Unpaid Fees and Attest Independence

By Charles Hall | Auditing

Sep 08

Unpaid fees can impair your independence in attest engagements. This article explains changes in the Unpaid Fees interpretation in the AICPA Code of Conduct

Peer review checklists ask if fees have been paid prior to issuance of attest reports. Why? A loan to an attest client can impair independence. The thought here is that the CPA may have a self-interest in the client; namely, the collection of unpaid fees. And this self-interest could potentially lead the CPA to assist the client by issuing inappropriate attest reports. 

So, has there been a change in the unpaid fees section of the Code of Conduct? Yes. 

The old rule of just looking back one year is no longer the sole consideration in determining your independence in regard to unpaid fees; current year fees, if significant, can also affect independence.

unpaid fees

The bolded fonts and underlines below are added by the blogger. 

Unpaid Fees Interpretation

The independence interpretation (1.230.010) in the Code of Conduct says:

Threats to the covered member’s compliance with the “Independence Rule” [1.200.001] are at an acceptable level if, when the current-year attest report is issued, unpaid fees are both clearly insignificant to the covered member and relate to professional services provided less than one year prior to the date of the current-year attest report.

Alternatively, threats would not be at an acceptable level if, when the current-year attest report is issued, unpaid fees are both significant to the covered member and relate to professional services provided more than one year prior to the issue date of the current-year attest report.

That guidance provides factors to consider in evaluating your independence.

Unpaid Fees Factors to Consider

Factors to consider (ET 1.230.010.02) when evaluating whether threats are at an acceptable level include the following:

a. The significance of the unpaid fees to the covered member

b. The length of time the fees have been due from the attest client

c. The attest client’s agreement to pay the unpaid fees

d. The covered member’s assessment of factors affecting the ability of the attest client to pay the fees

So, what should you do if a significant threat is present? Consider safeguards. 

Unpaid Fees Safeguards

You may use safeguards (ET 1.230.010.04) to mitigate the independence threat:

a. Have an appropriate reviewer who has not provided attest or nonattest services to the attest client review the attest work performed before the current-year attest report is issued.

b. Obtain partial payment of the unpaid fees balance before the current year attest report is issued such that the remaining unpaid balance is insignificant to the covered member.

c. Obtain an agreement from the attest client to a payment schedule before the current-year attest report is issued.

d. Suspend further work on current attest engagements and not accept new engagements with this attest client.

ET 1.230.010.05 goes on to say:

Communication with those charged with governance regarding evaluation of the unpaid fees and safeguards applied is not a sufficient safeguard when applied alone; however, it may be considered a safeguard when supplemented by other safeguard(s).

If the safeguards are not sufficient, you are not independent.

So, how do we define unpaid fees?

Unpaid Fees Defined

Unpaid fees include billed and unbilled services. 

If you provide a service whereby you expect payment, it’s a fee–whether you billed it or not. The issue is whether the client owes you for the service.

Not Applicable for Attest Clients in Bankruptcy

ET 1.230.010.06 says that this interpretation does not apply to attest clients in bankruptcy.

Collection Incentive

Oddly, the potential impairment of independence may assist you (the CPA) in collecting past-due accounts. If the client needs the current year attest report, and the CPA can’t provide it without payment, then the client may find a way to come up with the money for past fees.

Still Not Sure

If after doing the above, you’re still not sure whether your independence is impaired, consider contacting the AICPA to get their thoughts. You can email them at ethics@aicpa.org. 

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About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.

  • armando balbin says:

    Good information to know

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