Independence on a listed audit client: fees, services and a former partner
Nour & Partners has audited Cairo Medical Supplies (CMS), an EGX-listed company, since 2020. For 2025 the audit fee is EGP 3,200,000 and total firm fees are EGP 17,000,000. CMS has been the firm largest client for three consecutive years. Engagement partner Youssef has signed the audit report for six years. The firm also provides CMS with bookkeeping and payroll processing, internal audit outsourcing for the warehouse cycle, and tax return preparation. CMS has asked the firm to value its inventory for the financial statements and to accept a tax advisory engagement on a contingent fee equal to 15% of the tax saved from a proposed restructuring. Youssef spouse owns 20,000 CMS shares worth EGP 400,000. CMS has offered Youssef an EGP 2,000,000 interest-free housing loan. CMS new CFO was the firm audit partner on the CMS engagement until seven months ago. The audit committee asks the firm to continue all services and to sign the 2025 report.
1. Identify the threats and evaluate each relationship and service under the IESBA-based Egyptian code of ethics.
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Fee dependency: 3,200,000 / 17,000,000 = 18.8%, above the 15% level that requires disclosure and safeguards for a listed audit client. The threat is self-interest, because the firm may be reluctant to challenge management. It is not automatically a prohibition, but it requires disclosure to those charged with governance and an engagement quality review, and the firm should consider whether it can continue.
Long association: Youssef has signed for six years. For a listed entity, the engagement partner should rotate after seven years, followed by a five-year cooling-off period. The firm must plan rotation now, and the 2025 report may still be signed by him if local rules permit, but the familiarity threat is significant.
Bookkeeping and payroll: these involve assuming management responsibility and create self-review and advocacy threats; for a listed audit client they are prohibited. Internal audit outsourcing for the warehouse cycle: this is a management function and is prohibited for a listed audit client. Tax return preparation may be permissible if it is based on client-approved information and the client retains responsibility, but it must be monitored. Contingent tax advisory fee: a fee based on 15% of tax saved creates a self-interest threat and is not permitted for an audit client. Inventory valuation: this is a valuation involving significant judgement that will be audited by the same firm, creating a self-review threat; it is prohibited for a listed audit client. Spouse shares: a direct financial interest of an immediate family member is prohibited; the shares must be disposed of or Youssef must be removed from the engagement. The interest-free loan from the client is prohibited because it is not on normal commercial terms from a financial institution. The former partner as CFO, only seven months after leaving, creates familiarity and self-review threats; if he was the engagement partner, the five-year cooling-off rule for listed clients applies and the firm cannot audit while he is in a key management position.
2. Recommend the actions the firm should take before accepting or continuing the engagement, including safeguards and communication.
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The firm should first eliminate prohibited interests: Youssef spouse must sell the CMS shares, and the housing loan must be declined or repaid. The firm must resign from the bookkeeping, payroll and internal audit outsourcing engagements, and must not accept the inventory valuation. It may continue tax return preparation only if the client takes responsibility and the service is limited to mechanical preparation. The contingent fee tax advisory engagement must be declined.
On fees and rotation, the firm should disclose the fee dependency to the audit committee, arrange an engagement quality control review, and implement a rotation plan for the engagement partner. It should assess whether the former partner as CFO can be isolated from the audit team or whether the familiarity threat is so high that the firm should resign. Safeguards cannot reduce a prohibited service or financial interest to an acceptable level; they must be eliminated. The firm should document the assessment and communicate in writing to those charged with governance. If the audit committee insists on all services, the firm should decline the audit or withdraw, because independence cannot be compromised by client approval.
3. If CMS refuses to let the firm stop the inventory valuation and insists that the firm sign the report, what should the firm do and how does this affect the audit opinion?
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The firm cannot perform the valuation and then audit its own work for a listed client. The self-review threat is so significant that no safeguard can reduce it to an acceptable level. The firm should refuse to sign the report while the prohibited service continues, and should resign from the audit if the client will not release it from the valuation. Independence is a precondition for an audit opinion; the auditor cannot cure a lack of independence by disclosing it in the report or by adding a paragraph.
The firm should notify those charged with governance and consider its legal and regulatory reporting obligations, including any requirement to inform the regulator of the resignation. It should document the reasons and the attempts to resolve the matter. If the firm is required by law to issue a report despite the impairment, it should state clearly that it is not independent and explain the effect, but it should not express an unmodified opinion.