Brief facts of the enquiry
1.ABC is a public sector entity and has invited open competitive bids for the appointment of external auditors on quality cum cost basis method of selection under PPRA Rules 2004. Our annual turnover is significantly more than Rs. 20 billion and the quantum and scope of services has not changed much in comparison to the previous years. The issued bidding documents contained extracts of financials from the previous two years.
2.One of the interested bidders having secured lowest score in the technical/quality criteria has offered an audit fee which is not only substantially lower than the other competing bidder firms but also lower than the audit fee charged by our outgoing auditors and the ICAP’s approved recommended threshold for the minimum audit fee. Consequential to quoting an abnormally low fee, the firm has emerged as the overall first ranked firm despite the lowest technical score.
Below is the comparison of the quoted audit fee percentage viz-a-viz the outgoing auditor’s fee.
| DESCRIPTION/FIRM | A | B | C | D |
| Quoted audit fee as a percentage of the audit fee of the outgoing auditors | 41% | 124% | 103% | 620% |
3.In view of the above, we understand that the overall first ranked bidder firm has not quoted its fee in adherence to the Section R330.3 of the ICAP’s Code of Ethics and ICAP’s Council’s Directive No. 4.23 dated 21-22 March, 2019. Hence, your guidance is hereby solicited that whether the subject firm can be appointed as our auditors at their quoted audit fee which is not in adherence to the ICAP’s Code of Ethics and Directives in response to open competitive bidding?
The Auditing Standards and Ethics Committee’s comments and conclusion
1.The Committee based on the fact pattern submitted in the enquiry noted that:
a)a public sector entity invited open competitive bids for the appointment of external auditors on the ‘quality cum cost basis method of selection’ under the Public Procurement Rules, 2004 (PPRA Rules).
b)the bidding documents issued by the public sector entity contained extracts of financials from the previous two years. Those extracts of financial statements contained information about turnover amongst other relevant information.
c)one of the interested bidders (i.e. bidder ‘A’ in the enquired fact pattern) has secured the lowest score in the technical/ quality criteria carried out by the public sector entity, and it has also quoted the lowest audit fee as compared to other competing bidder firms.
The audit fee of interested bidder ‘A’ is also lower than the audit fee charged by the outgoing auditor’ of the public sector entity.
The Committee based on additional information obtained from the enquirer regarding the provision of information about the previous year’s audit fee to the interested bidders, noted the following representations of the enquirer:
•the details of the previous years’ audit fees were not included in the extracts of financial statements that were provided to all interested bidders, mentioned in (b), above.
•the financial statements of the public sector entity are publicly available on its website. In those financial statements, the audit fee is appropriately disclosed as per the requirements of the applicable financial reporting framework.
•in response to the telephonic enquiries of a few bidders, information about the previous year’s audit fees was provided by the entity. However, bidder ‘A’ did not ask for such information.
2.It is pertinent to mention that the Committee considers the audit and ethics-related enquiries and issues its opinions after consideration and analysis of:
a)the particular facts and information provided in each enquiry; and
b)the requirements of the International Standards on Auditing as applicable in Pakistan (ISAs), the Code of Ethics for Chartered Accountants (ICAP Code of Ethics), the Chartered Accountants Ordinance 1961, and the Companies Act 2017.
The Committee’s analysis and responses to the enquired matters do not include, ascertainment of facts relating to the enquired matter, the legal interpretation of statutory obligations, or study of internal policies applicable to the entity.
3.In the context of the enquired fact pattern, the Committee observed that the statutory auditor is appointed by an entity for the audit of its financial statements, in accordance with the statutory law applicable to such entity. The law applicable to an entity besides the requirement for appointment of a statutory auditor may also contain provisions relating to eligibility, qualification, disqualification, and rights and duties of a statutory auditor.
4.The Committee noted that the members of the Institute are required to comply with the Chartered Accountants Ordinance 1961.
The Chartered Accountants Ordinance 1961 prescribes ‘undercutting’ as professional misconduct. Resultantly, a ‘Chartered Accountant in Practice’ while accepting the position as an auditor is obligated to ensure that the audit fee does not constitute undercutting.
Relevant clause 11 of Part 1 of Schedule 1 of the Chartered Accountants Ordinance 1961 which states undercutting as professional misconduct is reproduced hereunder:
“A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he accepts a ‘position as auditor’ previously held by some other Chartered Accountant in such conditions as to constitute undercutting.” (Emphasis is ours)
5.Under the Chartered Accountants Ordinance 1961, a member of the Institute if found guilty of professional misconduct is subject to disciplinary action.
