It’s important to distinguish between inflation and efficiency expectations.
The inflationary adjustment is applied in accordance with the contractual arrangements established when the audit contracts were awarded. It is not an additional increase requested by firms each year; it is a mechanism built into the contracts and applies regardless of individual fee variations. This provided certainty at the time of the contract award so that inflationary risk was not built into contract prices from year one. As a reminder, when the firms submitted their bids in July 2022, CPI inflation was 10.1%. We continue to consider the certainty of an inflation clause to have been appropriate as it removed the risk of suppliers adding risk-proofing to their bids, noting that everyone knew that supply was extremely tight.
We expect audit firms to deliver their audits as efficiently as possible. When reviewing fee variations, we assess (within the limits of our remit) whether the additional work appears to us to be necessary to the requirements of the audit, and whether the proposed fee is reasonable and proportionate. Our checks also include comparative analysis with similar audit situations.
We also look for opportunities to streamline processes and reduce avoidable administrative work. For example, our proposal to incorporate recurring audit work into scale fees is intended to reduce the need for annual fee variation applications for work that is expected to continue.