2020/21 audit fee scale

Key factors affecting audit fees for 2020/21

63. The background to setting the 2020/21 fee scales is unusually turbulent and challenging for many reasons. We have been communicating with opted-in authorities on these matters in writing and at meetings of both our Advisory Panel and the Local Audit Quality Forum to help understanding of the context.
64. The key factors affecting the fee setting process for 2020/21 are set out in more detail in this section.
65. Following a number of high-profile corporate failures in the private sector, the role and performance of auditors is under intense scrutiny with a consequent increase in audit work to deliver a safe opinion. The Government’s response to the Kingman, Competition and Markets Authority and Brydon Reviews will hopefully bring welcome certainty for the industry in due course. The Redmond Review is looking specifically at local audit and accounting and will conclude later in the year, with recommendations that will have an impact on the future of local audit.
66. PSAA recently commissioned an independent review of the sustainability of the local government audit market to help understanding of the current market. The review was undertaken by an independent consultancy, Touchstone Renard (TR).
67. The TR report draws on the views of audit firms active in the local authority market as well as others that are not. In doing so it identifies a number of distinctive challenges in the current local audit market. In particular it highlights the unprecedented scrutiny and significant regularity pressure on the auditing profession; the resulting recruitment and retention challenges facing firms; the challenges of a demanding timetable for publication of audited accounts; and the impact of austerity on local public bodies and its effect on both the complexity of the issues auditors face and the capacity of local finance teams.
68. In addition to the factors mentioned in this section, the ongoing coronavirus pandemic has produced an additional layer of risk and uncertainty. Whilst it is not clear what the consequences will be, there is a real risk that it may impact the availability of both audited body and audit firm staff across all sectors, creating further difficulties for local government in relation to both 2018/19 delayed opinions and the 2019/20 audits. PSAA will be keeping the situation under review.

New Code of Audit Practice

69. The current Code of Audit Practice came into force on 1 April 2015, and the new Code will apply from 1 April 2020 for 2020/21 onwards.
70. The current Code requires the auditor to give an opinion on the financial statements of a body subject to audit under the 2014 Act, and a conclusion on the arrangements for value for money (VFM). The new Code requires a sharper focus on VFM arrangements, with specific reporting criteria on: financial sustainability, governance, and improving economy, efficiency and effectiveness. It also requires auditors to provide a commentary on their findings, rather than the current requirement to state a conclusion on whether the audited body did or did not have appropriate arrangements in place.
71. The new Code states that determining how much work to do on arrangements to secure VFM is a matter of auditor judgement, based on the requirements set out in the Code and 2020/21 fee scale for opted-in principal local government bodies supporting guidance.  Supporting AGNs will be published later in 2020 and will provide more detail on the work required.
72. The extent of additional work on VFM arrangements will depend on local circumstances and may vary from year to year and from authority to authority. Further, there may be a one-off effect as both authorities and auditors make the transition from old to new requirements and lay the foundations for appropriate audit coverage.
73. Early discussions between auditors and authorities about the new Code requirements will be helpful. However, definite conclusions about implications for audit risk and workplans will need to have regard to relevant guidance (AGNs) when available.
74. PSAA will also be able to consider the impact of the new Code requirements in more depth once the AGNs are finalised. At that stage we hope be able to provide indicative ranges in relation to the likely fee implications for different types and classes of body.

Financial reporting requirements

75. The 2020/21 scale fees reflect the audit work needed at audited bodies based on current financial reporting requirements. Any changes to these requirements may have an implication for the extent of audit work required to deliver an appropriate level of assurance.
76. For example, from 2020/21 the Code of Practice on Local Authority Accounting issued by CIPFA/LASSAC requires the adoption of the requirements of an updated version of IFRS161 on the treatment of leases. The changes to the requirements may mean additional work is needed.
77. The impact of the standard will vary between authorities and accounting periods, based on factors such as the volume of leases and quality of documentation, which make it difficult to estimate with any accuracy the potential impact on individual authorities at this stage. Auditors will need to have local discussions with individual opted-in bodies about IFRS16 as the bodies will need to disclose the estimated impact in their accounts. These discussions will inform the auditor’s judgement about the amount of additional audit work needed. Bodies may wish to discuss with auditors if there are any actions which they can take to reduce the extent of additional audit work needed.

Professional standards applicable to auditors’ work

78. Auditors are under increasing pressure to demonstrate greater professional scepticism when carrying out their work, for example, by exercising greater challenge in areas where management makes judgements or relies on advisers/experts. The International Auditing and Assurance Standards Board (IAASB) has revised its standard on accounting estimates, ‘ISA 540 (Revised) – Auditing Accounting Estimates and Related Disclosures’, to respond to the evolving business environment.
79. The revision is intended to ensure that the standard continues to keep pace with the changing market and fosters a more independent and challenging/sceptical mind-set in auditors. Audit firms in turn have updated their work programmes and reinforced their internal processes to meet the new expectations.
80. ISA 540 (Revised) becomes effective for financial statement audits for periods beginning on or after 15 December 2019 and will therefore apply for 2020/21 audits. The current version of the standard has 23 required procedures for auditors to apply to test each significant estimate in the accounts; the revised standard has 39.
81. These changes are likely to have a variable impact on 2020/21 audit plans depending on the type, number and significance of estimates included in an individual authority’s financial statements.
82. More generally, regulatory standards are being raised and seem set to continue to do so in response to widely reported financial failures in the private sector and resulting reviews commissioned by government. Current regulatory practice is to apply standards to all relevant audits, unless specifically dis-applied or adapted (for example by Practice Note 10).

Timetable for setting fee scales

83. PSAA has to set the scale of audit fees in accordance with the timetable prescribed in statutory regulations, which requires the scale of fees to be fixed before the start of the relevant year of account.
84. 2018/19, the first year of audit, has been difficult for all participants in the local audit market. Disappointingly the number of delayed audit opinions in local government rose sharply for 2018/19. More than 40% (210 out of 486) of audit opinions were not available by the target date of 31 July 2019. Near the end of March 2020 there remain over 60 opinions outstanding. This is an incredibly unsatisfactory position, particularly for all the bodies concerned, and a significant concern going forward.

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