Opted-in local government and police bodies, November 2020
About the Local Government Association
- The Local Government Association (LGA) is the national voice of local government. We are a politically led, cross party membership organisation, representing councils from England and Wales.
- Our role is to support, promote and improve local government, and raise national awareness of the work of councils. Our ultimate ambition is to support councils to deliver local solutions to national problems.
- We welcome the opportunity to comment on the proposed new system for audit fee variations. This response has been cleared by lead members of the LGA’s Resources Board. We note that the consultation is timetabled to take only four weeks; this is a very tight timescale and may affect the number of other responses to the consultation.
Answers to specific questions
Question 1: Do you agree that fee variation arrangements should be changed to improve the efficiency of the process and to help manage the pressures on senior finance staff and auditors?
- Yes. In our response to the consultation on scale fees for 2020/21 (February 2020) we pointed out that “dealing with audit fee variations continues to be an issue for many councils. PSAA will need to play a leading role in dealing with the variations to fees that will arise for both the 2019/20 and 2020/21 audits.” In that response we also highlighted that “many councils have reported that local negotiations over the 2018/19 fees have been difficult. Further communication with audited bodies on the role of PSAA and on what they can expect from PSAA in this process is needed, as well as further dialogue about how the processes involved can be improved.” We are therefore pleased that changes to the process are being considered and consulted on with the sector.
- We understand the context in which these proposals are being made. Recently, there have been a series of changes to audit requirements affecting the conduct of all or most audits, requiring more audit work to be carried out, and a number of further changes to come have been identified in the consultation document. As we outlined in our previous response, it would be much better if such changes could be incorporated in overall scale fees but we accept that the requirement to set scale fees before the start of the audit year means that this is often not possible. The situation could now also be affected by the outcome of the Redmond Review, although the Government has not yet formally responded to it. In these circumstances we agree that it is right to bring these new proposals on how the variation process is managed forward for consultation now.
Question 2: Do you agree that a system based on two distinct categories - national variations and local variations - would be a logical approach?
- Yes. We agree that in principal where there are variations that can be identified as national variations these ought to be dealt with nationally. This will mean that the burden on individual authorities and audit providers to negotiate individual terms is reduced. It is to be hoped and expected that this will reduce the number and scope of local negotiations.
- The current system gives rise to a lot of confusion about what individual councils are paying for and what they are not and where the responsibility lies for fee variations. One potential benefit of this approach – taking national issues out of local negotiations – is that it should allow councils and firms to have better conversations about how local changes can reduce local fee variations.
- It remains important of course that fee variations are related to additionality of work and firms need to be able to demonstrate and justify this additionality both in relation to national and local variations. Where the need for additional quality of audit outcomes is identified this similarly needs to be based on additionality of input.
- There is anecdotal evidence that the fee variations requested by individual audit firms vary markedly between firms but are also remarkably consistent within firms. If this is true it cannot be attributed either to local or to national factors but must be related to factors originating within the firms. The national fees variation process needs to challenge this and there needs to be more guidance to councils to support them in challenging local variations.
Question 3: Do you agree that PSAA should lead on national variations, carrying out research to enable it to assess appropriate additional fees for groups of bodies with similar characteristics, with appropriate consultation?
- Yes. Consideration also needs to be given to the process of negotiating national fee variations, consultation and dispute resolution, bearing in mind that this is a contractual process involving multiple parties.
- In the proposal, national issues will be identified by PSAA by undertaking a specific programme of work to consider the likely audit work and fee impact of expected changes in audit requirements. How this would then work needs to be mapped out in more detail in terms of timetabling and, for example, whether parties would have the opportunity to nominate potential national issues for consideration as part of the process.
Question 4: Do you agree that local discussions between the auditor and the audited body should continue to be a requirement in relation to additional audit work arising from factors which are specific to a particular audited body?
- Yes. As outlined in our response to question 2 we hope that taking out the discussions on the “national variations” will give the opportunity for these local discussions to be more useful.
Question 5: Do you agree that the fee rates applicable to fee variations should be increased in recognition of the importance of maintaining a sustainable local audit market?
- In relation to rate card changes, the consultation accepts Sir Tony Redmond’s calculation of the need for a 25 per cent uplift. An uplift in rates ought to bear a relationship to costs and not just be a simple uplift.
Question 6: Any other comments
- Although not a matter within PSAA’s remit, the LGA will continue to lobby government for adequate funding of the local audit system; we believe that there is a case for any national uplift, as well as for national variations resulting for additional audit requirements imposed by regulators, to be considered through the new burdens process.
- We will also continue to argue that any changes made to local audit should be relevant and proportionate to the risks faced by local government.