Consultation outcome

Government response to the consultation on changes to the Local Audit (Appointing Person) Regulations 2015

Updated 28 July 2021

Purpose of the consultation

Following the findings of Sir Tony Redmond’s independent review into the effectiveness of external audit and transparency of financial reporting in local authorities, the government committed to take swift action to support market stability and in particular to review regulations to provide the appointing person with greater flexibility to ensure the costs to audit firms of additional work are met and reduce the need for time consuming case by case consideration.

The government ran an open consultation from 20 April to 1 June 2021 to gather views from stakeholders on potential amendments to the Local Audit (Appointing Person) Regulations 2015. The consultation proposed a number of amendments:

• extending the regulatory deadline by which scale fees need to be set to enable the appointing person to take into account more up-to-date information
• enabling the appointing person to consult and agree standardised fee variations to be applied to all or certain groups of principal bodies
• providing clarification on enabling some fee variations for additional elements of work to be approved during the audit
• expressly enabling the appointing person to appoint auditors for the period that it considers to be the most appropriate, up to the maximum length of the appointing period subject to consultation with the relevant bodies

Overview of the respondents

There were 86 responses to the consultation in total. Responses were received from councils, fire and rescue authorities, local police bodies, national park authorities, audit firms and regulatory and accountancy bodies.

Summary of responses

Changes to the regulatory deadline by which the scale fees need to be set

This section sought views on the proposal to amend the date by which the appointing person for principal bodies (Public Sector Audit Appointments Ltd - PSAA) is required to consult on and set the scale of fees for the audit of the accounts of opted in bodies from before the start of the financial year to 30 November of the financial year to which the scale of fees relates. Therefore, for example, the 2022/23 scale fees would need to be set by 30 November 2022 rather than by 31 March 2022.

The aim of this proposal is to provide additional time for the appointing person to consider more up-to-date information when setting fee scales, such as the results of previous audits, analysis of any recurring fee variation requests that may need to be incorporated into fee scales and the results of any research conducted on the impact of new audit requirements. Extending the fee-setting deadline would also enable audited bodies to make an informed assessment of the fee for their budget setting process for the following year, drawing on the up-to-date information provided by the appointing person.

Question 1

Do you agree with the above proposal to extend the regulatory deadline by which the scale fees need to be set to enable the appointing person (PSAA Ltd) to take into account more up-to-date information?

• Yes – I agree with the above proposal
• No – I disagree with the above proposal
• Unsure

Question 1 responses

Overall, 86% of respondents said they agreed with this proposal, while 9% disagreed and 5% were unsure. Respondents that disagreed with the proposal were concerned that amending the fee-setting deadline to 30 November would be too late for audited bodies to plan and budget for audit fees. Respondents noted that the current timescales are designed to meet the annual budget and council tax setting timetable.

Government response

It is clear that the current deadline of 31 March is contributing to a high number of burdensome and time-consuming requests for fee variations that have to be considered and negotiated on a case-by-case basis. The overwhelming majority of respondents supported our proposal to amend the deadline for the appointing person to set scale fees and we are confident that moving the fee-setting deadline to 30 November will provide more time for the appointing person to consider a range of factors in order to determine more up-to-date scale fees, which in turn should provide greater certainty on costs to audited bodies in the long run.

Use of standardised fee variations

This section sought views on the proposal to amend regulations to enable the appointing person to set standardised fee variations to be applied to all bodies or groupings of bodies, subject to independent research and consultation with the relevant bodies.

At present, the appointing person can only approve individual requests for fee variation on a case-by-case basis, with each request requiring local negotiations. The aim of this proposal is to provide greater transparency of the fee variation process for audited bodies, reduce the burden on the appointing person, local bodies and auditors of negotiating fee variations on an individual case-by-case basis and to improve the consistency and fairness of the current audit fee structure.

As part of the proposal, we also sought views on circumstances in which respondents felt it would be appropriate to apply standardised fee variations, noting that PSAA Ltd had given example circumstances in their recent consultation, such as changes to audit and accounting codes and financial and regulatory requirements - i.e. where a standard cost can be reasonably estimated.

Question 2

Do you agree with the above proposal to enable the appointing person to consult on and agree standardised fee variations to be applied to all or groups of principal bodies?

Question 2 responses

Overall, 86% of respondents said they agreed with this proposal, while 5% disagreed and 9% were unsure. Respondents who disagreed with the proposal were concerned that standardised fee variations could reduce the role of local negotiations and therefore the influence of local bodies in the fee variation process.

