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RECOMMENDED PRACTICE GUIDE (RPG) 7 :
FEES AND COMMISSION
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1. |
Professional fees charged by members in public practice shall be
a fair reflection of the value of the work performed for the
client, and shall take into account inter alia -
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a. |
the
skill and knowledge required for the type of work involved; |
|
b. |
the
level of training and experience of the persons necessarily engaged
on the work; |
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c. |
the time
necessarily occupied by each person engaged on the work; and |
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d. |
the
degree of responsibility and urgency that the work entails.
Explanatory Note:
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(i) |
In order to carry out the professional service for which he is
engaged, a member in public practice must first consider the
instructions of his client in conjunction with any statutory
duty relating thereto and then discharge his responsibility by
applying to the affairs of his client the professional skill and
knowledge which he and his staff have acquired through training
and experience. |
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(ii) |
The
member’s fees for that service should provide him with appropriate
remuneration for the time and skill which he has personally devoted
to his client's affairs and the responsibility he has accepted
together with reimbursement of and a suitable margin of profit on
his overhead expenses and the salaries of his staff for whose work
he takes responsibility. |
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(iii) |
Fees should therefore normally be computed by reference to the above
factors (a) to (d). |
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(iv) |
It is neither usual nor necessary for bills submitted to clients
to be fully detailed but the member's records should be adequate
to enable this to be done if required either to satisfy the
client or in the unfortunate event of it becoming necessary to
take legal proceedings to recover unpaid fees. |
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(v) |
For
further guidance, please refer to Section 240, Part 1 of the By-Laws
for Professional Ethics. |
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2. |
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(1) |
No member shall charge an unrealistic professional fee. |
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(2) |
In this respect, a professional fee of less than Ringgit Malaysia Five
Hundred (RM500.00) for audit services shall be considered as an unrealistically
low professional fee. |
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(3) |
Notwithstanding Para 2(1) and 2(2) of the above, a member may charge
charitable bodies and non-profit organisations low professional fees or provide
free services provided always that the provision of such services is not used as
an inducement to secure professional appointments or engagements which may arise
there from. |
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3. |
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(1) |
In specific circumstances where a member in public practice feels there
are genuine grounds to propose a lower fee than another member undertaking the
same or similar work (other than non-recurring or specialist work including
management consultancy services), the member shall exercise due care to ensure
that the lower fee is in line with the provisions of Para 1 above. |
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(2) |
Subject to Para 3(1) above, any fee proposal of less than 90% of the fee
previously charged shall be taken as prima facie evidence of a likelihood that a
compromise or lowering of professional standards will result in the carrying out
of the assignment. |
Explanatory Note:
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(i) |
The fact that one member may charge a lower fee than another for undertaking
the same or similar work is not improper provided due care is taken to ensure
that the client is not misled:
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(a) |
as to the precise range of services that a quoted fee is intended to cover
(in which connection that member should provide the client with an engagement
letter); and |
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(b) |
as to the likely level of future fees for any work undertaken for the
client. |
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(c) |
that the member intending to charge a lower fee shall inform the client in
the engagement letter referred to in sub-paragraph (i)(a) above of the precise
range of services covered by the quoted fee. |
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4. |
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(1) |
Fees shall not be charged and/or instructions shall not be accepted, on a
percentage or contingency fee basis save where that course is authorised by
statute or is generally accepted practice for certain professional services. |
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(2) |
For further guidance, please refer to Section 240.3 and 240.4, Part 1 of the
By-Laws for Professional Ethics which deals with the evaluation of threat and
the implementation of safeguards where appropriate.
For further guidance, please refer to Section 240 in the By-Laws |
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5. |
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(1) |
A member in public practice shall not directly or indirectly allow or
agree to allow the participation by any person other than another member in
public practice in the fees of his professional work.
