The 2023/24 fee scale
Introduction
PSAA is required under the Local Audit (Appointing Person) Regulations 2015 to consult on and prescribe a scale or scales of fees for bodies that have opted into its national auditor appointment scheme.
A scale of fees must relate to a particular financial year and must be set by 1 December of the relevant year. A published fee scale cannot be amended after the statutory publication date.
The 2023/24 fee scale consultation is taking place in the context of considerable turbulence and uncertainty in the local audit system. Following a number of widely reported financial failures in the private sector the government commissioned a series of reviews of audit and has subsequently consulted on proposals for change. The 2020 Redmond review focused specifically on the local audit system and the transparency of local authority financial reporting. It highlighted a lack of coherence and leadership in the current local audit framework, contributing to wider issues including audit delays and market instability.
Audit delays have become more prevalent in the local audit system under the pressure of additional audit requirements, increasing expectations from professional regulators, shortages of experienced auditors and greater complexity of transactions and structures at opted-in bodies. In July 2023 DLUHC announced proposals to address the backlog, and is working in tandem with the FRC and all other stakeholders to find a sustainable solution.
System leadership arrangements are also evolving, with the expected transfer of shadow system leadership from DLUHC to the FRC ahead of the creation of a new regulator, the Audit, Reporting and Governance Authority, which will become the system leader for local audit.
The 2023/24 fee scale is the first in the second five-year appointing period specified by PSAA, covering 2023/24 to 2027/28 audits. Auditors will undertake their work under new contracts. The bid prices we received in the procurement involve a significant increase compared to our previous procurement in 2017, reflecting the major challenges in the wider audit market and in the local audit system.
The 2023/24 fee scale
In setting the 2023/24 fee scale, PSAA is proposing to update individual scale fees to ensure they reflect current audit requirements for all opted-in bodies. This updating is particularly important for the 2023/24 fee scale, to ensure fees are set on a consistent and equitable basis at the start of the new contract period.
We propose that the 2023/24 fee scale should include the following elements:
- the scale fees set for 2022/23;
PLUS:
- approved fee variations for recurrent additional work in prior years that have not yet been included in the fee scale, or estimates where fee variations are yet to be determined (for example where audit completions have been delayed);
- fees where changes in audit requirement for prior years have required additional work and these fees have not yet been consolidated into the fee scale (for example the requirement for the VFM arrangements commentary);
- fees for new changes in audit requirements, where there is appropriate evidence to support consolidation at this point;
- adjustments at specific bodies where there are special circumstances; and
- the adjustment required for the procurement outcome.
Further information on each element is provided in the following paragraphs.
The scale fees set for 2022/23
In setting the fee scale each year, we use the scale fees for the previous year as the starting point before taking into account any necessary adjustments, for example in respect of any recurring approved fee variations. This should provide the most up-to-date information available about the work required to deliver an audit compliant with the Code of Audit Practice and regulatory requirements at each opted-in body.
However, the impact of delayed audit completions meant that when we consulted on and set the last fee scale in autumn 2022, we did not have complete data on the total fees needed for all audits. We were therefore not able to update the scale fees for ongoing additional work at all opted-in bodies when we set the 2022/23 fee scale.
Fee variations for recurrent requirements not yet included in the fee scale
Auditors may find it necessary to carry out additional audit work to give their audit opinion. This may be because requirements have changed, or it may be due to local circumstances. The local audit regulations allow for additional fees to be payable where substantial additional work is required. Additional fees are evaluated under our fee variations process and are subject to PSAA approval.
Where the additional audit work is of an ongoing nature we consolidate the additional fee into the fee scale fee at the earliest opportunity, to reflect the need for that work in future years and reduce the need for fee variations. In contrast, non-recurrent additional work continues to be dealt with through one-off fee variations each year.
For the 2023/24 fee scale we are proposing to update the scale fees for individual opted-in bodies where additional recurrent audit work is needed. We will use information on approved fee variations for prior years or estimated figures where audits have been delayed. This updating process will put the scale fees for all 2023/24 audits onto an equal basis.
The categories of additional work where we have reviewed approved fee variations or proposed estimates for consolidation cover: group accounts, pension valuation, PPE valuation, enhanced audit requirements in relation to public interest entities and major local audits, increased FRC challenge, PFI, and investment valuation (pension funds).
