Enquiry:
M/s PQR Textile Mills Limited was public listed company and stands de-listed from Pakistan Stock Exchange Limited on April 28, 2016. The operations of the company were remained closed from October-2008 to April-2014 and the operations were started again from May 2013 to March 2014. From April 2014 till date, the operations are still closed. In the meanwhile, we have changed the auditors of the company for the year June 30, 2016 due to ICAP QCR requirement.
According to clause 5 of revised ATR -14 of ICAP, the minimum audit fee in case of sickness of the project or closed operation or discontinuation of business, shall be restricted to Rs. 75,000 per annum.
According to clause 7 of same ATR, the minimum audit fee determined in accordance with said ATR shall not be less than the present auditor’s fee of an existing client.
There seems to be contradiction between the two clauses of the ATR. Our previous auditors were charging Rs. 150,000 as audit fee for the year ended June 30, 2015. If we ask our present auditor to charge minimum audit fee of Rs. 75,000 as closed operation segment, then they refer clause 7 of the ATR, which require not charging less audit fee than the previous year charge.
As our mill has discontinued its business operations. ICAP is requested to clarify, how the present auditor can charge minimum audit fee of Rs. 75,000 as required in clause 5 of the ATR against clause 7 of the ATR, by restricting not to charge audit fee less than the corresponding year audit fee.
Opinion:
The Committee considered your query and is of the view that the matter does not relate to ATR-14 alone because it is not a simple case of minimum fees only while the said Auditing Technical Release (ATR) – 14 covers only the aspect of the minimum fees and doesn’t prescribe the maximum fees that can be charged in that category. The inquired matter relates to the fees to be charged by an incoming auditor. From the information provided, there seems to be no major change in ground realities and volume of work from previous year to current year for which the incoming auditor has reduced the fee by 50%.
The Committee feels that the matter of fees at the occasion of change of auditors’ should be viewed by the incoming auditor as to whether application and adherence to the provisions of clauses (7) relating to ‘communication’ and (11) relating to ‘undercutting’ of Part I of Schedule I of the Chartered Accountants Ordinance, 1961 was made or not.
The Committee would also like to refer section 240.1 of the Revised ICAP Code of Ethics for Chartered Accountants 2015 (the Code) which is reproduced below for your ready reference:
“Fees and Other Types of Remuneration
When entering into negotiations regarding professional services, a chartered accountant in practice may quote whatever fee deemed to be appropriate commensurate with the nature and service to be rendered. However, in such cases, chartered accountants in practice should be careful not to quote fee lower than that charged by the chartered accountants in practice previously carrying out the audit unless scope and quantum of work materially differs from the scope and quantum of work carried out by the previous auditor, as it could then be regarded as undercutting.”
It is solely the responsibility of the incoming auditor to confirm that his appointment did not amount to undercutting.
In view of the above, the Committee is of the view that the incoming auditor cannot accept fees less than the predecessor auditor, in accordance with the requirements of clause No.7 of ATR-14 and section 240.1 of the Code, on the assumption that the quantum of work is the same.
(December 20, 2016)