Draft Prospectus for 2023 and beyond

PSAA’s commitments

PSAA will contract with appropriately qualified suppliers

In accordance with the 2014 Act, audit firms must be registered with one of the chartered accountancy institutes – currently the Institute of Chartered Accountants in England and Wales (ICAEW) – acting in the capacity of a Recognised Supervisory Body (RSB). The quality of their work will then be subject to inspection by either or potentially both the RSB and the FRC. Currently there are fewer than ten firms registered to carry out local audit work.

We will take a close interest in the results of RSB and FRC inspections and plans which firms develop to address any areas in which inspectors highlight the need for improvement. We will also focus on the rigour and effectiveness of firms’ own internal quality assurance arrangements, recognising that these represent some of the earliest and most important safety nets for identifying and remedying any problems arising. To help inform our scrutiny of both external inspections and internal quality assurance processes, we will invite regular feedback from both audit committee chairs and chief finance officers of audited bodies.

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PSAA will support market sustainability

We are very conscious that our next procurement will take place at a very difficult time given all of the fragility of and all of the uncertainties within the external audit market.

Throughout our work we will be alert to new and relevant developments that may emerge from the Government’s response to the Kingman, CMA and Brydon Reviews, as well as its response to the issues relating specifically to local audit highlighted by the Redmond Review. We will adjust or tailor our approach as necessary to maximise the achievement of our procurement objectives.

A top priority must be to encourage market sustainability. Firms will be able to bid for a variety of differently sized contracts so that they can match their available resources and risk appetite to the contract for which they bid. They will be required to meet appropriate quality standards and to reflect realistic market prices in their tenders, informed by the scale fees and the supporting information provided about each audit. Where regulatory changes are in train which affect the amount of audit work which suppliers must undertake, firms will be informed as to which developments should be priced into their bids. Other regulatory changes will be addressed through the fee variation process.

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PSAA will offer value for money

Audit fees must ultimately be met by individual audited bodies. The prices submitted by bidders through the procurement will be the key determinant of the value of audit fees paid by opted-in bodies.

We believe that the most likely way to secure competitive arrangements in a suppliers’ market is to work collectively together as a sector.

We will seek to encourage realistic fee levels and to benefit from the economies of scale associated with procuring on behalf of a significant number of bodies. We will also continue to seek to minimise our own costs (which represent less than 5% of overall scheme costs). We are a not-for-profit company and any surplus funds will be returned to scheme members. For example, in 2019 we returned a total £3.5million to relevant bodies.

We will continue to pool scheme costs and charge fees to opted-in bodies in accordance with our published fee scale as amended from time to time following consultations with scheme members and other interested parties. Pooling, sometimes referred to as ‘Post Office pricing’, means that everyone within the scheme will benefit from the prices secured via a competitive procurement process – a key tenet of the national collective scheme.

Additional fees (fee variations) are part of the legal framework. They only occur if auditors are required to do substantially more work than anticipated, for example, if local circumstances or the Code of Audit Practice change or if the Regulator (the FRC) increases its requirement on auditors.

If the changes that relate to audit fees, proposed in MHCLG’s recent consultation on the Appointing Person Regulations, are ultimately approved and implemented, PSAA will be able to manage the scale of fees and fee variations more flexibly. This will enable scale fees to be determined taking into account the outcome of more recently completed audits, and fee variations to be managed differently depending on whether they are driven by national or local factors.

It is important to emphasise that by opting into the national scheme you have the reassurance that we review and robustly assess each fee variation proposal. We draw on our technical knowledge and extensive experience in order to assess each submission, comparing with similar submissions in respect of other bodies/auditors before reaching a decision.

Audit developments since 2018 have focused considerable attention on audit fees. The drive to improve audit quality has created significant fee pressures as auditors have needed to extend their work to ensure compliance with increased regulatory requirements. Changes in audit scope and technical standards, such as the requirement in the new Code of Audit Practice 2020 for the auditor to provide a VFM arrangements commentary, have also had an impact.

Scale audit fees are rising in response to the volume of additional audit work now required. However, in the case of audits which currently attract relatively modest scale fees, we are concerned that these may be insufficient to cover the actual cost of the audit. We therefore plan to carry out research to explore this risk more fully and to consider the possibility of introducing a minimum scale fee, to ensure that all fees are sufficient to cover the actual costs of a Code-compliant audit. Striving to ensure realistic fee levels is a vital prerequisite in relation to achieving a more sustainable local audit market.

If we decide to introduce a minimum fee, we would do so at the outset of the next appointing period in respect of the audit of 2023/24 accounts. We anticipate that the introduction of a minimum fee would be likely to lead to an increase in fees for a relatively small number of local bodies. It may also impact the scale fees of some pension fund audits.

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