Corporate Reporting Ethics: The Two Fee Numbers You Have to Know

This topic is covered as ETH.3 in our Corporate Reporting Model Answer Notes, which are built entirely from ICAEW Question Bank model answers: https://learn.paradigmshift.training/course/cr-man-2026

Fee dependency questions start with two percentages. If you cannot say which applies to which client, everything you write afterwards is built on sand, because the whole analysis turns on whether the firm is over the line or under it.

Ten and fifteen

Measured against the firm's total fee income, the thresholds are 10% for listed companies and other public interest entities, and 15% for everyone else.

Where fees approach or exceed the relevant threshold, three things follow. The firm discloses to the ethics partner. It discloses to those charged with governance at the client. And it adopts safeguards, which may extend as far as declining some of the work in order to bring the proportion back down.

The percentages are not rigid rules, and treating them as a pass or fail test is a mistake. They are based on expected regular fee income, so a one-off engagement that pushes the total over the line in a single year is a different proposition from a recurring arrangement that will do so every year. The underlying test, and the sentence worth including in your answer, is whether a reasonable and informed third party would consider objectivity to be impaired. Quote the number, then apply the test.

Watch for a change of status, because a single event can move both sides of the calculation at once. In the Lyght scenario the client was obtaining a listing. Two things happened simultaneously. The applicable threshold dropped from 15% to 10%. And the firm's fee income from that client rose, because it was acting as reporting accountant on the listing itself. The proportion goes up while the limit comes down, and a firm that was comfortably compliant a year earlier now has a problem it needs to plan for.

That double movement is exactly the kind of thing examiners like, because it rewards candidates who read the scenario for its consequences rather than for its facts.

Low-balling, and what is actually wrong with it

Students often assume that tendering at a price which produces an under-recovery must be unethical. It is not. Low-balling is permitted, and an answer that condemns it outright has missed the point of the requirement.

The threats sit elsewhere, and there are two of them.

The first is that the low bid was made in the expectation of profitable non-audit work to follow, which brings you straight back to self-interest and to the question of whether the firm's judgement on the audit would be influenced by its hopes for the consultancy.

The second is that the firm cuts procedures to protect its margin. This is the one that matters most, and the principle is simple to state: the audit plan must require sufficient appropriate evidence whatever the fee turned out to be. The fee is the firm's commercial problem. It is not an input into the audit strategy.

The same logic applies to fee pressure on an existing engagement. Where a client insists that fees stay flat while the scope of work expands, perhaps because the group has grown or a new system has been implemented, guard against that pressure influencing two things in particular: the materiality level adopted, and the procedures planned. Materiality is an audit judgement driven by the users of the financial statements. It is not a budgeting tool, and moving it because the fee is tight is precisely the failure the standard is written to prevent.

One further rule appears in the papers and is easy to state. Audit staff must not be assessed on, or remunerated by reference to, their ability to sell non-audit services to audit clients. Cross-selling incentives and audit independence do not sit comfortably together, and where a scenario mentions a partner's bonus depending on the growth of client billings, that is the point being tested.

Four things to remember

10% for listed companies and public interest entities, 15% for everyone else, measured against total fee income and based on expected regular income rather than a single year's accident.

A listing changes the threshold and the fee income at the same time, so treat it as a double event and say so explicitly.

Low-balling is legal, but cutting procedures to make it pay is not, and the audit plan must be driven by evidence requirements rather than by the fee.

And never let fee pressure move your materiality.

These are short, mechanical points, which is exactly why they are worth learning properly. Fee requirements reward precision rather than eloquence. A candidate who quotes the right threshold, identifies the change of status and applies the third party test will comfortably outscore one who writes three paragraphs of general concern about independence without a number in sight.