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84 Section 362, Companies and Allied matters Act, Cap C20, LFN 2004 provides for the removal of an auditor before the expiration of his term of office, while S.365 allows for the resignation of an auditor before his term expires. Also, an old auditor may not be re-appointed after his tenure for any of several reasons.

When any of these events happens, an auditor may be approached to take up a new appointment as an auditor a company.

A change of an auditor may arise for many reasons including:

i. The company has grown bigger in size and level of activities and the current firm is too small to cope with the demands of the expanding client.

ii. There may be a change in the composition of the company’s board of directors, and the new directors wish to accommodate their interest.

iii. There may be a perceived lack of independence, possibly one that has just arisen.

iv. A disagreement between the directors and the ‘old’ audit firm and/or v. a loss of confidence in the ‘old’ audit firm.

3.1.2 Procedures before Accepting a new Audit Appointment

Before accepting a new audit client, the auditor should ensure that there are no independence or other ethical problems that could militate against the engagement. New auditors should ensure that they have been validly appointed.

The nominee auditors should carry out the following pre-acceptance procedures:

i. The auditors should ensure they are professionally qualified to act as auditors and that there are no legal or ethical grounds that could disqualify them.

ii. The auditors should ensure that existing resources in terms of available time, staff and technical expertise are adequate.

iii. The auditors should screen the prospective client i.e. make independent enquiries about the credibility of the directors if not personally known to the auditors.

iv. Communicate with existing auditors to enquire if there are professional and ethical reasons that could prevent them from accepting the client (referred to as professional enquiry).

Client Identification

The audit firm should carry out client identification procedures in line with anti-money laundering regulations. These procedures confirm credibility of the client and that there are no reasons to suspect that the client may be involved in money laundering activities. Evidences sought may include documentary evidence of the identity of the entity such as certificate of incorporation in the case of a company or Business registration certificate and confirmation of the address of the entity, through headed letter paper or Utility bills. If the client is an individual, evidence of identity can be obtained from a passport or driving licence, and evidence of address (possibly) from a recent utility bill. The audit firm should consider whether the business of the potential new client ‘makes commercial sense’. The size of the company should align with the nature of its business operations.

Professional Enquiry

85 The nominee firm should communicate with the existing or outgoing auditors to determine if there are any professional and/or ethical reasons why the audit may not be accepted. Such communication will involve discussion of the appointment, the client and the audit work.

The following communication process should be followed:

i. Upon nomination, the prospective auditor should inform the prospective client that he has a professional duty to communicate with the existing auditor.

ii. If the prospective client refuses to give its permission, the appointment as auditor should not be accepted.

iii. If the client does not give the current auditor permission to reply to any relevant questions, the current auditor should inform the prospective auditor who should reject appointment.

iv. If the current auditor does not provide any information relevant to the appointment, the new auditor should accept or reject the engagement based on other available knowledge.

v. The existing auditor or adviser should answer without delay the communication from the prospective auditor, whether or not there are matters of which the prospective auditor should be aware.

vi. Where the existing auditor or adviser prefersoral communication of the facts to the prospective auditor, each party should make his own record of such a discussion.

vii. The prospective successor auditor should discuss any conflicting viewpoints raised by the outgoing auditor with the client and satisfy himself either that the client’s view is one which he can accept as reasonable or that the client will accept that the incoming auditor or adviser might have to express a contrary opinion.

viii. Where the existing auditor or adviser does not respond within a reasonable time, the prospective successor should endeavour to contact the existing auditor by some other means, for instance, by telephone, facsimile or email.

ix. where this fails, and the prospective successor has no reason to believe that the change of auditor is being legally and properly effected , he should send a final letter by recorded delivery service stating that unless he receives a reply within a specified time he will assume that there are no matters of which the existing auditor is aware that should be brought to his attention.

x. If the prospective auditor is satisfied that he can properly act, and is prepared to accept nomination/appointment, he should so inform the client in writing.

