Summary of responses to the consultation
We invited responses to the consultation on the 2019/20 fee scale from approximately 500 institutions including all of our opted-in bodies, their representative organisations, our contracted audit firms, bodies of accountants and other relevant national stakeholders. We received a total of 30 responses.
Consultation responses broadly welcomed the proposals to maintain scale fees for 2019/20 at the same level as 2018/19 and if possible to maintain fee stability during the appointing period. We have thanked those who responded and replied individually where responses requested clarification or further information.
Responses raised a number of issues about the level of fees, for example about the possible impact of lower fees on quality. The PSAA Board has considered these points very carefully and in a number of cases agreed to undertake further analysis and research to develop a fuller understanding of the issues raised and to enable consideration of potential options to respond to them.
PSAA has set the 2019/20 fee scale on the basis that individual scale audit fees for opted-in bodies are maintained at the same level as 2018/19 unless there are specific circumstances which require otherwise. This continues to give opted-in bodies the benefit of the cost savings achieved in the 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 has made in its own operating costs.
We have set 2019/20 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 and arising from the introduction of a new Code of Audit Practice that will apply from 2020/21, both of which have the potential to have an impact on the fee scale for future years of the appointing period.
We will be consulting on the 2020/21 fee scale in autumn 2019.
Key themes in consultation responses
Some consultation responses raised concerns about the level of service auditors are able to provide as a result of the possible impact of continuing to apply the 23 per cent fee reduction implemented in relation to audits of the 2018/19 accounts. These views were often expressed in the context of greater risk and complexity as a result of financial constraints on audited bodies, and in the expectation 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.
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.
The audit fees payable by audit bodies reflect a 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. Fees also fund PSAA’s own costs. Importantly, audit fees do not drive the level of contract payment made to firms. Such payments are determined by the bids made by firms to PSAA during the procurement process.
Assurance over audit quality was a fundamental part of the procurement. In order to be eligible to tender for an audit contract with PSAA, the firm had to appear on the ICAEW’s register of Local Auditors, having fulfilled the criteria required by legislation as evaluated by the ICAEW (the Recognised Supervisory Body). Contracts were awarded after a competitive tender which balanced audit quality with price. These pre-award processes help to ensure that the appointed firms meet the audit quality standards required for satisfactory performance of the contract. 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.
Post award we have developed new arrangements for monitoring firms’ performance and reporting on audit quality, based on the International Auditing and Assurance Standards Board Framework for Audit Quality. We will publish regular reports on the managing audit contracts page of our website. The company has also established the Local Audit Quality Forum, which is particularly focused on supporting the effectiveness of local audit committees.
Some of the firms who responded to our fee scale consultation questioned the appropriateness of continuing to apply the 23 per cent reduction to bodies with low scale audit fees, particularly pension funds.
The main points they expressed concerns about are:
- irrespective of size and complexity there are core audit requirements that auditors have to meet in order to complete an audit which is compliant with the requirements of the Code of Audit Practice and professional standards, including the same suite of auditor reports and attendance at similar numbers of meetings with those charged with governance.
- In relation to pension funds the complexity of auditing the estimates inherent in a defined benefit scheme and recent changes in arrangements for pooling investments and the need to provide assurance to other admitted auditors are not adequately reflected in the current scale fee.
Similar concerns were raised during the 2018/19 fee consultation. As part of the research and analysis mentioned above, PSAA plans to compile and review detailed evidence in relation to these issues. Depending upon our findings we will also consider whether changes to the scale fees of relevant bodies are appropriate.
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 where possible annual discussions about additional fees over and above 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 differs significantly from the level reflected in the previous scale fee, meaning that substantially more or less work is required than previously, or where supporting working papers do not meet the required standard. 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 proposed 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.
PSAA is in the process of rolling out a new CRM system to our appointed firms. Our aim is to make the fee variation process more straightforward and to reduce the processing time.
The variations process also applies to work in relation to the auditor’s other powers and responsibilities such as objections, as this work is not covered by the scale fee because of its inherently unpredictable nature.
As with the scale fees, the standard hourly rates provided by PSAA for charging for additional Code related work have been adjusted in line with fee reductions over the years. Several firms challenged the logic of reducing rates in this way.
One firm explained that fee variations increasingly relate to new, higher risk areas that require expertise from elsewhere in the firm, and that rates for these staff routinely exceed audit rates. Examples provided involved staff specialising in IT, property valuation, financial instruments, pensions and restructuring. The current fee variation process does not consider the possible involvement of non-audit staff.
As part of the research and analysis mentioned above, PSAA will explore these concerns around fee variations and hourly rates in more detail. Depending upon our findings we will propose options for improved arrangements.
We hope to be able to maintain the 2018/19 reduction in scale fees for the first three years of the appointing period. Whether or not this proves to be possible in relation to year 3, 2020/21, will depend upon a number of variables including the prevailing rate of inflation and impact of the review of the Code of Audit Practice and new Financial Reporting Standards requirements on the amount of work auditors are required to undertake. We will review the position later this year when we update our assumptions and estimates, prior to a further formal consultation process with stakeholders.