We have considered the applicability of each category to each opted-in body to ensure we are consolidating the proposed additional fees consistently and equitably. In some cases, for example bodies with long-standing group accounts requirements, if we have not previously consolidated a fee variation into the scale fee but are aware that group accounts are required, we have updated the proposed 2023/24 scale fee to include this.
While most PFI schemes will be long-standing schemes, an incoming audit firm will not be familiar with the details of each scheme and will need to undertake additional work to understand the scheme and model. This additional work will require a fee variation.
It is important to stress that consolidating additional fees for recurrent requirements identified in prior years does not change the total fee to be charged. It introduces greater certainty on fees and will help to address the current imbalance where fee variations have become a significant proportion of the total audit fee required.
Changes in local audit requirements
Audit requirements have increased in recent years as a result of increased regulatory challenge, changes to the audit work required under the Code of Audit Practice and updated auditing and financial reporting standards.
Where local audit requirements change or are updated PSAA must consider the potential impact of each development on the fee scale. We need to consider whether additional fees are appropriate, whether we can estimate the additional fees based on reliable evidence, and at what point it is appropriate to incorporate the fees into the proposed fee scale. When consolidating fees into the fee scale it is particularly important to avoid the risk of over-estimating the additional audit work needed in the longer term.
Over the last three years we have commissioned external independent technical research to provide information, analysis and recommendations to support our work on updating the fee scale. This work has also provided input to our fee variations reviews. The results of this work support the information paper we publish each year in relation to audit fees.
Based on the research this year we are now able to determine the level at which it is reasonable to consolidate additional work into the 2023/24 fee scale for:
- the VFM arrangements commentary that replaced the previous binary conclusion in the 2020 Code of Audit Practice, effective from 2020/21 audits; and
- additional requirements in ISA (UK) 540 (revised) Auditing Accounting Estimates, effective from 2020/21 audits.
We have previously published indicative minimum additional fee ranges for work in these areas from 2020/21 onwards, and will publish an update for 2022/23 audits in September 2023. The level at which we propose to consolidate additional fees for the work into the 2023/24 fee scale assumes there is nothing unusual about the circumstances of an individual body and that good arrangements and internal controls are in place.
VFM arrangements commentary – fees for consolidation
| Body type | Minimum core range published for 2020/21 and 2021/22 audits | Benchmark level for inclusion in 2023/24 fee scale |
|---|---|---|
| District councils | £6,000 – £11,000 | £8,500 |
| County councils | £10,000 – £19,000 | £14,500 |
| Unitary authorities London borough councils Metropolitan district councils | £10,000 – £19,000 | £14,500 |
| Police and crime commissioners and chief constables | £6,000 – £11,000 Split between PCC and CC not specified | £8,500 in total, split as: £5,700 PCC £2,800 Chief constable |
| Fire authorities | £5,000 – £9,000 | £5,250 |
| Other local government bodies (such as combined authorities, national park authorities) | Not specified, as the number of bodies by body type is too small and arrangements are variable | Based on average of approved fee variations by body type |
ISA 540 revised – fees for consolidation
| Body type | Minimum core fee published for 2020/21 and 2021/22 audits | Benchmark level for inclusion in 2023/24 fee scale |
|---|---|---|
| District councils | £2,500 | £2,000 |
| County councils | £3,800 | £3,000 |
| Unitary authorities London borough councils Metropolitan district councils | £4,400 | £3,500 |
| Police and crime commissioners and chief constables | £2,500 Covers both | £2,000 in total, split as: £1,300 PCC £700 Chief constable |
| Fire authorities | £1,900 | £1,500 |
| Pension fund audits | £1,600 | £2,000 |
| Other local government bodies (such as combined authorities, national park authorities) | Not specified, as the number of bodies by body type is too small and arrangements are variable | Based on average of approved fee variations by body type |
For work on the VFM arrangements commentary it is important to note that:
- the NAO guidance requires the auditor to make a judgement on the work required at each body based on a risk assessment. Where previously approved fee variations for the core work are higher than the proposed benchmark, we expect to consolidate the higher figure recognising that additional work is required;
- where we have not yet received fee variations for individual bodies, or where the audit is moving to a new appointed audit firm from 2023/24, we expect to use the benchmark figure for fee scale consolidation; and
- any work required in addition to the core work on the commentary, for example on specific risks, would continue to be subject to one-off fee variations because the work will vary from year to year and the additional fees should not therefore be consolidated into the fee scale.