Explanatory Note:
This Para does not prohibit members to undertake a project with other
professionals of different competency where bills are issued on an aggregated
basis and where there are actual justifications of the involvement of the other
professionals in the said project. |
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(2) |
The prohibition in Para 5(1) above shall not apply to any member paying or
agreeing to pay any sum out of his profits or any remuneration to any retiring
partner of the member's practice or of any related practice or to the personal
representatives or the spouse or dependants of any deceased partner whether such
partner had retired from practice or not at the date of his demise or to any
predecessor in the member's practice or the personal representatives of such
predecessor. |
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6. |
A member
in determining audit fees shall take into consideration the
Recommended Basis for Determining Audit Fees as set out as
appendices to this RPG, which shall be applicable
in respect of all statutory audits. |
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7. |
Any member in public practice who fails to comply with the provisions of this
RPG shall be deemed to have compromised or lowered professional standards in
carrying out his professional work, and this shall represent a valid reason for
a complaint to be made against him. |
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8. |
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(1) |
A
member in public practice shall not -
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(a) |
pay a commission to obtain a client; |
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(b) |
accept a commission for the referral of a client to another member or to a
third party; or |
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(c) |
accept a commission for the referral of the products or service of others; |
where such payment or acceptance would impair or give the appearance of
impairing the objectivity, integrity or independence of the member in carrying
out his professional work. |
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(2) |
For further guidance, please refer to Section 240.7, Part 1 of the By-Laws
for Professional Ethics which deals with the implementation of safeguards where
appropriate. |
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(3) |
The provisions in Para 8(1) above shall not prohibit payments for the
purchase of an accounting practice or retirement payments to individuals
formerly engaged in public practice or payments to their heirs or estate. |
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9. |
Payment and receipt of referral fees between members in public practice when
no services are performed by the referring party shall be regarded as commission
for the purpose of Para 8 above. |
EFFECTIVE DATE
This RPG is effective for members to observe from the date of issuance and is
set herein as 1 January 2007.
RECOMMENDED BASIS FOR DETERMINING AUDIT FEES
FOREWORD
Audit Fees shall generally be based upon the degree of responsibilities, risk
and skill involved and the time necessarily occupied on the work by the partner
and staff in terms of the quality and level of competence required to meet
auditing standards and statutory compliance with reference to the size,
complexity and technical input expected of the audit assignment.
The cost of time occupied, the time charge, will be based on the cost of the
practice which shall include attributable direct cost, the recovery of overheads
and the appropriate return on the investment in the practice (see Appendix I).
The time charge based on the aforementioned factors may vary from practice to
practice. However, empirical studies carried out by the Institute way back in
1992 have shown a proportionate correlation between audit fees charged, based on
time charge, and the value of total assets or gross turnover or operating
expenditure (see Appendix II).
The value of total assets or gross turnover or operating expenditure is a fair
reflection of the size and level of transactions of an entity. Therefore, as a
benchmark to assist member firms in determining audit fees and also for the
information of users of auditing services, subject to the Act and the By-Laws
(on Professional Conduct and Ethics), where relevant, the Council recommends
that appropriate audit fees level should be determined in accordance with the
Appendices set out herein.
Appendix I
Audit Charge-Out Rates
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(A) |
Introduction:
Time management is essential in ensuring efficiency in audit performance while
time recording is an integral part of the documentary evidence of work
performed.
Time charge shall be reflective of time spent by the partner and staff in terms
of the quality and level of competence required to meet the auditing standards
with reference to the size, complexity and technical input expected of the audit
assignments.
A critical factor in maintaining the viability of a practice depends on good
costing.
The determination of chargeout rate is costing for audit practice.
In the absence of a uniform basis, charge-out rates may differ due to inadequate
or over computation of the variable cost factors.
The Council therefore recommends the basis for time charging as set out below.
From past experience, cost computation based on the recommended basis will
normally produce a factor of about three times the direct labour cost. |
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(B) |
Definitions
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(i) |
"Economic time charge" shall include the following:
Labour Cost
Opportunity Cost, equivalent to the direct labour recovery cost of each staff
Appropriate Recovery of Overheads
Profit Element |
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(i) |
The unit rate should be based on net working hours.
