6 Audit fees and the market in audit |
84. According to the Government one of the key
objectives of the draft Bill is to achieve lower audit fees through
a competitive market in audit.
The impact assessment accompanying the draft Bill concludes
that the current arrangement of central procurement of audit "does
not include strong incentives for costs to be minimised"'
The Secretary of State argued that, under the auspices of the
Audit Commission, "local authorities had been overcharged
for their audit function".
Consequently, and as an interim step towards abolition, the Government
asked the Audit Commission to outsource the work of its in-house
practice with effect from 2012/13, under its existing powers.
85. In its latest procurement exercise the Audit
Commission reduced fees by 40% on 2011/12 levels. Part of this
saving resulted from the decision to end its assessment and inspection
functions and its ability to negotiate bulk contracts on behalf
of local bodies. However, the Audit Commission told us that these
savings were not attributable to these factors alone; in addition
the Audit Commission argued that they were made possible due to
the Audit Commission's "twin powers of being able to impose
and appoint the auditors".
These twin powers enabled the Audit Commission to operate what
it termed a "Post Office" equalisation approach to pricing
whereby Audit Firms were offered large contracts which contained
a mixture of desirable and less desirable bodies to audit.
86. Witnesses representing local authorities
said that the Audit Commission had been successful in identifying
savings in audit fees. For example Joanna Simons, Chief Executive
of Oxfordshire County Council, noted that "one of the good
things in the past few years has been the downward pressure on
The impact assessment notes that it is difficult to predict
what impact the unwinding of this system will have on the level
of audit fees in the new regime.
Variation in audit fees
87. The majority of our witnesses argued that
there would be substantial geographical variation in fees between
different local bodies in the new regime.
According to Michael O'Higgins, former Chief Executive
of the Audit Commission:
Very large or attractive authoritiesthe Birminghams
and the Westminstersmay well be able to get quite good
deals, but there will be many smaller and more remote authorities
that will not benefit from the sort of Post Office pricing that
the Commission carries out.
Sir Robert Naylor, Chief Executive of the University
of London's Hospital (UCLH) NHS Foundation Trust informed us that
the audit fees that UCLH currently pay are "about half"
of what it previously paid to the Audit Commission.
This reduction in fees can, in part, be attributed to differences
between the Audit Commission's and Monitor's Code; the latter's
Code of Practice does not provide for VfM studies and is narrower
than the Audit Commission's.
88. We heard contrary evidence regarding whether
fees are likely rise or fall overall compared to current rates.
A minority of our witnesses, including Paul Woolston of PwC, suggested
to the Committee that "fees will come down across the board,
including smaller organisations".
Conversely the majority of our witnesses, including Grant
Thornton, argued that "it is likely that fees will increase,
not decrease, as a result of the draft Bill".
The possibility of increased audit fees were cited by Steve
Parkinson, Society of Local Council Clerks, who suggested that
when "we get to the 2017 tender exercise, I cannot imagine
those fees going down, and especially for the smallest, I can
see them needing to go up". 
89. Sarah Howard, Head of Public Sector Assurance
at Grant Thornton LLP, also told the Committee that "there
will be pressure on fees in the absence of large volume contracts
and the huge discounts" that they are currently able to offer.
This, she argued, is due to the loss of efficiencies in procurement
costs, increases in tendering costs and the loss of the Audit
Commission's indemnity function.
The draft impact assessment highlights fourteen potential
drivers of local bodies' audit fees, some of which may act as
upward pressures, others as downward pressures, and others with
90. While we recognise that
there would be scope for achieving economies of scale through
joint procurement in the new regime, we also consider that substantial
economies could be realised through central purchasing and appointment.
This reinforces our view that a central procurement capacity should
be retained. However, should the Government maintain its commitment
to local appointment, we recommend that local bodies be encouraged
and supported in jointly procuring audit in an effort to secure
more competitive fees than could be achieved if each individual
body appointed its own auditor. We consider the LGA to be well
placed to potentially play an active role in facilitating this
91. Given the uncertainties
surrounding the level of future audit fees, we recommend Government
conduct a post-implementation review following both the first
and second self-appointment exercises.
The audit market
92. The Government assumes that a more competitive
market in audit will be established as a result of the implementation
of the draft Bill and, in turn that a more competitive market
will lead to a downward pressure on audit fees. The Government
argues that audit firms will "benefit from the opening up
of the audit market to competition, as they will have increased
opportunity to realise profits".
93. On the other hand, Grant Thornton told us
that the draft Bill would not promote competition. Indeed, they
suggested that the opposite is likely;
telling us that "the impact assessment of the draft Bill
is flawed in that there is already full competition with 100%
of audits outsourced. The outsourcing followed a competitive process
with commercially attractive 'lots' to attract potential new entrants
to the market".
Only two new entrants were awarded contracts during the last procurement
94. When it considered this matter, the Communities
and Local Government Select Committee recommended that a stand-alone
company, preferably a mutual, should be established to capture
the Audit Commission's skills and expertise.
The DA Partnership, named after District Audit (the forerunner
to the Commission), was temporarily established as part of a mutual
partnership. If successful in the bidding process, it was expected
that the partnership would transfer staff from the Audit Commission
under TUPE regulations.
However, the DA Partnership were awarded only one contract,
and "the partnership could not launch as an employee-owned
independent firm. Instead it became a wholly-owned subsidiary
of Mazars, trading as Mazars DA".
95. We heard evidence to suggest that it is not
realistic for smaller firms and organisations such as mutuals
and co-operatives to bid successfully for one-off audits without
an inevitable impact on quality, consistency or cost.
This, it was argued was because the characteristics and complexity
of public sector audit requires auditors to invest in understanding
the unique aspects of the public sector audit regime in order
to deliver high quality audits. Moreover, it was argued, that
the wider scope of audit, public reporting and the relationship
with local electors distinguish local authority audit from other
audits and audit suppliers therefore use highly specialised and
experienced teams. These requirements were cited as likely barriers
which would prevent smaller firms from entering the market.
96. We are concerned that the
provisions in the draft Bill will not produce an open and competitive
audit market as envisaged by the Government which is an aim that
we support. The Bill should not result in contracts being awarded
to a small number of audit firms. We recommend that the Government
consult further appropriate bodies including the Competition Commission,
FRC, LGA and professional accountancy bodies in order to amend
the Bill so that effective competition can be realised.
108 Draft Local Audit Bill, Cm 8393, July 2012,
p 6 Back
Draft Local Audit Bill, Cm 8393, July 2012, p 152 Back
Q 671 Back
Draft Local Audit Bill, Cm 8393, July 2012, p 159 Back
Q 95 Back
Q 176 Back
Draft Local Audit Bill, Cm 8393, July 2012, p 154 Back
Q 463 Back
Q 94 Back
Q 300 Back
Q 464 Back
Written evidence from Grant Thornton LLP Back
Q 238 Back
Qq 463-464 & Written Evidence from Grant Thornton LLP Back
Draft Local Audit Bill, Cm 8393, July 2012, p 18 Back
Draft Local Audit Bill, Cm 8393, July 2012, p 87 Back
Written evidence from Grant Thornton Back
Written evidence from Grant Thornton Back
Communities and Local Government Committee, Audit and inspection
of local authorities, para 14 Back
"Gareth Davies to head up new audit mutual", Guardian
Professional , 30 September 201, www.guardian.co.uk/public-leaders-network Back
"Big Firms Scoop Up Audit Commission Work", Accountancy
Age, 5 March 2012, www.accoutancyage.com Back
Written evidence from Grant Thornton Back