common name or through the sharing of significant common professional resources.
It is important to bear in mind that not all network firms will meet the definition of firm for the purposes of including their fee income. Not only must they meet the criteria above but they must also be under the control of the firm or its partners. Furthermore, where profits are not shared on a firm-wide basis, the calculation must be done by reference to the part of the firm from which the audit engagement partner’s profit share is calculated, which in the case of a group containing an audit firm and a non-audit firm, could potentially only be the audit firm itself.
The limits may be difficult for a sole practitioner to apply however the FRC Ethical Standard includes a footnote to paragraph 4.23 confirming that as a sole practitioner, annual fee income includes all earned income received by the individual. This is because the firm (the sole practice) and the individual are effectively one and the same. Monies received from pensions can also be considered as ‘earned income’ as they arise from past earnings.
Where the profit share for the engagement partner is derived from only part of the firm, the reference to firm should be taken to mean that part of the firm only.
What does regularly mean?
Although there is no definition of the term ‘regularly’ a sensible approach would be that where income from an audited entity has exceeded the limits for three years it has become a ‘regular’ event. In such circumstances it would be difficult to argue that it would be acceptable to continue to act.
There are some limited circumstances in which the fee limits may be exceeded.
Engagements assigned by legislation
The fee dependence limits do not apply to engagements of entities where the responsibility for the engagement is assigned by legislation and the firm cannot resign from the engagement, irrespective of considerations of economic dependence (e.g. for certain public sector bodies) (FRC Ethical Standard paragraph 4.22).
Where fee limits are exceeded as the result of an unpredicted individual event or engagement and an objective, reasonable and informed third party would consider ceasing to act as detrimental or against the public interest, the firm may be able to continue subject to disclosure and adequate safeguards (FRC Ethical Standard paragraph 4.26).
Starting a new practice
A new firm seeking to establish itself may find it difficult to comply with the fee limits. For a period not exceeding two years, a firm may exceed the 15% limit for non-listed audited entities which are not PIEs subject to an external independent quality control review before the audit report is issued (FRC Ethical Standard paragraph 4.32).
For small entities the firm may be able to claim the relief given in paragraph 6.5 of the FRC Ethical Standard Provisions Available For Audits of Small Entities (PAASE) and dispense with the need for an external review provided the disclosure required by paragraph 6.6 is made. See paragraph 6.4 of the FRC Ethical Standard for a definition of what constitutes a ‘small entity’.
If in doubt seek advice
ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.
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ICAEW cannot accept responsibility for any person acting or refraining to act as a result of any material contained in this helpsheet. This helpsheet is designed to alert members to an important issue of general application. It is not intended to be a definitive statement covering all aspects but is a brief comment on a specific point.
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For further details members are invited to telephone the Technical Advisory Service T +44 (0)1908 248250. The Technical Advisory Service comprises the technical enquiries, ethics advice, anti-money laundering and fraud helplines. For further details visit icaew.com/tas.
- 01 Oct 2017 (12: 00 AM BST)
- First published
- 16 Feb 2021 (03: 48 PM GMT)
- Changelog created, helpsheet converted to new template
- 16 Feb 2021 (03: 49 PM GMT)
- Name of helpsheet changed from Fee percentage limits. Amended to reflect the updated FRC ethical standard. Section headed If in doubt seek advice updated.
- 07 Dec 2021 (12: 10 PM GMT)
- Content added to the section headed What is the firm's annual fee income?