Local Audit System Reform: Government Prioritizes Overhaul

PSAA Webinar 2024/25 Fee Scale Consultation 1 October 2024

Agenda Bill Butler - PSAA Chair 13.00 Welcome Introduction 2024/25 fee proposals Consultation timetable 13.05 PSAA Team 13.35 All Q&A panel session 14:30 Bill Butler Closing comments

The local audit system needs reform we must also reform funding for local government and sort out these inefficiencies. We will start by reforming the local audit system to support value for money for the taxpayer. The Rt Hon Angela Rayner Secretary of State (MHCLG) 18 July 2024 Significant reform is needed to overhaul the local audit system . I will continue to review the evidence, including considering the recommendations of external reviews to date, and will update the House in the Autumn on the Government's longer-term plans to fix local audit. Jim McMahon Minister of State (MHCLG) 30 July 2024

The local audit system needs reform We agree that the local audit system is broken We strongly welcome local audit reform being a Government priority and the the commitment to an overhaul Our view is that local audit should focus on what matters to decision makers when they allocate public money

Introduction whats happening on the backlog The framework to address the backlog is in progress Legislation laid to create 6 backstop dates including - 13 December 2024 (up to FY 2022/23) - 28 February 2025 (FY 2023/24) - 27 February 2026 (FY 2024/25) New Code of Audit Practice is with Parliament NAO has published guidance for auditors Local Audit Reset and Recovery Implementation Guidance (LARRIGs) An unprecedented level of modified opinions is expected, and rebuilding assurance will take several years

Introduction - local audit legal framework The audit work is determined by the requirements of: CIPFA LASAAC issues the Code on Practice on Local Authority Accounting National Audit Office - sets the scope (Code of Audit Practice approved by Parliament) Financial Reporting Council - the regulator that sets the audit quality expectations PSAA s statutory role is to appoint auditors, determine scale fees and fee variations, and oversee issues of auditor independence and contract management PSAA works to specific regs Local Audit (Appointing Person) Regulations 2015

Introduction - setting the 2024/25 scale fees Our aim is to set a scale fee for each opted-in body that as far as possible reflects the cost of the expected audit work in order to: provide greater certainty for opted-in bodies minimise the need for fee variations enable discussions to focus on the audit not the fees To reflect new requirements in the scale fees, we must be able assess the amount of work needed and consult on and decide on the change by 30 November If additional audit work can only be quantified after the fee scale has been set, a fee variation will be needed

Introduction why the proposed increase? PSAA is extremely disappointed to have to propose increased fees especially given the financial pressures on bodies We procure a rate - audit fees rise and fall with the volume of work required to deliver a Code of Audit Practice audit Although options to reduce and focus the required work have been explored by the bodies that do determine the work required, this has not happened so far We lobby for audit work to be focused on the areas that matter to the sector, which we believe could reduce fees We use your feedback to add weight to our call for a more proportionate audit, which is now being actively pursued

2024/25 scale fees proposal - the headlines We propose a 9.5% increase on 2023/24 fees for core work This is due to increased audit Code requirements from revised audit standards (ISA (UK) 315 (risks of material misstatement) and linked work on ISA (UK) 240 (fraud)), and contractual inflation 130 bodies have changes where we have new information since setting 2023/24 fees about specific ongoing audit work If we do not apply the changes the fees would still increase through fee variations to accommodate the extra work required and not covered by the scale fee. Incorporating fee changes into scale fees provides more certainty The impact of the statutory backstop and the subsequent impact on audit work in future years cannot be calculated at present

How we arrive at the proposed fees Contracts contain an obligation to increase fee rates linked to inflation We commission independent research to help us understand the work and fee impact of changes in audit requirements We consider whether it is possible to determine the additional audit work and fees needed for changed audit requirements The research started in 2021 and has been updated annually As part of the research, we meet with the NAO, FRC, ICAEW, CIPFA to discuss the changes, and with the firms to understand how: they plan to discharge their responsibilities through their standard work programme their approach has changed from the previous year, for example for new auditing standards

This years research what we reviewed We reviewed the impact of changes in the audit framework, including: FRC Ethical Standard 2024 International Standards on Quality Management (ISQM) Code of Practice on Local Authority Accounting in the UK International Standards on Auditing (UK) The relevant auditing standards were: ISA 220 Quality Control ISA 240 Fraud ISA 315 Planning We noted impending changes in local audit requirements ISA 600 Groups IFRS 16 Leases

This years research our conclusions We concluded that: ISA 315 has a significant impact, requiring a substantial increase in audit time, seniority and expertise as with most new requirements, the impact in the first year is more significant than for subsequent years the local arrangements and circumstances of individual opted-in bodies can have a substantial impact on the amount of additional audit work needed

Setting the 2024/25 fee scale We adjust the previous year scale fee for new requirements, new specific information and inflation Example 2023/24 scale fee 313,800 Add: changes in audit requirements new requirements of ISA (UK) 315 (risks of material misstatement) and related work on ISA (UK) 240 (fraud), not included in the fee scale 15,690 Add/remove: changes in ongoing fee variations (specific bodies only, not applicable to all audits) 3,452 Subtotal 2023/24 scale fees plus recurring additional fees 332,942 Contractual indexation (3.4% of subtotal) 11,320 Total scale fee for 2024/25 344,262

Adjustments for specific bodies We have proposed adjustments for significant changes in size or complexity or a change in other audit risk factors We will review adjustments each audit year to determine if the adjustment is correct Our aim in amending the 2024/25 scale fee in this way is to provide a scale fee that is more aligned with the likely final audit fee required, but recognising the potential for change where appropriate

Billing based on delivery milestones 25% of fee on production of the previous year s Auditor s Annual Report or issuing of audit opinion for the previous Audit Year (but not before 1 December) 50% of fee on production of the draft Audit Plan to audited body, will set out the auditor s plan and timetable 75% of fee when 50% of planned hours are delivered 100% of fee when 75% of planned hours are delivered

Consultation timetable The 2024/25 fee scale consultation closes on Thursday 10 October 2024 The details are available on our website and we have sent them to all bodies and stakeholders The PSAA Board will consider consultation responses carefully in determining the final fee scale Our consultation response and the scale of fees are published on our website We will publish the final fee scale on our website by 30 November 2024

Q&A panel session

Closing comments We value your feedback on this session, so ask you to complete a short feedback form