Other changes in local audit requirements
Our fees research has also considered whether it would be appropriate to determine suggested fee ranges or consolidate additional fees into the fee scale for other new requirements, including:
- ISA 315 revised (risks of material misstatement), applicable from 2022/23;
- ISA 240 revised (auditor’s responsibilities relating to fraud), applicable from 2021/22; and
- IFRS 16 (leasing), applicable from 2024/25.
The research has concluded that it is premature at this stage to consolidate additional fees into the fee scale for these requirements because:
- the research could not identify a consistent basis for estimating the additional fees needed at this stage in the application of the new requirements;
- there is expected to be a significant first year effect which it would not be appropriate to consolidate into the fee scale; and
- the level at which consolidation will be appropriate is likely to be variable depending on the circumstances of individual bodies.
We therefore propose using the fee variations process to establish a realistic fee level for consolidation into a future fee scale.
We have also considered the expectation in NAO auditor guidance that auditors of pension funds should provide IAS 19 assurances under the scope of the Code of Audit Practice to auditors of admitted bodies that are relevant local audit bodies. We propose including an additional fee for this work into the 2023/24 scale fee for each pension fund audit, calculated based on the number of assurances expected for local audit bodies.
Adjustments for specific opted-in bodies
As part of our work to update the fee scale we have considered whether there are opted-in bodies which have experienced significant changes in size or complexity or other factors, and assessed whether it is appropriate to make adjustments to the 2023/24 scale fee.
We propose making a temporary scale fee adjustment in less than 20 cases, but subject to detailed review after the first audit year in order to compare to the actual outcome. We will then determine if the adjustment is correct or requires further refinement for subsequent years.
Our aim in amending the 2023/24 scale fee in this way is to provide a more realistic scale fee for opted-in bodies.
Adjustment for the procurement outcome
PSAA announced the outcome of the procurement for the appointing period 2023/24-2027/28 in October 2022. We advised opted-in bodies to anticipate a major re-set of total fees for 2023/24, involving an increase of the order of 150% on the total expected fees for 2022/23, based on the information available at the time, some of which had to be estimated.
The finalised adjustment required is 151%, reflecting latest information on approved fee variations and confirmed auditor appointments for each firm.
Calculation of the procurement uplift of 151% also applies to the hourly rates used to calculate fees for additional work, as set out below.
Additional fee hourly rates
| Grade | Hourly rates for audit year 2022/23 | Audit fee adjustment to reflect the procurement outcome (uplift by 151%) | Hourly rates for audit year 2023/24 (rounded) |
|---|---|---|---|
| Partner or Director | £165 | £249 | £414 |
| Senior Manager or Manager | £91 | £137 | £228 |
| Senior Auditor | £59 | £89 | £148 |
| Other | £45 | £68 | £113 |
For example, an additional fee of £10,000 for audit year 2022/23 would generate a fee of £25,100 for comparable work in audit year 2023/24.
PSAA sets the fee scale each year based on the income it needs from audit fees to meet the costs of the audit contracts, and its own costs (1.4% of the total). Periodically we return any surplus to opted-in bodies by means of a distribution, once it is clear the surplus is no longer needed to discharge our responsibilities.
Summary of proposal
In summary, we propose that the fee scale for 2023/24 will be built up as follows:
| 2023/24 fee scale: proposed elements |
|---|
| A – The scale fees for 2022/23 Plus: B – Fee variations for recurrent additional audit work in prior years not yet included in scale fees C – Changes in local audit requirements D – Adjustments at specific bodies for local circumstances E – Adjustment for the procurement outcome |
We will write to each individual opted-in body during the consultation period to set out their expected scale fee based on these elements. We have set out below an example of how the scale fee will be made up:
| Example | |
|---|---|
| 1) 2022/23 scale fee | £52,140 |
| 2) Add: approved fee variations or estimates for recurring work* not already included | £10,500 |
| 3) Add: changes in audit requirements (VFM arrangements, ISA 540) | £10,000 |
| 4) Add: adjustment for special circumstances (where applicable) | 0 |
| 5) 2022/23 scale fees plus recurring fees | £72,640 |
| 6) Audit fee adjustment to reflect the procurement outcome (uplift by 151%) | £109,686 |
| Total scale fee for 2023/24 | £182,326 |
* The categories of work we have included in our review of approved fee variations are: group accounts, pension valuation, PPE valuation, enhanced audit requirements in relation to public interest entities and major local audits, increased FRC challenge, PFI, and investment valuation (pension funds).