2020/21 audit fee scale

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2020/21 fee consultation response

  1. We consulted in January and February 2020 on the proposed fee scale for 2020/21. In the context of only partial data on 2018/19 audits, and in the absence of any data on the impact of current issues on 2019/20 audit work and fees, our consultation proposal was to set the fee scale at the same level as for 2019/20.
  2. We acknowledge that it is highly likely that additional fees will be needed in 2020/21 at most if not all bodies. This is because of the work required as a result of the ongoing impact of increased regulatory requirements, new accounting and auditing standards, and potentially the requirements of the new Code of Audit Practice in relation to Value for Money arrangements (while the scope of the work is yet to be finalised, it is clear the reporting methodology is likely to require additional time). The impact of these changes is likely to vary between bodies, depending on local circumstances. PSAA’s view is that it would be inequitable to apply a standard increase to all authorities in these circumstances, and in any case there is insufficient information available to arrive at any such ‘standard’ increase. In the current turbulent climate PSAA is, however, keen to engage with representative groups to share views and information about fees on an on-going basis.
  3. We received 54 responses to our consultation on the 2020/21 fee scale from opted-in bodies, contracted audit firms, the LGA and two representative associations of district councils. This level of response is a significant increase compared to fees consultations in recent years (there were 30 responses to the 2019/20 fees consultation.
  4. Key themes from the consultation responses and our observations and comments are summarised below.

Overall consultation feedback

  1. The responses to the consultation on the 2020/21 fee scale raise a range of important issues, often with very diverging and opposing views. Consultation responses from opted-in bodies are varied, with no majority view about the most appropriate approach to setting the 2020/21 fee scale. Around 35% of responses support accepting the consultation proposal, although they also raise concerns. In contrast, 46% of responses would prefer an across-the-board increase in scale fees in order to reduce the need for local discussions about fee variations.
  2. The consultation responses we received from audit firms consistently present a strong view that the challenges of increased regulation, additional technical requirements and the tighter timetable mean that scale fees are no longer aligned with the level of audit work now required. Firms therefore argue the need for significant increases in scale fees across the board. They have also highlighted again their concerns about the problems created by the low scale fees applicable for some smaller opted-in authorities.
  3. Responses from opted-in bodies and firms have expressed concern that uncertainty about audit fees is likely to continue to have an adverse impact on the relationship between audit firms and opted-in bodies, especially with many more changes likely in the medium term.

Fee variations

  1. There are many comments from opted-in bodies about the principle of fee variations in the responses, some welcoming the opportunity for individual discussion about additional fees, and others raising significant concerns about additional charges and about the time and effort required to consider and agree them. Responses from firms also raise concerns about the impact on audit fees of increased regulation and technical requirements, a perceived lack of clarity and certainty on fees, and the difficulties created by the shorter accounts timetable.
  2. 40% of replies from opted-in bodies requested guidance from PSAA to help them better understand additional fee requests from firms. Although we do not have a remit to provide technical guidance to authorities or auditors, we will provide more information and analysis on actual average additional fees by type of body for 2018/19 (and future years) once we have more complete data. Additionally, when the NAO has finalised the Auditor Guidance Notes (AGNs) on the new Code’s approach to work on VFM arrangements, we will review the likely impact on fees and may be in a position to provide an indicative range for different types of opted-in bodies.
  3. Almost half the bodies that responded to the consultation are concerned that fee variations requested by auditors may be too high, or that this approach could lead to inconsistency across the country. Some bodies are worried that auditors want to charge higher fees to recover perceived losses as a result of their bids in the 2017 procurement. It is important to recognise that audits undertaken since the 2017 procurement need to respond to the regulatory challenges that have emerged subsequently.
  4. The process PSAA has put in place for approving fee variations is subject to careful checks and balances. Auditors are required to discuss and seek to agree any relevant proposals with an appropriate representative of the body concerned, and all proposed variations are subject to challenge and approval by PSAA.
  5. The timing and clarity of auditors’ communication with opted-in bodies on fee variations was also raised in the 2020/21 consultation responses. Bodies have stated that they do not receive information about additional work which the auditor may need to undertake until very near to the end of the audit process. PSAA has stressed to the audit firms that bodies need this information at the earliest possible opportunity (noting that unforeseen issues may arise during the audit process). We have emphasised that wherever possible auditors should highlight at the planning stage any additional work which is likely to be required during the audit, with an indication of the potential fee implications, and we understand that this is happening in practice.
  6. The firms also have concerns that the fee variations process is time consuming and onerous, especially when the audited body has agreed the additional fee. One suggestion made by a firm was for PSAA to focus only on those cases where fees cannot be agreed by the auditor and the body. PSAA is committed to reviewing the fee variation process within the framework of our responsibilities under the Regulations, which effectively require that we consider every fee variation proposal.

Other issues raised by opted-in bodies

  1. The consultation responses from opted-in bodies also raised a wide variety of other issues. For example, there are concerns that:
  • low fees are reducing the quality of service;
  • the delivery of 2019/20 audits could be problematic given the issues in 2018/19; and
  • private sector focused regulations are not relevant for local audit.
  1. We will respond to these matters in our Q&As.

Other issues raised by firms

  1. Some firms who responded to our fee scale consultation questioned the appropriateness of continuing to apply the 23 per cent reduction to bodies with low scale audit fees, particularly pension funds. The main points they expressed concerns about are:
  • irrespective of size and complexity, there are core audit requirements that auditors have to meet in order to complete an audit which is compliant with the requirements of the Code of Audit Practice and professional standards, including the same suite of auditor reports and attendance at similar numbers of meetings with those charged with governance; and
  • in relation to pension funds, the complexity of auditing the estimates inherent in a defined benefit scheme and recent changes in arrangements for pooling investments, and the need to provide assurance to other admitted bodies’ auditors are not adequately reflected in the current scale fee.
  1. The standard hourly rates provided by PSAA for charging for additional Code-related work have been adjusted in line with fee reductions over the years. Several firms challenged the logic of reducing the rates in this way. As part of the research and analysis mentioned above, PSAA will explore these concerns around fee variations and hourly rates in more detail in the context of all comments received from stakeholders.
  2. The firms have highlighted concerns that the diminished attractiveness of the audit profession and a shortage of skilled public sector auditors is resulting in difficulty in recruiting and training staff. Feedback included that public sector audit suppliers have experienced higher attrition rates caused by regulatory pressure, increasing complexity and risk profile, the accelerated accounts closure timetable and the pressure audit teams experience when there is a lack of understanding of professional audit requirements.
  3. Firms are also concerned that:
  • authorities do not allocate sufficient resources to the audit process and are not well prepared for it. Two firms commented that the finance functions in councils have been eroded over many years of austerity and have much less capacity, technical skills and experience to cope with an increasingly complex environment;
  • local public audit operates on much lower profit margins than other parts of the business and is seen to be a less attractive area of work; and
  • barriers to entry within the market are significant and, if one more major firm exits, it may be difficult for the market to continue to meet the sector’s needs.

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