Government response

As a clear majority of respondents agreed with our proposal, we are confident that regulations should be amended to enable the appointing person to set standardised fee variations to be applied to all bodies or groupings of bodies, subject to appropriate research and consultation.

We recognise that local bodies must continue to have influence over the fee variation process and local fee variations will still operate as they do currently. In order to set standardised fee variations, the independent appointing person will need to have collected sufficient evidence of additional work through appropriate research and consulted with the relevant bodies and audit firms. This should improve the transparency of the fee variation process and ensure greater consistency of fees across all bodies.

Question 3

National fee variations could only be implemented in prescribed circumstances, which would be defined in the regulations. Do you have any comments on the example circumstances outlined in paragraph 8, or any additional circumstances that should be considered?

Question 3 responses

There were a number of comments suggesting example circumstances in which national fee variations should be considered:

• changes in legislation
• impact of rulings in relevant legal cases
• issues that have a common impact on high risk areas, such as pensions and asset valuations
• unique/extraordinary circumstances which affect all bodies
• sector specific developments – e.g. changes in funding or business rates regime

Government response

We note the variety of circumstances in which respondents felt standardised fee variations would be required and therefore have determined that is best not to set prescribed circumstances beyond existing requirements within the regulations.

Timing of fee variation payments

This section sought views on the proposal to clarify that the appointing person is able to approve additional fee proposals from audit firms for additional elements of work completed during the audit rather than after completion.

The aim of this proposal is to allow auditors to recover an appropriate audit fee more promptly for additional work they need to carry out during the audit cycle, while still requiring the appointing body to receive confirmation that the additional work itself has been completed. This would also provide both auditors and audited bodies with more certainty on fees early in the audit cycle.

Question 4

Do you have any comments about the above proposals to enable some fee variations for additional elements of work to be approved during the audit, noting that the appointing person’s scrutiny processes to review the proposed additional fees would operate in all cases in the usual way?

Question 4 responses

There were a variety of responses to this question. Some key themes are below:

• the need for clear guidance and documentation for audited bodies to understand how fee variations have been calculated
• the importance of fee variations only being approved after consultation with all affected audited bodies and subject to full scrutiny from the appointing person
• limiting fee variations to exceptional circumstances
• there were some concerns that consultation on fee variations during the audit could impact on auditors and possibly cause further delays to completion of audits

Government response

The government is content that the current regulations do not prohibit the appointing person from approving fee variations during the audit and will provide clarification on this in due course. The government is satisfied that the current fee variation process, whereby all relevant bodies are consulted on any requests for fee variation before being submitted to the appointing person, means that fee variations are subject to appropriate scrutiny. While the current regulations do not prohibit the appointing person from approving fee variations during the audit, we will provide clarification within the regulations to make this clear to all parties.

Auditor appointment period

This section sought views on the proposal for the appointing person to be able to appoint auditors for the period that it considers most appropriate, up to the maximum length of the appointing period, subject to consultation with the relevant bodies.

Under current regulations, the ‘compulsory appointing period’ is the financial year or years for which the appointing person is responsible for appointing a local auditor, which can range from 1 to 5 years, with the default being 5 years to provide certainty for all parties.

The aim of this proposal is to provide the appointing person with flexibility around auditor appointments. For example, this proposal would enable procurements within an appointing period, which may help maintain a sustainable supply market and could enable audit firm rotation part way through an appointing period in certain circumstances.

Question 5

Do you agree with the above proposal that the appointing person is able to appoint auditors for the period that it considers to be the most appropriate, up to the maximum length of the appointing period subject to consultation with the relevant bodies?

Question 5 responses

Overall, 91% of respondents agreed with this proposal, while 5% disagreed and 5% were unsure.

Respondents that disagreed felt that the proposal could potentially create uncertainty for audited bodies if auditors were appointed for shorter periods than the compulsory appointing period and that any change in auditor should be subject to consultation with the affected audited body.

Government response

A clear majority of respondents support enabling the appointing person to appoint auditors for the period that it considers most appropriate. While current regulations do not explicitly prohibit the appointing person from acting in this way, we will provide further clarification on this for all affected bodies in due course. The government’s expectation is that this would be utilised for those bodies who did not opt into an initial procurement or require a change of auditor during an appointing period, rather than on a wholesale basis affecting all local bodies.

