Introduction to the fee scale
PSAA’s appointing person role
PSAA is specified by the Secretary of State for DLUHC 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. This involves procuring and managing contracts with audit firms for the provision of audit services.
PSAA’s specific remit under the regulations is to:
- appoint an auditor to all bodies 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.
Scope of audit
PSAA is responsible for setting the fee scale for opted-in bodies but does not control the scope of the work auditors undertake:
- the National Audit Office publishes the statutory Code of Audit Practice for auditors of local public bodies, setting the overall scope of the audit;
- CIPFA/LASAAC sets financial reporting requirements for local government bodies in the Code of Practice on Local Authority Accounting; and
- the Financial Reporting Council is responsible for regulating audit quality.
The Code of Audit Practice sets out what local auditors of relevant local public bodies are required to do to fulfil their statutory responsibilities under the Local Audit and Accountability Act 2014.
In undertaking their work, the Code of Audit Practice requires the auditor to:
- use their professional judgement to apply the principles and requirements set out in the Code to the particular circumstances that exist at different audited bodies;
- ensure their work is designed to meet the auditor’s statutory responsibilities, applying the auditor’s professional judgement to tailor their work to the circumstances in place at the audited body and the audit risks to which they give rise; and
- comply with auditing standards currently in force in the United Kingdom, as may be amended from time to time, having regard to any other guidance issued by a relevant regulatory body, and statutory guidance issued by the NAO.
The local audit framework
The 2020 Redmond review into local audit and the transparency of local authority financial reporting highlighted a lack of coherence in the current local audit framework, contributing to wider issues including audit delays and market instability. Delays are becoming more prevalent under the pressure of increasing expectations from professional regulators, shortages of experienced auditors, greater complexity of transactions and structures, and the challenges posed by the Covid pandemic.
The government has announced a range of measures to strengthen the local audit framework in response to the Redmond review. A ‘system leader’ role will be discharged by a new regulator, ARGA, when it is established under new legislation. In preparation, the FRC is implementing shadow arrangements and has appointed the first Director of Local Audit.
In the meantime, DLUHC has been acting as interim system leader to co-ordinate progress on changes in response to the Redmond review.
The fee scale set by PSAA
PSAA is required to set a fee scale by the end of November of the financial year to which the scale applies. The 2022/23 fee scale must therefore be set by the end of November 2022 for audit work which will largely be undertaken from autumn 2023 onwards.
A fee scale cannot be amended after 30 November of the financial year to which it applies. We therefore cannot take account of any changes in national requirements or local circumstances for the 2022/23 fee scale once it is published at the end of November 2022, and the impact of any such changes will need to be reflected in fee variations.
In setting the fee scale PSAA considers the existing scale fees of individual opted-in bodies at the time of the fee consultation, plus any known adjustments required at that point. The existing scale fees should represent the work required for a Code-compliant audit. In recent fee scales we have made adjustments to individual scale fees for approved fee variations where they relate to audit work which will be required on an ongoing basis.
Where it is not possible to adjust scale fees to reflect changing requirements, for example where audit completions are delayed; where we do not have sufficiently reliable evidence to make a permanent adjustment to the scale fee; or where we do not have information on changes in requirements, fee variations will be needed in addition to the scale fee. The total audit fee will therefore be higher than set out in the fee scale.
The total audit fee for an individual opted-in body is driven by the volume and nature of the work needed for an auditor to deliver a Code of Audit Practice compliant audit. This will be determined by a combination of local factors and the accounting, auditing and regulatory requirements which are determined nationally.
Total audit fees are a combination of:
- the scale fee, which is based on the information available to PSAA at the time of setting the fee scale; and
- fee variations, which are based on our assessment of the information provided by the auditor as to why they have had to do more/less work than expected.
The 2022/23 fee scale consultation
Our consultation explained that PSAA is setting the 2022/23 fee scale in the context of the significant tensions and pressures in the wider audit market and profession, and of evolving arrangements in the local audit system. These issues continue to have a significant impact on audit delivery and have led to increasing delays for auditors in completing some audits.
Audit requirements have increased in recent years as a result of increased regulatory expectations and changes to the audit work required under the Code of Audit Practice and updated auditing and financial reporting standards. PSAA has evaluated the impact on audit fees of these additional requirements using fee variations and independent technical research.
We aim to adjust the fee scale at the earliest opportunity to reflect changes in requirements, removing the need for discussion each year between audited bodies and auditors about additional fees for ongoing work. We received generally positive feedback on this proposed approach from opted-in bodies and stakeholders in previous consultations in November 2020 on fee variation arrangements and in 2021 on the 2021/22 fee scale.
Our consultation for the 2022/23 fee scale therefore set out a proposal to construct scale audit fees using the following elements:
| 2022/23 fee scale: proposed elements |
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A. The fee scale set for 2021/22 Plus: B. Fee variations for recurrent requirements in 2019/20 audits C. Fee variations for recurrent requirements in 2020/21 audits D. An adjustment of 5.2% for inflation required under our audit contracts, to be funded from the surplus which would otherwise be distributed to opted-in bodies (see table below for a worked example) Additional fees needed for work relating to additional changes in auditing and financial reporting requirements and to the VFM arrangements commentary will be determined using the fee variations process in 2022/23 audits and considered for consolidation into a future fee scale. |
| Illustration of the adjustment for inflation | |||||||
| 2021/22 scale fee | Recurrent additional work | Subtotal | Inflation | Fee including inflation | Funded by PSAA | 2022/23 scale fee | |
| A | B | A+B=C | Cx5.2%=D | C+D=E | – D | E+D | |
| Example | 100,000 | 20,000 | 120,000 | 6,240 | 126,240 | -6,240 | 120,000 |
We wrote to all opted-in bodies during the consultation period to set out the position on the approved recurrent fee variations to be consolidated into their individual 2022/23 scale fee, where approved fee variations were available.
We received a good response to the consultation, in terms of the number of responses and the comments provided on our proposals. The majority of consultation responses (80%) broadly support the proposed approach to setting the 2022/23 fee scale, although more than half these positive responses also raised some concerns or issues. A relatively small proportion of consultees (18%) do not support the fee scale proposals, and 2% of responses did not comment specifically on the proposals.
Many of the issues raised in consultation responses are complex and typically call for change that is beyond PSAA’s remit. PSAA has highlighted the need for urgent action to reform the local audit system in England, in response to the pressures and market fragility experienced in recent years. In our view there need to be radical changes in the local audit system to achieve a more proportionate audit and a more sustainable audit system. We will continue in our determination to raise these issues with government and key stakeholders.
A summary of the responses to the consultation is set out in the Appendix to this fee scale document. We welcome 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.