FRC announces measures to support small business growth

The Financial Reporting Council (FRC) has today announced a package of measures to make audits more proportionate and efficient for small and medium-sized enterprises (SMEs), helping to support their growth and access to capital.  

The FRC's measures are designed to ensure audits for SMEs are more practical, proportionate and appropriate for smaller, less complex businesses.  

To do that, the FRC will:  

• Publish new guidance to support auditors apply auditing standards in a way that is relative to the complexity and size of the business. 

• Launch a new programme of engagement with auditors of SMEs to support understanding of this new guidance. 

• Develop a Technology Sandbox within the FRC's Innovation and Improvement Hub to enable smaller audit firms to explore the use of AI in corporate reporting. 

• Establish a new working group with the Recognised Supervisory Bodies (RSBs) to promote more consistency in how audits of SMEs are supervised. 

• Engage with stakeholders on the international Less Complex Entities auditing standard, providing UK stakeholders with the opportunity to influence its future development.   

Supporting SMEs is part of the FRC's wider work to reduce burdens on businesses and support economic growth. SMEs are a cornerstone of the UK economy, driving innovation, creating jobs and powering growth across the country.  

The FRC engaged with over 500 stakeholders, including SMEs, capital providers and auditors, to understand how the audit market is working in practice and where improvements can be made.  

Richard Moriarty, FRC Chief Executive, said:  

“We've been looking closely at how we can reduce complexity and make sure regulation remains proportionate for UK businesses. As regulators, it's important that we challenge ourselves on where we might be creating unnecessary burdens on businesses and take steps to ease them.  

“SMEs are a vital engine of innovation and growth in the UK, creating jobs and opportunities across the country. It's important the audit market supports them and helps them access the capital they need to grow. 

“I'm really pleased with how quickly we've been able to deliver this project and the level of engagement we've had from stakeholders. We're already beginning to implement changes to support more proportionate audits of SMEs where we can and will continue working with other regulators to ensure they too can support this change.”  

Maggie McGhee, Executive Director – Strategy and Governance, ACCA, said:  

“The UK SME audit market is of critical importance and small businesses deserve a reporting and audit regime that is fit for purpose. The FRC's conclusion that overall, the market is functioning well is positive news, but we know there is room for improvement and will continue to work with the FRC to improve the regulatory requirements and the supervisory environment.  

We welcome the Guidance on auditing small and medium-sized entities and we will use this to inform our inspection approach. The FRC is also taking an important step in looking at international guidance on Less Complex Entities. We have long maintained that the focus should be on the complexity of the organisation, rather than just its size.” 

Nick Reynolds, ICAEW Professional Standards Head of Audit, said:  
 
“We welcome the FRC's focus on the audit market for SMEs. These findings highlight the important role that many smaller audit firms in the UK play in supporting the great majority of the private and entrepreneurial businesses in this sector that underpins the UK economy. We have long supported a wide-ranging public discussion of how the International Standard on Auditing for Less Complex Entities could be made fit for purpose in the UK, so we are pleased that the FRC intends to call for views to understand stakeholders' views on how it could be improved in that context.   

“As an RSB we look forward to continuing FRC engagement with a shared ambition for proportionate and risk-based audit monitoring.”  

Paul Wilson, Policy Director at the Federation of Small Businesses, said:  

"FSB welcomes the FRC's investigation into the audit framework that SMEs face. When we are all seeking ways to boost growth, it's important to keep the small business front of mind and ensure audits are proportionate to a firm's size and complexity. Small firms have a tendency to gold-plate their compliance if they are uncertain about how regulators will interpret rules, a point that this study helpfully recognises." 

Findings from the market study 

• The audit market for SMEs is broadly functioning well, with strong competition and good availability of audit services. Nearly 9 in 10 audits are delivered by firms outside the largest UK audit firms. Most SMEs report no issues finding an auditor and consider audit fees to represent good value for money. 

• Some SMEs identified opportunities to make audits more efficient and proportionate. In particular, regulatory requirements and the way audits are supervised can lead to more work being done than is necessary. 

• There is a perception that auditing standards do not always scale well for smaller, less complex businesses, alongside a need for clearer guidance to support more proportionate application in practice. 

• There is mixed understanding of how ethical requirements apply, with some SME auditors not fully utilising existing flexibilities within the Ethical Standard. 

• The current supervisory framework may, in some cases, discourage a more risk-based and proportionate approach to SME audits. 

• Smaller audit firms can face barriers to adopting and tailoring new technologies, including AI, due to limited resources and technical expertise, often relying on off-the-shelf solutions. 

• There is a lack of clarity on how technologies, including AI, can be used to add clear value to SME audits. 

• While audits are generally seen as valuable, they may not always be the most proportionate option for all SMEs and there is scope to better support businesses in maximising the benefits of the audit process. 

• Levels of knowledge and understanding of audit vary across the SME market, highlighting a need for greater awareness and support for both auditors and businesses.  

Read the full findings   
Read the Guidance   

ENDS 

Notes to editors: 

ICAS said:  

“We are pleased to have assisted the FRC in undertaking their important review, including providing access to valuable feedback from our firms. We welcome the recognition of the need for a more proportionate approach to supervision and look forward to working collaboratively with the FRC, other professional bodies, and audit firms to achieve the identified goals.”