The need for sustainable audit fees

Central government spends about $160 billion every year. Councils further spend about $19 billion a year. Quality public audits support transparency about how this money has been spent and what has been achieved from it. Our audits also help public organisations identify what and how they can improve.

Auditing public organisations is complex. The public sector operates in an increasingly challenging environment. In recent years we have seen significant reforms in some sectors, the impacts of climate change, and a sharp rise in the cost of living, along with the effects of the Covid-19 pandemic. These challenges have resulted in increases to public spending and add to the complexity of audits.

At the same time, the auditing profession is facing challenges to its sustainability, driven by a global shortage of auditors, increased requirements in auditing standards, increasing scope in the nature of information that is audited, and transitioning audit practices to take advantage of new technologies.

Public sector audits are funded by fees paid for by the public organisations we audit. Under the Public Audit Act 2001, we must set audit fees that are reasonable, given:

• the nature and extent of the service provided;
• the requirements of auditing standards published by the Auditor-General;
• the necessary qualifications and experience of the people who provide the services; and
• any other matters that the Auditor-General sees fit.

In practice, this means that fees need to be reasonable for the public organisation being audited and should cover the cost of the audit and allow for reinvestment in the capacity and capability of audit providers.

Our auditors prepare fee proposals based on a range of factors that affect the time required to do the audit and the staff mix needed. The Office of the Auditor-General then reviews proposed fees to make sure that proposed fees are in keeping with the size, complexity, and risks for the audit. Auditors then negotiate with the public organisation to agree the audit fee, normally to cover a period of three years. We commission an independent review of how we set and monitor the reasonableness of audit fees and include a report from this review in our Annual Report (see Appendix 2). This year, as in previous years, the review concluded we have been consistent and reasonable in the way we have set audit fees.

Why we must move to sustainable audit fees

In recent years, we have been reviewing audit fees in sectors where fees have not kept pace with the rising costs of providing audits. This year, our focus is on agreeing audit fees with councils.

Audit fees have not kept up with audit costs for some time. Costs have continued to rise in response to increased complexity, changing professional standards, and, more recently, high wage inflation reflecting labour shortages in the accounting and audit professions.

Moving to sustainable audit fees earlier for parts of the Auditor-General’s portfolio was also constrained during the pandemic. This has contributed to the widening gap between what it costs to carry out a quality audit and the fees charged. The Office has carried the unmet costs of annual audits for several years, but this is no longer sustainable – the fees in some sectors are simply not meeting the costs of the audits we are required to do.

In recent years, Parliament has invested in the Office to address the inefficiencies arising from the Covid-19 pandemic. This has ensured that those costs have not been borne by public organisations. But ultimately fees need to be sustainable so that we can continue to carry out quality audits of the public sector.

We acknowledge the economic challenges facing many public organisations. Moving to more sustainable audit fees is not something that we take lightly, and we are working closely with public organisations to agree audit fees that are reasonable to both parties.

As negotiations are still under way for the 2022/23 audits, we will report in 2024 on our progress toward achieving sustainable fees. There are also steps that public organisations can take together with their auditor to improve the efficiency of the audit.

Key questions to consider are:

• Are plans in place? Is there a clear plan for preparing and auditing your annual report? Is the audit clearance date set, and are the expectations clear between your appointed auditor and your team on the information required for the audit and when it will be provided?
• Are complex issues being managed? What are the complex judgement areas for your organisation (often it is asset valuations or provisions)? Is the information required to prepare and audit the financial statements in these areas available and agreed?
• Has anything out of the ordinary occurred? For example, the recent North Island weather events created significant challenges for many organisations. How are these being managed, funded, and accounted for?
• Have audit recommendations and issues from last year’s audit been addressed?