Net working hours:
Total chargeable hours based on the normal working days in the year of a
practice net of annual holidays, annual leave, study and examination leave and
firm's holidays. |
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(iii) |
Total Labour Cost:
Actual Wage, including EPF and Socso Contribution
Training Cost, including course and examination fees
Cost of Study Leave
Gratuities
Welfare Cost |
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(iv) |
Overheads Recovery Rate:
Members may wish to adopt the absorption method which will take into account the
total net working hours of the practice. However, it may not be appropriate
because the recoverability rate of each member of staff differs. An alternative
is to derive the weighted average based on estimated administrative time of each
grade of staff. The administrative time of each staff can be determined with
reasonable accuracy from the time sheets submitted by each staff over a control
period. |
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(C) |
Basis
Charge-out Rates shall be computed on the basis of economic time charge and
should reflect its recoverability. It should include direct cost and also an
appropriate proportion of fixed overheads. |
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(D) |
Calculation of Charge-out Rate |
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RM |
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Direct Labour Recovery Rate represented by |
Total Labour Cost |
XX |
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Add |
Net
Working Hours |
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Opportunity cost (represented by Direct Labour Recovery Rate*) |
XX |
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Add |
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Overhead Recovery Rate |
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XX |
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Add |
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Profit Element |
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XX |
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Charge-out Rate |
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XX |
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* The
element of Direct Labour Recovery Rate is effectively doubled in the
calculation of Charge-out Rate.
Appendix II
Benchmark in Assisting Members to Extrapolate Audit Fees:
Recommended Basis Only
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(A) |
Introduction
Audit fees shall generally be based upon the degree of
responsibility, risk and skill involved and the time necessarily
occupied on the work.
Empirical studies carried out by the Institute have shown a
proportionate correlation between audit fees charged, based on
time charge, and the value of total assets or gross turnover or
operating expenditure. Therefore, for consistency and
harmonisation of the fee levels, Council recommends that it is
appropriate to determine audit fees using the Total Assets or
Gross Turnover as shown in the financial statements and
multiplying it with the coefficient percentages as shown in the
coefficient percentage table (Appendix III).
The choice of Gross Turnover or Total Assets as the basis must
be relevant and reflects closely to the time charge. Only where
it is not appropriate to use Total Assets or Gross Turnover,
members may adopt Total Operating Expenditure basis which must
be relevant and reflect closely to time charge.
The guidelines for the determination of time charge is set out
in Appendix I. |
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(B) |
Definitions
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(i) |
"Total Assets" is defined as the total of all assets as shown in
the Balance Sheet. |
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(ii) |
"Gross Turnover" shall mean and include:
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(a) |
Total amount of sales including all other income and earnings
for the year in the case of all manufacturing and trading
organisations: |
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(b) |
Total gross premium income including all other income and
earnings for the year in the case of all insurance
organisations; |
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(c) |
Total
amount of interest, discount, commission, exchange brokerage and all
other income and earnings for the year in the case of banks and
other financial institutions; |
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(d) |
Total
amount of commission including all other income and earnings for the
year in the case of travel agencies, indentors, brokers and other
organisations whose principal source of income is commission
earnings; and |
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(e) |
Total
receipts/bills accounted for and all other income and earnings for
the year in the case of construction companies and other entities
not covered under (a) to (d) above. |
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(iii) |
"Total
Operating Expenditure" includes all expenses charged against gross
profit to arrive at net profit before tax but excludes direct cost
of sales. |
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(C) |
Computation Examples
Example 1
Assume that the Gross Turnover is RM1,740,000 and its Total
Assets amount to RM2,560,000. The audit fees based on Total
Assets and Gross Turnover will be computed as follows:-
On Total Assets:
|
First |
100,000 |
at
0.8% |
= |
800 |
|
Next |
150,000 |
at
0.35% |
= |
525 |
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Next |
250,000 |
at
0.25% |
= |
625 |
|
Next |
500,000 |
at
0.15% |
= |
750 |
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Next |
1,500,000 |
at
0.10% |
= |
1,500 |
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Next |
60,000 |
at
0.08% |
= |
48 |
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Total |
RM2,560,000 |
|
|
RM4,248 |
On Gross Turnover :
|
First |
100,000 |
at
0.8% |
= |
800 |
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Next |
150,000 |
at
0.35% |
= |
525 |
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Next |
250,000 |
at
0.25% |
= |
625 |
|
Next |
500,000 |
at
0.15% |
= |
750 |
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Next |
740,000 |
at
0.10% |
= |
740 |
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Total |
RM1,740,000 |
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|
RM3,440 |
However, the above determination must always be matched
against time charge.
