- This document sets out the fee scale for the audit work to be undertaken in respect of the 2020/21 financial statements at local bodies that have opted into Public Sector Audit Appointments’ (PSAA) national auditor appointment scheme.
- PSAA is specified by the Secretary of State for Housing, Communities and Local Government under the Local Audit and Accountability Act 2014 (the 2014 Act) and the Local Audit (Appointing Person) Regulations 2015 (the Regulations) as the appointing person for principal local government bodies in England, including local police and fire bodies.
- PSAA is responsible for providing an auditor appointment scheme for eligible bodies which choose to opt in. Other organisations such as the National Audit Office (NAO) and the Financial Reporting Council (FRC) have responsibility for setting the scope of auditors’ work and regulating it.
- The local audit system is currently being reviewed by Sir Tony Redmond as part of his review of local authority financial reporting and external audit. Our submission to the review is available from our website.
- PSAA’s role is to:
- appoint an auditor to all eligible authorities that have chosen to opt into the auditor appointments scheme rather than appoint their own auditor;
- set a scale or scales of fees; and
- monitor independence and contractual compliance of the audit firms it appoints to opted-in bodies.
Scope of audit
- Under the provisions of the 2014 Act, the NAO is responsible for publishing the statutory Code of Audit Practice for auditors of local public bodies. Further information on the Code and supporting guidance is available on the NAO website.
- The Code sets the overall scope of the audit, requiring the auditor to give an opinion on the financial statements of a principal body subject to audit and, from 2020/21, to provide a commentary on the arrangements for value for money (VFM).
- Auditors are required to use judgement to design an audit approach that meets their statutory responsibilities under the Code and the 2014 Act. The Code requires auditors to carry out their work in compliance with the requirements of the relevant professional standards issued by the Financial Reporting Council and relevant quality control standards.
- The Code requires that the auditor’s work should be risk-based and proportionate. Auditors tailor their work to reflect local circumstances and their assessment of audit risk. They do this by assessing the significant financial and operational risks facing an audited body and evaluating the arrangements it has put in place to manage those risks.
- 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.
Fee setting process
- PSAA is legally required by the Regulations to set a scale of fees before the start of the financial year to which the fees relate and cannot amend the scale after the start of the relevant financial year. In practical terms, the fee scale must therefore be set more than a year before the relevant audit work is actually started, and before audit work is undertaken under the previous year’s scale fee. This means for 2020/21 we are required to set the scale fee without complete data for 2018/19 audits or any data for 2019/20 audits. In the current audit climate of significant uncertainty and ongoing change, this poses very real challenges.
- The Regulations allow the audit fee for an individual body to be varied if substantially more or less audit work is required than envisaged by the fee scale. Fee variations commonly affect a single year, for example where a change of systems requires additional audit work. In other cases, the reasons for a variation may point to the need for an ongoing change to the scale fee, for example where group accounts are needed. It has become clear there are underlying issues in the scale fees for some authorities where relevant changes in local circumstances have not been reflected in the ongoing scale fee and we will review these cases as and when they are brought to our attention by auditors.
- The Regulations require PSAA to consult opted-in authorities, representative organisations and bodies of accountants before setting the fee scale. In practice PSAA consults with a wider group of stakeholders with the aim of seeking comprehensive feedback on its proposals.
Further work on scale fees
- During 2019 the PSAA Board commissioned a review of the scale fees framework. The aim is to develop a more in-depth understanding of concerns expressed in fees consultations and in other related independent research undertaken for PSAA, taking into account the turbulence in the wider audit environment. The report of recent research on the sustainability of the local audit market, undertaken by independent consultants Touchstone Renard for PSAA, is published on our website.
- The current level of scale fees is generating significant comment from audit firms, opted-in authorities and other stakeholders, and is a common theme for commentators on public audit. In most cases scale fees have reduced by 65% from the 2011/12 level. The reasons for these reductions include a significant reduction in Audit Commission activity from 2012/13, transfer of all the Commission’s audit staff to firms, keen pricing from firms in successive procurements, improved audit efficiencies, and reductions in PSAA’s costs.
- There is now mounting pressure on fees as the scope of audit and the role of the auditor have come under renewed scrutiny. Recent high-profile corporate failures in the private sector, concerns about the financial resilience of some local government bodies and additional technical requirements have led to an increase in the amount of work auditors are undertaking to discharge their statutory responsibilities.
- PSAA’s fee setting process strives to take into account both the needs of opted-in bodies and the need for long-term sustainability of the local audit supply market. Our current review is exploring the arrangements for setting and varying scale fees.
- The results of this review will be reported to the Board during 2020.
- We welcome all the feedback received to our consultation and thank those who responded. We will publish a ‘Q&A’ on our website, setting out the main points arising from the consultation responses in more detail and providing answers to the particular issues raised. We will update the Q&A periodically to take account of ongoing developments affecting scale fees. We will also be publishing the results of our 2018/19 audit survey of S151 officers and Audit Committee Chairs.
- The PSAA Board has reflected on the consultation outcome and takes very seriously all the points made. The matters raised are complex, and possible solutions must be considered in the context of the full range of views expressed by stakeholders, wider developments in local audit and the audit profession more generally, and the timetables within which fees must be set and audit work completed.
- Subsequent sections of this document set out the fee scale for 2020/21 and the factors influencing the PSAA Board’s decision in setting the fees.
- If you have questions about this fee scale document, please send them to us by email to: [email protected].