We invited responses to the consultation on the 2018/19 fee scale from opted-in bodies (a total of 484 when we issued the consultation), their representative organisations, our contracted audit firms, bodies of accountants and other relevant national stakeholders.
We received 32 responses to the consultation. Replies welcomed the proposals to reduce fees by 23 per cent and to maintain fee stability if possible during the appointing period. There were no replies that fundamentally disagreed with the consultation proposals, although some did raise specific points or concerns, for example about the potential impact on audit quality of the proposed fee reduction. We have thanked those who responded and replied individually where responses requested clarification or further information.
Following the consultation, PSAA has set the 2018/19 fee scale as proposed. Scale audit fees for all opted-in bodies have been reduced by 23 per cent from the fees applicable for 2017/18. This gives opted-in bodies the benefit of the cost savings achieved in the recent audit procurement, and continues the practice of averaging firms’ costs so that all bodies benefit from the same proportionate savings, irrespective of the firm appointed to a particular audited body. It also passes on the benefit of economies which PSAA is making in its own operating costs.
We have set 2018/19 fees on the basis of no changes to the overall work programme required by the Code of Audit Practice published by the National Audit Office. Our consultation did highlight expected changes to financial reporting requirements after 2018/19 and the new Code of Audit Practice that will apply from 2020/21, both of which could have an impact on the fee scale for future years of the appointing period.
We will be consulting on the 2019/20 fee scale in autumn 2018.
Key themes in consultation responses
Audit quality and scope
Some consultation responses raised concerns about the potential impact of the 23 per cent fee reduction on the level of service auditors will be able to provide from 2018/19. These views were generally in the context of greater risk and complexity as a result of financial constraints on audited bodies, and the view that auditors should widen the scope of their work in response.
The scope of auditors’ work and the level of assurance auditors provide is set by the Code of Audit Practice and professional standards. The auditor is required to give an opinion on the financial statements of an audited body and a conclusion on the arrangements for value for money. The auditor is required to use judgement to design a risk-based and proportionate audit approach which meets statutory responsibilities under the Code and the Local Audit and Accountability Act 2014. The audited body is responsible for putting in place appropriate arrangements to support the proper conduct of public business, and for ensuring that public money is safeguarded, properly accounted for and used with due regard to value for money. The statement of responsibilities of auditors and audited bodies provides more information on the different responsibilities of auditors and audited bodies.
The fee reduction does not mean there will be a change in the scope, volume or quality of audit work required at opted-in bodies. Auditors must undertake sufficient work to comply with the requirements of the Code of Audit Practice and relevant professional standards, and to enable them to discharge their statutory responsibilities under the Local Audit and Accountability Act 2014 and their contractual obligations to PSAA.
PSAA is very aware of the need to maintain and, where possible, strive for improvements in audit quality. Our responsibilities in this area are emphasised in the contracts we have entered into with audit firms. We are developing new arrangements for monitoring and reporting on audit quality and contract compliance, based on the International Auditing and Assurance Standards Board Framework for Audit Quality. We will be publishing regular reports on the managing audit contracts page of our website, and have also established the Local Audit Quality Forum as an important element of our arrangements.
Bodies with low scale fees
Some of the firms who responded to our fee scale consultation asked PSAA to consider not applying the proposed 23 per cent reduction to bodies with low scale audit fees, expressing concern about their ability to cover the cost of an audit compliant with the Code of Audit Practice and professional standards.
The PSAA Board has considered this matter carefully and concluded that it would not be appropriate to limit the proposed fee reduction to opted-in bodies with scale audit fees greater than an arbitrary threshold. To do so would be inequitable, particularly in relation to bodies with fees close to but on either side of the threshold. Audit firms bid in the audit services procurement on the basis of the fees applicable for 2017/18, and their bids allow for the 23 per cent reduction we have consulted on for 2018/19. Firms’ remuneration has been fixed based on the bids they made, and would not change if the reduction in scale audit fees did not apply to bodies with smaller fees.
A small number of consultation responses identified concerns about fee variations. The individual concerns vary, but the main issues are that audited bodies wish to avoid annual discussions about fees in addition to the scale fee, or do not think that firms discuss proposed variations with them appropriately.
A fee variation is needed in cases where audit risk or complexity differ significantly from the level reflected in the previous scale fee, meaning that substantially more, or less, work is required than previously envisaged. The appointed firm must discuss the variation with the audited body and then make a variation request to PSAA using a standard process to seek approval, and cannot invoice the audited body for the additional amount requested until PSAA has approved the variation.
We consider the reasonableness of the explanations provided by auditors for variations, and require the auditor to confirm that they have had an appropriate discussion with the audited body about the reasons for the additional fee before we finalise our decision on any variation to the scale fee.
Work on objections is not covered by the scale fee, so the variations process also applies where the auditor accepts an objection as valid, that is, requiring investigation.
Fee stability during the appointing period (2018/19 to 2022/23)
We hope to be able to maintain the 2018/19 reduction of 23 per cent in scale fees for the first three years of the appointing period, based on current assumptions about inflation and the amount of work auditors are required to undertake. However, the uncertainties are such that we cannot guarantee this at this stage. We will review the position each year when we update our assumptions and estimates, and consider any further information on potential changes to the scope of auditors’ work.
We will need to consider the impact of a variety of factors each year, some of which could be significant and could require a change in the fee scale. The most important variables are likely to be inflation, any changes to auditors’ work arising from the new Code of Audit Practice to be introduced from 2020/21, and possible changes in financial reporting requirements.