In response to feedback from opted-in bodies and auditors, PSAA consulted in November 2020 on a possible new approach for determining some fee variations. The aim of the proposals was to seek views on the desirability of reducing the volume of local audit fee variations if PSAA could determine some fees for additional work on a national basis, across all or most audits.
Fee variations are the way in which PSAA approves additional fees when an auditor needs to undertake more work than was envisaged when the fee scale was set. They are also used if the required work reduces – for example if the body no longer needs to produce group accounts. Fee variations have become more common as changes in the auditing and accounting codes, technical standards and the audit quality expectations of the Financial Reporting Council (FRC) have increased the amount of audit work now required. These changes were not known, or the amount of extra work they entail could not be established reliably, at the time PSAA was required under the local audit regulations to set the fee scale. MHCLG has announced the intention to amend the local audit regulations to provide more flexibility on the timing of fee setting.
The response to our consultation from opted-in bodies and other stakeholders was positive. There was general support for the principle of reducing the number of local fee variations if possible, but responses also emphasised that national determination would still need to take account of the local circumstances of individual bodies.
PSAA commissioned external independent technical research for setting standardised fee variations to assess the expected impact on audit work programmes from 2020/21 audits and onwards. We have considered the new requirements in the Code of Audit Practice 2020 and new or updated auditing, accounting and quality standards. The research has not been able to consider the possible impact of FRC audit quality requirements in relation to the changes in standards, as this information is normally available after audit work has been completed. Further information on the research is available.
The research has concluded that:
- where a change in requirements is significant and requires additional audit work, the overall impact will be an increase in audit time, seniority and expertise;
- the impact in the year of implementation will be more significant than for subsequent years;
- changes in requirements involve increased ‘overhead’ costs for each firm, to reflect the central investment in development, training and review necessary to support delivery of new requirements;
- the new requirements in the Code of Audit Practice for a VFM arrangements commentary will have the most significant impact on audit time and fees; and
- the local arrangements and circumstances of individual opted-in bodies can have a significant impact on the amount of additional audit work needed.
The research has also 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 in this briefing, 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 are therefore publishing additional information for 2020/21 audit fees on the factors and minimum additional fee ranges associated with specific changes in requirements for 2020/21 audits. The information is based on estimated resource requirements, before the first year of work has been undertaken. The information is intended to support local discussion about additional fees between opted-in bodies and their auditors and has been provided in response to a clear desire from opted-in bodies for greater national co-ordination on additional fee requirements. Local audit regulations require PSAA to consider every request for additional fees individually, on a case-by-case basis.
PSAA will incorporate the additional fees into the scale fee for each opted-in body as quickly as the regulations allow and once the ongoing impact of each change in requirements is clear. We will review the minimum fee ranges following completion of 2020/21 audit work to consider what information may be appropriate for subsequent audit years.