Introduction to the fee scale
PSAA’s appointing person role
PSAA is specified by the Secretary of State for the Department for Levelling Up, Housing and Communities under the Local Audit and Accountability Act 2014 and the Local Audit (Appointing Person) Regulations 2015 as the appointing person for principal local government bodies in England.
PSAA is responsible for providing an auditor appointment scheme for eligible bodies which choose to opt in. This involves procuring and managing contracts with audit firms for the provision of audit services.
PSAA’s specific remit under the regulations is to:
- appoint an auditor to all bodies that have chosen to opt into the scheme rather than appoint their own auditor;
- set a scale or scales of fees; and
- monitor independence and contractual compliance of the audit firms it appoints.
Scope of audit
PSAA is responsible for setting the fee scale for opted-in bodies but does not control the scope or the timescale of the work auditors undertake:
- the National Audit Office publishes the statutory Code of Audit Practice for auditors of local public bodies, which sets out what local auditors are required to do to fulfil their statutory responsibilities under the Local Audit and Accountability Act 2014;
- CIPFA/LASAAC sets financial reporting requirements for local government bodies in the Code of Practice on Local Authority Accounting; and
- the Financial Reporting Council is responsible for regulating audit quality.
The Code of Audit Practice requires the auditor to:
- use their professional judgement to apply the principles and requirements set out in the Code to the particular circumstances that exist at different audited bodies;
- ensure their work is designed to meet the auditor’s statutory responsibilities, applying the auditor’s professional judgement to tailor their work to the circumstances in place at the audited body and the audit risks to which they give rise; and
- comply with auditing standards currently in force in the United Kingdom, as may be amended from time to time, having regard to any other guidance issued by a relevant regulatory body, and statutory guidance issued by the NAO.
PSAA’s contracts with audit firms require auditors to undertake audits that are compliant with the requirements of the Code of Audit Practice.
Once appointed auditors exercise their statutory and professional responsibilities independently of PSAA, by design of the local audit framework.
The local audit framework
The Redmond review into local audit and the transparency of local authority financial reporting highlighted a lack of coherence in the current local audit framework, contributing to wider issues including audit delays and market instability. Delays have become more prevalent under the collective strain of increasing expectations from professional regulators and more demanding professional standards, shortages of experienced auditors, pressures on finance staff and greater complexity of transactions and structures.
The government announced a range of measures to strengthen the local audit framework in response to the Redmond review. A ‘system leader’ role will be discharged by the Audit Reporting and Governance Authority, a new statutory regulator to be established to replace the Financial Reporting Council (FRC). In preparation, the FRC is building shadow arrangements. In the meantime, DLUHC has been acting as interim shadow system leader.
In July 2023 the Department for Levelling Up, Housing and Communities (DLUHC) announced proposals to address the audit backlog, and is working with all stakeholders to tackle the complex issues involved.
The fee scale set by PSAA
PSAA is required to set a fee scale before 1 December of the financial year to which the scale applies. A fee scale cannot be amended after this statutory date. The 2023/24 fee scale must therefore be set by the end of November 2023.
In setting the fee scale we consider the existing scale fees of individual opted-in bodies at the time of the fee consultation, plus any known adjustments required at that point. In theory the existing scale fees should represent the work required for a Code-compliant audit, but because we have to set them at a point in time and cannot change them, in practice they do not do so in times of change. In recent fee scales, where we have reliable information we have made adjustments to individual scale fees for additional audit work which will be required on an ongoing basis.
Where we are not able to determine the impact of changes in audit requirements at the time we set the fee scale, the fee variations process provides the mechanism to adjust fees for increases or decreases in the audit work required. Where more work is needed, the total audit fee will be higher, where less work is needed a negative fee variation is appropriate. If these adjustments are expected to be permanent, we will consolidate them into a future fee scale.
The total audit fee for an individual opted-in body is driven by the circumstances and audit risks of the body and by the volume and nature of the work needed for an auditor to deliver a Code of Audit Practice-compliant audit. This will be determined by a combination of local factors and the accounting, auditing and regulatory requirements which are determined nationally.
The total audit fee for an opted-in body is a combination of:
- the scale fee, which is based on the information available to PSAA at the time of setting the fee scale; and
- fee variations, which are based on our assessment and challenge of the information provided by an auditor as to why they have had to do more/less work than expected.
The 2023/24 fee scale consultation
Our consultation explained that PSAA’s proposal is to set the 2023/24 fee scale on the basis of updating individual scale fees to reflect current audit requirements for all opted-in bodies. This updating is particularly important for the 2023/24 fee scale, to ensure fees are set on a consistent and equitable basis at the start of the new contract period.
The consultation proposed that the 2023/24 fee scale should include the following elements:
- the scale fee for the previous year (2022/23), as the starting point;
- adding in fees for any changes in the audit work now needed, replacing the need for fee variations wherever possible; and
- taking the total of the previous scale fee plus the additional work needed (a plus b) and applying the procurement adjustment for the new contract rates for audit firms.
We also wrote to each opted-in body during the consultation period to set out the calculation of their expected scale fee based on these elements.
We received a good response to the consultation, in terms of the number of responses and the comments provided on our proposals. We received 128 responses in total (25% of all consultees), with 126 responses (98%) from opted-in bodies and two from other stakeholders.
The majority of consultation responses (70%) broadly support the proposed approach to setting the 2023/24 fee scale, although more than three quarters of these supportive responses also raised some significant concerns or issues. 30% of consultees do not support the fee scale proposals and also raise significant concerns.
A summary of the responses to the consultation is available on our website. We welcome the feedback received to our consultation and thank those who responded. The PSAA Board has reflected on the consultation outcome and takes very seriously all the points made.
Many of the issues raised in consultation responses are complex and typically call for change that is beyond PSAA’s statutory role. PSAA’s remit does not include being able to:
- change the scope of local audits;
- direct auditors as to the amount or timing of their work; or
- secure additional funding for higher audit fees.
We have highlighted the need for urgent action to reform the local audit system in England, in response to the pressures and market fragility experienced in recent years. In our view there need to be radical changes in the local audit system to achieve a more proportionate audit and a more sustainable audit system.
We will continue to raise these issues with government and key stakeholders and highlight the concerns set out in consultation responses.