High Proportion of Non-Audit Fees: A Red Flag for Auditor Independence?

Why is a High Proportion of Non-Audit Fees a Concern?

When an audit firm earns a significant portion of its revenue from a single client through non-audit services, it can create a self-interest threat. This is because the firm may be more likely to overlook or downplay potential issues during the audit to avoid jeopardizing the lucrative non-audit work.

The Correct Answer:

• B The proportion of fees for services other than the audit is high compared to the audit fee.

This is the most direct indicator of a potential self-interest threat. The higher the proportion of non-audit fees, the stronger the financial incentive for the auditor to prioritize the client's interests over the interests of the public and investors.

Why Other Options Are Less Relevant:

• A The proportion of fees for services other than the audit are expected to be earned over a short time period. While the time frame is a factor, the proportion itself is more critical in determining the level of threat.* C The service other than audit is a one-off engagement. A one-off engagement can still pose a threat if the fee is substantial compared to the audit fee.* D Law or regulation mandates the services to be performed by KPMG. Even if services are mandated, a high proportion of non-audit fees can still create a perception of dependence on the client.

Key Takeaway:

A high proportion of non-audit fees compared to audit fees is a significant red flag for auditor independence. Investors and regulators carefully scrutinize this ratio to ensure audit quality and protect the integrity of financial reporting.