Procedures after accepting nomination

After client screening (check on the risk level of the client and integrity of management), the audit firm should carry out the following procedures:

i. Ensure that the outgoing auditor’s removal or resignation has been properly conducted in accordance with legislation (law of the land) and that all outstanding fees due to the other member have been fully paid. Sight the resignation letter or confirm proper removal of the outgoing auditor.

ii. Ensure that your (the new auditor’s) appointment is valid. Obtain a copy of the resolution passed at the AGM appointing you as auditor.

86 iii. Write and submit a letter of engagement to the directors of the company.

iv. Obtain from the old auditors, all books and papers which belong to the client, unless the old auditors have a particular lien over the documents for unpaid fees.

3.1.3 Obtaining and charging for Professional work

Audit firms increase their client base through promoting their reputation in the business community, recommendations from existing clients as well as advertising, publicity and promotion.

Advertising and publicity

Advertising and publicity activities by accountancy firms are regulated by IFAC and ICAN through their codes of ethics and conduct respectively.

The main requirements for marketing professional services are that the advertising and publicity material used by any firm:

a. must not bring into disrepute the professional body, the firm or the profession as a whole b. should not make exaggerated claims for services offered, qualifications possessed or

experience gained

c. must not discredit the services provided by other firms or make disparaging references to unsubstantiated comparisons to the work of another Chartered Accountant

d. It should be honest and truthful and not mislead, either directly or by implication

e. must not break any locally recognised codes of advertising practice, in terms of its legality, decency, honesty and truthfulness.

Note: Students should recall the requirements of one of the fundamental ethical principles, i.e.

PROFESSIONAL BEHAVIOUR.

Reference to fees in advertising and publicity is not encouraged. If fees are mentioned, there should be a statement of the basis on which the fees are to be charged. Comments about fees:

 must not be misleading

 must not offer discounts, and

 must not make comparison with the fees of other service providers.

Fees and Remuneration

Section 361 of CAMA provides that, in the case of auditors appointed by the directors, their remuneration may be fixed by the directors; or the remuneration may be fixed by the company in a general meeting or in such manner as the company in general meeting may determine.

Remuneration here includes fees and expenses.

However, ICAN Code of Conduct provides guide to members on charging for services provided.

Where the basis of a fee has not specifically been agreed, then a member should charge a fee which is fair and reasonable taking into account:

 the seniority and professional expertise of the persons necessarily engaged in the work;

 the time expended by each;

 the degree of risk and responsibility which the work entails;

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 the priority and importance of the work to the client together with any expenses properly incurred.

Fees charged to clients should be in line with quoted and agreed amounts or the tender price.

Variations may only apply when extra work outside the agreed scope arises and this should be mutually agreed upon.

Other ICAN code of conduct guidelines

Further specific guidance by the ICAN Code regarding fees as include:

 Minimum charge-out rates in respect of fees for professional services below which members are not ordinarily expected to charge

 A member should inform a client in writing prior to commencement of any engagement the basis upon which any fee he proposes to charge for his services will be calculated.

 Firms should not quote a level of fees for new audit work which is lower than that charged by an existing auditor. Firms should also not quote by tender a level of fees which they have reason to believe is significantly lower than those quoted by other tendering firms.

 When performing audit work firms should ensure that their work complies with auditing standards and guidelines and, in particular, quality control procedures. Quality of services rendered should not be compromised on the basis of low fees.

 A member whose fees have not been paid may be entitled to exercise a lien on certain books and papers of a client upon which he has been working and may refuse to pass on information to the client or his successor Chartered Accountant, until those fees are paid.

The incoming auditor has a duty to assist in the recovery of such fees within a reasonable time.

 Fees should generally not be based on a percentage or on contingency calculations for audit work, reporting assignments and similar non-audit roles.

Self-assessment question

1. Outline the procedures a nominee auditor should adopt before accepting appointment as an auditor of a company.

2. Explain the requirements of the profession with regard to advertising and charging for professional job.