Consultation on proposed new system for fee variations (November 2020)

*This document is for reference only as the consultation closed on 1 December 2020*


This consultation sets out our proposed new approach for determining fee variations in respect of local audits of opted-in bodies from 2020/21 onwards.

Fee variations are the mechanism by which Public Sector Audit Appointments (PSAA) approves additional fees for audit work. Additional fees are required when an auditor needs to undertake substantially more work than was envisaged when the fee scale for the audit was set by PSAA. This is an increasingly common occurrence in the current climate. Since PSAA’s contracts with audit suppliers were let in 2017, audits have been subject to increased scrutiny and regulatory pressures following a number of controversial financial failures in the private sector. Additional work has been required in the majority of audits to enable a safe audit opinion on the financial statements. The new Code of Audit Practice will apply from 2020/21 and further additional audit work will be needed to deliver the requirement for a commentary on the body’s arrangements for value for money.

The current fee variations process requires the auditor to discuss all proposed variations with the audited body before submitting them to PSAA for determination. Feedback from both auditors and audited bodies frequently refers to the practical challenges and limited value of local discussions about proposed variations which relate to factors which affect most or all audited bodies. Many contributors have asked PSAA to take a national lead on additional fees, where possible removing the need for local negotiations. PSAA is also engaging with MHCLG to facilitate the proposed approach outlined in this consultation.

PSAA therefore proposes introducing a new approach to fee variations for audits of 2020/21 and subsequent accounts, based on two types of variation:

  • national variations, required for changes that relate to the conduct of all or most audits, such as changes to the auditing and accounting codes, standards and regulatory requirements, where a standard cost can be reasonably estimated; and
  • local variations, required for issues that relate to local factors arising from the conduct of the particular audit, such as the additional audit work required if accounts reflect complex transactions that are not built into the scale fee, or where working papers are poorly prepared, or for work relating to an auditor’s statutory responsibilities such as objections, statutory recommendations or public interest reports.

Wherever possible PSAA will calculate and determine national variations. Local discussions between the auditor and the audited body will not be necessary. In order to reach fair determinations, PSAA will carry out research into each of the variations which arise in this category. This will include engagement with representatives of both audit suppliers and audited bodies. We will also consult as appropriate with bodies such as the National Audit Office and the Financial Reporting Council. Implementation of new arrangements will necessarily be influenced by how MHCLG chooses to respond to the recent Redmond Review recommendations.

Local variations will continue to be the subject of local discussions. We think this is appropriate in the context that these relate to matters which are specific and frequently unique to the particular audit. The relevant auditor and the chief finance officer should therefore be well aware of the issues and able to bring valuable knowledge and insights to bear.

The detailed methodology for calculating the value of fee variations uses PSAA’s rate card, which prescribes different hourly rates for different levels of audit staff. The Redmond report has recently documented significant challenges in local government auditing, acknowledging that the market is fragile and lacks resilience and highlighting issues in relation to the adequacy and sustainability of audit fees. Against this backcloth we are proposing to increase the relevant hourly rates for fee variations by 25% for 2020/21 audits. The resulting new rates continue to be keenly competitive compared to those payable in other sectors. The cost to local bodies of the rate card increase will vary depending on the scale of any fee variations arising. By way of illustration, if a body experiences fee variations equivalent to say 10% of its scale fee, calculated using current rates, the overall cost of its audit will rise by approximately 2.5% as a result of the rate card change. Current rates will continue to apply for audit years before 2020/21.

We recognise that local bodies are managing hugely challenging budgets and that any increase in the rates for fee variations will be unwelcome. However, in the context of the need to maintain a sustainable audit market going forward, we believe that this is an important and necessary step to take.

Fee variations often relate to additional audit work which is of a recurring nature. Ideally in these circumstances the scale fee for the relevant body would be updated to reflect the cost of the work concerned in subsequent audits. However, current regulations hamper how quickly this can be done. PSAA is therefore in active discussions with MHCLG with a view to amending the regulations to enable scale fees to be updated more promptly where appropriate.

We look forward to receiving your comments on our proposals.

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