Question 6

Finally, we would also welcome any more general comments on the proposals, including any comments relating to equalities impact or any potential for unintended consequences of any of the above proposals.

Question 6 responses

There were a variety of responses to this question. Some key themes are below:

• further emphasis on the need for greater transparency on fee variations to provide clarity on the justification for additional costs.
• acknowledgement that there is an ongoing issue with recruitment and retention in relation to local authority auditors
• the need for fee variations to be consistent across local bodies to ensure a fair and equitable outcome
• scope for in-year fee variations should reduce if revised scale fees start to take into account recurrent fee variations

Government response

The proposals we have outlined above should help to improve the transparency and consistency of the fee variation process and provide greater certainty to both auditors and audited bodies. In time we believe this will strengthen the stability of the local audit market.

Conclusion

The government is grateful for all the responses to the consultation. Through this exercise we have gathered views from a wide range of stakeholders on our proposals and have considered carefully the best way to give the appointing person greater flexibility and to support the overall stability of the local audit market.

As outlined above, the overwhelming majority of respondents agreed with the proposals. Consequently, the government commits to introducing secondary legislation to amend the Local Audit (Appointing Person) Regulations 2015 to:

• extend the regulatory deadline by which scale fees need to be set to before 30 November of the financial year to which the scale of fees relates
• enable the appointing person to set standardised fee variations for additional work that will affect all bodies or groupings of bodies, subject to sufficient evidence, research and consultation
• provide clarification on the ability of the appointing person to approve requests for fee variations during the audit
• provide clarification on the ability of the appointing person to appoint an auditor for a contract of shorter duration than the compulsory appointing period

The intention is that the updated regulations will come in force this autumn.

List of respondents

• Babergh and Mid Suffolk District Councils
• Basildon Council
• Bournemouth, Christchurch and Poole Council
• Blackburn with Darwen Council
• Breckland Council
• Broads Authority
• Bromsgrove and Redditch District Councils
• Cambridgeshire and Peterborough Combined Authority
• Carlisle City Council
• Chelmsford City Council
• Chichester District Council
• Chartered Institute of Public Finance and Accountancy (CIPFA)
• City of Wolverhampton Council
• Cleveland Police
• Cotswold District Council
• Crawley Borough Council
• Dartmoor National Park Authority
• Devon & Somerset Fire & Rescue Service
• Dorset Council
• East Sussex County Council
• East Sussex Fire Authority
• Eastbourne Borough Council
• Ernst & Young
• Financial Reporting Council (FRC)
• Grant Thornton UK LLP
• Hertfordshire County Council
• Horsham District Council
• Hampshire County Council (including Hampshire Pension Fund), Hampshire & Isle of Wight Fire and Rescue Authority, Hampshire Constabulary and the Police and Crime Commissioner for Hampshire (joint response)
• Kent County Council
• Kent Fire and Rescue Service
• Kingston upon Hull City Council
• KPMG LLP
• London Borough of Havering
• Leicestershire County Council
• Lewes District Council
• Lichfield District Council
• Local Government Association (LGA)
• London Borough of Waltham Forest
• London Fire Brigade
• Melton Borough Council
• National Fire Chiefs Council - Finance Committee
• Newcastle City Council
• North East Lincolnshire Council
• North Lincolnshire Council
• North Northamptonshire Council
• North Yorkshire County Council
• Norwich City Council
• Nottinghamshire Fire and Rescue Authority
• Oxford City Council
• Peterborough City Council
• Police, Fire and Crime Commissioner for Essex
• Police and Crime Commissioner for the West Midlands
• Public Sector Audit Appointments Ltd (PSAA)
• Redcar and Cleveland Borough Council
• Royal Borough of Kensington and Chelsea
• Rotherham Metropolitan Borough Council
• Selby District Council
• Sheffield City Council
• Society of County Treasurer
• Society of District Council Treasurers
• Society of London Treasurers
• Solihull Metropolitan Borough Council
• South Gloucestershire Council
• South Hams District Council
• South Oxfordshire District Council
• Spelthorne Borough Council
• St Helens Borough Council
• Stoke-on-Trent City Council
• Surrey County Council
• Surrey Office of the Police and Crime Commissioner
• Test Valley Borough Council
• Torbay Council
• Wakefield Council
• Walsall Council
• Warwickshire County Council
• Wealden District Council
• West Devon Borough Council
• West Northamptonshire Council
• West Sussex County Council
• West Yorkshire Fire and Rescue
• Wirral Council
• Yate Town Council