Audit fees in local government in England are expected to rise by 150% for the 2023/24 accounts according to the outcome of the procurement programme announced today by Public Sector Audit Appointments (PSAA).
The PSAA said that it understood that this “dramatic increase” in total audit fees would represent a “significant funding challenge” for local bodies already facing a range of financial pressures.
“The outcomes of our procurement reflect the backcloth of a troubled audit profession, a challenged local audit system and a sellers’ market,” said Steve Freer, PSAA chair.
“Unfortunately, we simply do not have levers to mitigate the very significant increase in audit fees anticipated in 12 months’ time. We have therefore requested government to give urgent consideration to providing further special support to local bodies to help fund the expected dramatic increase in fees.”
The government is currently providing £15m a year in additional support to local bodies to compensate for rises in audit fees, but this will come to an end in 2024/25.
We have requested government to give urgent consideration to providing further special support to local bodies to help fund the expected dramatic increase in fees.
Total audit fees to reach £125m
The PSAA said that estimated total fees for 2022/23 audits will be £50m and that the total fees for 2023/24 will be “in the region” of £125m.
A consultation on 2022/23 scale fees closed on 30 September and the PSAA board will set those at the end of November.
Tony Crawley, PSAA chief executive, told Room151 that he understood that the increase in fees would be a concern to local government.
“Given everything else going on, they [local bodies] will be concerned at the level of fee increase, but there will also be an element of relief that we have managed to get enough supply,” he said.
The PSAA confirmed that it had awarded contracts for 99.5% of the work detailed in its tender for the audits spanning 2023/24 to 2027/28. However, there are only ten audit suppliers currently registered to undertake local audits in England, and three of those opted to not take part in the procurement.
Deloitte and BDO to exit local government audit market
The three that chose not to opt in are PwC, Deloitte and BDO. PwC had pulled out of the local government market some time ago, but Deloitte and BDO each have 6% of the market under the five-year procurement that ends with the 2022/23 accounts. KPMG, which did not opt into the previous programme, has joined for the latest five-year period.
“We would have liked to have had as many suppliers of those ten as possible. However, we respect the decisions made by the firms in terms of their capacity, their channel choice and their priorities,” Crawley said.
A spokesperson for Deloitte UK said: “Deloitte has taken a decision to not tender for the latest round of English local government audits. This is based on a number of factors surrounding the local government audit market and regulatory framework. We currently audit 6% of English local authorities and will fulfil current contracts. This decision does not affect Deloitte’s audits in other parts of the public sector, or wider work, for public sector bodies.”
Similarly, a spokesperson for BDO said the firm “chose not to bid as part of wider strategic considerations when determining how best to allocate expertise”.
The share of the local audit market from 2023/24 will be: Grant Thornton (36%), Mazars (22.5%), EY (20%), KPMG (14%), Bishop Fleming (3.75%) and Azets Audit Services (3.25%). The breakdown for the previous period was: Grant Thornton (40%), EY (30%), Mazars (18%), Deloitte (6%) and BDO (6%).
Grant Thornton’s market share has fallen slightly, but it remains the largest player. Mazars has increased its share and overtaken EY, which saw a ten-percentage point reduction in its slice of the market. Bishop Fleming and Azets Audit Services are new entrants.
A rise of over 150% will be difficult for local authorities, which are already under severe financial pressure. We would hope this increase in fees is reflected in future allocations of resources to local authorities.
CIPFA and ICAEW response
The significance of the PSAA’s announcement was emphasised by a joint response from the chief executives of CIPFA and the ICAEW. Rob Whiteman and Michael Izza said that the current procurement round “underlines concerns about market stability”.
According to Whiteman and Izza, “urgent action” is needed to ensure the market is robust and attractive.
The chief executives said that an increase in fees was necessary to support high quality and timely audits. “However, a rise of over 150% will be difficult for local authorities, which are already under severe financial pressure. We would hope this increase in fees is reflected in future allocations of resources to local authorities.”
‘Radical changes’ required to local audit
In announcing the procurement outcome, the PSAA called for “radical changes in the local audit system”. This would involve a reduction in the volume of work enabled by revisions to the accounting and auditing requirements. “A more proportionate audit is an absolute prerequisite to achieve a more sustainable audit system,” it suggested.
Awarding new contracts would help to maintain the system for the next five years and “buy time” for changes to be developed to the local audit system.
Speaking to Room151, Crawley highlighted the role of the Financial Reporting Council (FRC) as the local audit systems leader. The FRC is currently transitioning into the Audit Reporting and Governance Authority (ARGA) and has appointed Neil Harris as director of local audit.
According to Whiteman and Izza: “As a minimum, the government should implement the [Sir Tony] Redmond Review recommendations and bring forward the necessary legislation to formally establish ARGA as the system leader as soon as possible.”
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