The Committee noted that section 20D of Chapter VA ‘Misconduct’ of the Chartered Accountants Ordinance 1961 explains that a member of the Institute, if found guilty of professional misconduct (professional misconduct includes undercutting as explained above), is subject to disciplinary and penal actions. Section 20D is reproduced below:
“20D. Orders by the Council if member found guilty
(1) If, on receipt of the report under Section 20B, the Council is of the opinion that the member of the Institute has been guilty of any professional misconduct specified in Schedule I, it may, after affording such member an opportunity of being heard, either personally or through counsel or another member of the Institute, make any of the following orders, namely:-
(a) reprimand or warn such member;
(b) impose such penalty as it may d em necessary not exceeding one thousand rupees; and
(c) remove the name of such member from the Register for a period not exceeding five years:
Provided that, where it appears to the Council that the case is one in which the name of such member ought to be removed from the Register for a period exceeding five years or permanently, it shall not make any order but shall refer the case to the High Court with its recommendations thereon.
(2) If the Council is of opinion that the member of the Institute is guilty of professional misconduct specified in Schedule II, it shall refer the case to the High Court with its recommendations thereon.”
This section specifies that if Institute’s Council is of the opinion that a member of the Institute has been guilty of any professional misconduct specified in Schedule I of the Chartered Accountants Ordinance (professional misconduct includes undercutting), the Council may make an order for action against the member, including removing the name of such member from the Institute’s member’s register for a period not exceeding five years.
6.The Committee further noted that the members of the Institute are also required to comply with the ICAP Code of Ethics.
ICAP Code of Ethics in section 330 ‘Fees and Other types of Remuneration’, based on the above-noted statutory provision (relating to undercutting) of the Chartered Accountants Ordinance 1961, sets out the ethical requirements for establishing the audit fees.
Relevant paragraph R.330.4 of ICAP Code of Ethics is reproduced hereunder:
“When entering into negotiations regarding professional services, a chartered accountant in practice may quote whatever fee is 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 the 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.”
7.The Committee also noted that the Institute has issued Directive 4.23 ‘Ensuring Audit Quality’. The directive provides the audit fees for members in practice as recommended reference fees. It also explains the critical value of a quality audit in the public interest and the linkage between the audit quality and the audit fee.
8.Based on the limited review of the entity’s website, the Technical team of the Institute, noted that the financial statements of the entity till the year ended 2019 are available on the entity’s website.
The Committee considered it pertinent to mention that the provision of information by an entity about the previous year’s audit fee along with the information about the quantum and scope of audit work (to all interested bidders, prior to the submission of their audit quotes/proposals) would, on one hand, facilitate the entity in the timely and effective evaluation and appointment of the auditor, and on the other hand, it will also help interested bidders (i.e. Chartered Accountant in practice) in complying with the statutory and ethical requirements relating to undercutting, noted above. Further, the provision of information to all interested bidders would also ensure transparency and avoid disparity among interested bidders, in scenarios where one of the bidder is the predecessor auditor and as a result has information about the previous year’s audit fee.
The Committee also observed that the information about the previous period’s audit fee is the basic information that should be sought by the auditor (i.e. Chartered Accountant in practice) from an entity in order to avoid non-compliance with the undercutting related provisions of the Chartered Accountants Ordinance 1961 and ICAP Code of Ethics.
The Committee’s conclusion9.The Committee, based on the information provided by the enquirer and in consideration of the above-noted requirements of the Chartered Accountants Ordinance 1961 and ICAP Code of Ethics, concluded the following:
a)Members of the Institute are required to comply with the Chartered Accountants Ordinance 1961 and ICAP Code of Ethics.
b)Under Part 1 of Schedule 1 of the Chartered Accountants Ordinance 1961 (as discussed in point 4 above), undercutting is considered as a professional misconduct for a chartered accountant in practice. Consequently, it is not permissible for a chartered accountant in practice to accept the position of auditor of an entity at a fee lower than that charged by the previous external auditor unless the scope or quantum of audit work is materially reduced from the scope or quantum of work carried out during the previous year’s audit, as it could then be regarded as undercutting.
c)A member of the Institute if found guilty of professional misconduct (professional misconduct includes undercutting as explained above), is subject to disciplinary and penal actions under Section 20D of the Chartered Accountants Ordinance 1961, including removing the name of such member from the Institute’s member’s register for a period not exceeding five years.
d)The Committee considers it pertinent to explain that it has provided its conclusion on the enquired matter in the light of relevant provisions of the Chartered Accountants Ordinance 1961 and ICAP Code of Ethics. The Committee is not an appropriate forum for commenting and concluding on the legal, regulatory and statutory provisions applicable to other entities.
(Issued in April 2022)