In early 2021 PSAA commissioned external independent technical research for setting standardised fee variations to assess the expected impact on audit work programmes from 2020/21 of a range of new and updated audit requirements, including the new Code of Audit Practice 2020, and auditing and accounting standards.
PSAA is an independent company that has been specified by the Secretary of State for Housing, Communities and Local Government as the appointing person for principal local government bodies from 1 April 2018, in accordance with the Local Audit and Accountability Act 2014 and the Local Audit (Appointing Person) Regulations 2015.
The local audit regulations set out the responsibilities of the appointing person. In summary these are to appoint auditors to opted-in bodies, set fee scales and monitor the contractual compliance of audit firms. PSAA does not control the factors that influence the amount of work, and therefore level of audit fees, required to discharge the auditor’s statutory responsibilities.
The National Audit Office sets the scope of auditors’ work in the Code of Audit Practice, published on a five-yearly cycle. The Financial Reporting Council determines regulatory requirements, often as a result of its annual audit quality reviews once an audit year is completed. CIPFA/LASAAC prescribes the financial reporting requirements applicable to local government bodies. All these requirements shape the work auditors undertake and have a bearing on the actual fees required.
The local audit regulations set out the legal framework for audit fees and variations. These require PSAA to set the fee scale and allow auditors to propose to PSAA that fees should be varied where the work involved in a particular audit was substantially more or less than envisaged by the appropriate fee scale.
Why we commissioned this research
The local audit regulations currently require PSAA to consult on and set a scale, or scales, of fees before the start of the financial year to which the fees relate. As at 1 April 2021 PSAA had therefore completed annual consultations and set the fee scales for four audit years (2018/19, 2019/20, 2020/21, 2021/22) of the current five-year appointing period.
The regulations do not allow amendment of a published fee scale once the relevant financial year has begun, even if audit requirements subsequently change. However, they do allow for a larger or smaller fee to be charged where more or less work is required to deliver an audit than was envisaged in the fee scale. PSAA has developed the fee variations process to approve cases where extra fees are required. We also use the fee variations process to identify cases where fee variations relate to ongoing audit work requirements, and we convert those additional fees into future fee scales at the first opportunity.
The fixed timing for setting the fee scale in the regulations generally means that PSAA must set the scale before the previous one, or even two, audit cycles are completed, and so in advance of information on audit outcomes. This presents a significant difficulty for PSAA in determining the appropriate level for scale fees each year and has resulted in an increasing need for fee variations.
PSAA consulted in November 2020 on a possible new approach for determining some fee variations, to consider the desirability of reducing the volume of local audit fee variations if PSAA could determine some fees for additional audit work on a national basis, across all or most audits. There was general support for the proposals, with most stakeholders welcoming action to reduce the volume of fee variations. MHCLG has announced the intention, following a consultation, to amend the regulations to provide more flexibility. This would include the ability for PSAA to approve standardised fee variations to apply to all or groupings of bodies where it may be possible to determine additional fees for some new requirements nationally rather than for each opted-in body individually.
Research scope and approach
The purpose of this research was to consider the suitability for national determination of a series of expected changes in local audit requirements. It considered the potential impact on resource requirements, including factors that might influence the amount and type of additional work required. The research did not consider the possible impact of FRC audit quality requirements in relation to the changes in standards covered in our research, because this information is not yet available.
The research considered the impact of the following changes in regulatory requirements as its starting point:
- the 2020 Code of Audit Practice;
- proposed International Standards on Quality Management 1 and 2;
- revised International Standards on Auditing (UK) 220, 230, 240, 250, 260, 315, 500, 540, 570, 580, 600, 620, 700, 701 and 720;
- amendments to IFRS 9, IAS 19, and IAS28; and
- IFRS 16.
The work involved:
- desk-based review of the changes and new requirements;
- structured engagement with the NAO, FRC and the PSAA Advisory Panel on the expected impact of the changes on local audit work;
- structured engagement with contracted audit firms on the expected impact of the changes on local audit work;
- analysis of information requests; and
- presentation of conclusions and recommendations.
For each change in requirements the research considered:
- the relevance to the bodies that have opted into PSAA’s appointing person arrangements;
- the relative applicability based on the different categories of opted-in body;
- the additional work needed beyond what is currently covered in a Code audit (subject to the local arrangements and audit risks of individual opted-in bodies);
- the linkages between individual changes in audit requirements and any potential economies;
- whether it is possible to identify a proposed additional fee or range of fees required; and
- to what extent there would be an ‘implementation year’ effect that should not be built into scale fees in the longer term.
The research was commissioned by PSAA and undertaken during the first half of 2021 by external technical experts. It considered specifically the potential impact on 2020/21 audits, to be undertaken in the autumn 2021, as well as longer-term implications.
The research has concluded that where changes are relevant and will require additional audit work, the impact during the initial implementation period will be variable depending on the local circumstances and arrangements of individual opted-in bodies. This means that at this stage it would not be equitable to set a fixed additional fee across all or most bodies for these particular changes even if the regulations allowed us to do so. Subsequently, however, as ongoing requirements clarify it may well be possible to propose national variations for different classes of body and, at the earliest opportunity, to adjust scale fees accordingly. We will therefore carry out further research at the appropriate stage and publish our findings.
However, it has been possible to estimate a range of minimum additional fees for some additional requirements. These minimum additional fee ranges are set out to provide a structure for local discussion at individual opted-in bodies about the amount of additional audit work and fees needed on the new requirements.
We have therefore published information we think will be helpful to opted-in bodies and auditors on the factors and minimum additional fee ranges associated with specific new requirements for 2020/21 audits. This information is indicative and cannot be prescriptive because we cannot estimate the impact of local factors. The information is based on estimates, before the work has been undertaken for the first year, of the time needed to complete the additional work. The estimates reflect the minimum additional core audit work required, and do not include the impact of any specific local circumstances or audit risks of individual opted-in bodies.