Introduction to setting the 2021/22 fee scale
PSAA’s appointing person role
PSAA is specified by the Secretary of State for Housing, Communities and Local Government under the Local Audit and Accountability Act 2014 and the Local Audit (Appointing Person) Regulations 2015 as the appointing person for principal local government bodies in England.
PSAA is responsible for providing an auditor appointment scheme for eligible bodies which choose to opt in. Its role is to:
- appoint an auditor to all authorities that have chosen to opt into the 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
The National Audit Office 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).
The Code requires the auditor to:
- use judgement to design an audit approach that meets their statutory responsibilities;
- ensure their work is risk-based, proportionate and tailored to reflect local circumstances and their assessment of audit risk; and
- 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 fee scale consultation proposal
Our consultation explained that PSAA is setting the fee scale for the audit of 2021/22 financial statements and value for money arrangements in the context of significant continuing turbulence and uncertainty in the audit market.
Key developments include the possible reshaping of local audit following the Redmond Review and the Government’s initial policy response to its findings and recommendations published in December. MHCLG has announced its intention to consult on proposed amendments to the appointing person regulations and is expected to make further announcements in relation to its response to the Redmond Review in Spring 2021. The government has also set out proposals for audit reform in the white paper, Restoring trust in audit and corporate governance, in response to three independent reviews of audit in 2018 (the Kingman review of audit regulation, the Competition and Markets Authority review of the audit market, and the Brydon review of the quality and effectiveness of audit).
A significant proportion of audit work is undertaken after the relevant financial year by necessity. Consulting on changes to the fee scale in advance of the start of the relevant year (as the Appointing Person Regulations explicitly require) therefore presents us with significant challenges when audit is subject to as much change as it is currently. Ideally, we would be able to set fees with the benefit of relatively complete information about all preceding years’ audits. In practice, we are having to consult on 2021/22 fees with incomplete information in relation to:
- audits of 2018/19 accounts for which a minority of audit opinions remain outstanding;
- audits of 2019/20 accounts (a significant proportion of opinions remain outstanding); and
- audits of 2020/21 accounts (very limited if any audit work done).
Our consultation proposal for the 2021/22 fee scale therefore set out a proposal to construct fees using the following information:
- 2020/21 scale fees.
- plus relevant adjustments for ongoing additional audit work arising from 2018/19 approved fee variations.
- plus any adjustments relating to changes in auditing and financial reporting requirements which are classified as national variations under PSAA’s new arrangements for dealing with fee variations and which could be determined before 31 March 2021.
- plus any relevant adjustment for inflation arising from PSAA’s contracts with audit suppliers.
Since the consultation, we have confirmed the following:
- We wrote to opted-in bodies during the consultation period to confirm the ongoing adjustments to be applied to their fee for 2021/22. The responses from opted-in bodies to these communications are summarised later in this document.
- We were able to confirm the ongoing adjustments for 34% of individual audits. The adjustments we were able to make have increased the scale fees for the opted-in bodies concerned by 6.63%, or 2.7% across the whole fee scale. Ongoing adjustments where information was not available this time will be considered in the next phase of the exercise. It is important to note that baking in the ongoing elements of previous fee variations does not actually have the effect of increasing fees or changing the overall quantum of fee to be paid by each body, rather it alters the timing of payment for additional work that is required on an ongoing basis.
- Our work on potential national fee variations involves a range of stakeholders. We will consult on proposed changes to the fee scale in due course. Although this work is progressing it has not been possible to conclude and consult on any proposed adjustments to the 2021/22 fee scale ahead of 31 March. We will therefore consult during 2021/22 on appropriate national fee variations, subject to expected changes in the regulations during 2021. Where it is not possible to determine a national fee variation that is applicable across all or most opted-in bodies, we will provide information on indicative fee ranges or key determinants for the fees for additional work.
- Based on the CPI index for the rolling 12-month period to February 2021, the prevailing rate of inflation remains below 1%, so no adjustment for inflation is required under our contracts with audit suppliers (the formula specified in the contract is CPI minus 1%).
A summary of the responses to the consultation is set out in the Appendix to this fee scale document. We welcome all the feedback received to our consultation and thank those who responded. The PSAA Board has reflected on the consultation outcome and takes very seriously all the points made.