Therefore, different jobs with different business activities and
business structure may have the same Total Assets and Gross
Turnover but the time incurred in performing the audit may vary.
For comparison purposes, if we use the above figures that has
the same gross turnover and total assets but with different time
charge for different companies audit, as follows:-
Company 1- RM3,400
Company 2 - RM3,600
Company 3 - RM4,000
Company 4 - RM4,500
the audit fees shall be determined as follows:
Company 1
Time Charge is relevant and closer to fees computed based on
Gross Turnover. Thus, the recommended fee of RM3,440 will apply.
Company 2
Time Charge is between fees computed based on Total Assets and
Gross Turnover. Thus the recommended fee will be based on time
charge at RM3,600.
Company 3
Time Charge is relevant and closer to fees computed based on
Total Assets. Therefore, the recommended fee will be RM4,248.
Company 4
Time Charge is higher than the fee calculated based on Total
Assets. Therefore, the recommended fee will be on time charge at
RM4,500.
Example 2
In a situation where an organisation has a Turnover of RM100
million and Total Assets of RM5,000 with total operating
expenditure of RM1.5 million, it will be inappropriate to
determine audit fees using the Total Assets or Gross Turnover
basis because of the extremes.
Therefore, it will be appropriate to use Total Operating
Expenditure.
Based on Total Operating Expenditure of RM1.5 million, the fee
computed per the coefficient percentage table will be RM7,500 as
follows:
|
The
first |
50,000 |
at
2% |
= |
1,000 |
|
The
next |
150,000 |
at
1% |
= |
1,500 |
|
The
next |
800,000 |
at
0.5% |
= |
4,000 |
|
The
next |
500,000 |
at
0.2% |
= |
1,000 |
|
Total |
RM1,500,00 |
|
|
RM7,500 |
|
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(D) |
Procedures for Implementing the Change in Audit Fees Billing
|
(i) |
The revised recommended levels of audit fees shall be applicable
in respect of all statutory audits. |
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(ii) |
The recommended levels of audit fees are applicable only for
draft accounts submitted for audit with proper schedules.
Members may wish to charge higher audit fees having considered
the reliance placed on internal control, complexity of business
activity, volume of transactions, degree of responsibility and
risk, skill of staff and timing of the audit etc. |
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(iii) |
Draft accounts submitted without proper schedules would require a
member firm to utilise more skill and knowledge as well as time
spent on the assignment, and as such the member firm should advise
the client that higher audit fees may be charged for such audit
assignments. |
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Appendix
III
Coefficient Percentage Table
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(i) |
Gross Turnover or Total Assets Basis
|
Gross Assets or Turnover for every ringgit of |
Rate(%) |
|
RM |
|
|
|
|
The next |
100,000 |
|
0.8 |
|
The next |
150,000 |
|
0.35 |
|
The next |
250,000 |
|
0.25 |
|
The next |
500,000 |
|
0.15 |
|
The next |
1,500,000 |
|
0.10 |
|
The next |
2,500,000 |
|
0.08 |
|
The next |
5,000,000 |
|
0.075 |
|
Above |
10,000,000 |
|
Negotiable |
|
|
(ii) |
Total Operating Expenditure Basis
|
Total Operating Expenditure for every ringgit of |
Rate(%) |
|
RM |
|
|
|
|
The next |
50,000 |
|
2 |
|
The next |
150,000 |
|
1 |
|
The next |
800,000 |
|
0.5 |
|
The next |
1,000,000 |
|
0.2 |
|
Above |
2,000,000 |
|
0.1 |
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