FRC outlines measures to make SME audits more proportionate

The UK’s Financial Reporting Council (FRC) has set out a package of measures intended to make audits more “proportionate” and “efficient” for small and medium-sized enterprises (SMEs).

The regulator said the focus is on ensuring audit work better reflects the size and complexity of smaller, less complex businesses.

A central plank is new guidance aimed at helping auditors apply existing standards in a way that scales to the business being audited.

The FRC is also planning a fresh engagement programme with auditors working in the SME market to support understanding and use of the guidance.

The FRC will also develop a Technology Sandbox within its Innovation and Improvement Hub. It said this is intended to support smaller audit practices as they adopt AI and other technologies to improve audit quality.

In terms of oversight, the regulator said it will establish a working group with the Recognised Supervisory Bodies to encourage greater consistency in how SME audits are supervised.

It will also engage with stakeholders on the international Less Complex Entities auditing standard, with the aim of giving UK stakeholders an opportunity to influence its future development.

FRC chief executive Richard Moriarty said: “We have been looking closely at how we can reduce complexity and make sure regulation remains proportionate for UK businesses. As regulators, it is 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 is important the audit market supports them and helps them access the capital they need to grow.”

The announcement follows an FRC market study drawing on input from more than 500 stakeholders including SMEs, capital providers and auditors to examine how the audit market is working and where changes could be made.

In its findings, the FRC said nearly nine in ten audits are carried out by operators outside the largest UK audit companies. It added that most SMEs do not report difficulties finding an auditor and generally consider audit fees good value for money.

However, some SMEs pointed to opportunities to improve efficiency and proportionality. The FRC said regulatory requirements and the way audits are supervised can result in more work being done than is necessary.

The study also reported a perception that auditing standards do not always scale well for smaller, less complex businesses, alongside demand for clearer guidance to support more proportionate application in practice.

Maggie McGhee, executive director for strategy and governance at the Association of Chartered Certified Accountants, said: “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.”