Last month, the Financial Reporting Council (FRC) launched a campaign that aims to support UK SMEs’ access to audit services and, in turn, the capital they need to grow and scale. Unveiled on 29 January, the year-long initiative comprises three workstreams.

First, a special market study – which was subsequently published on 3 February – will focus on challenges that SMEs face in relation to audit and reporting. As part of that, the study will examine areas where practitioners encounter difficulties with auditing SMEs. The FRC says that the study could lead to a range of outcomes, including richer insights into the underlying concerns and proposals to improve how the audit market functions for SMEs.

Second, in the spring, the watchdog will issue a consultation on a draft Practice Note providing guidance for supporting the proportionate audit of SMEs. That will replace ‘Practice Note 26 – Guidance on Smaller Entity Documentation’, which was withdrawn in 2018. According to the FRC, while International Standards on Audit are designed to be scalable to suit the size of the business being audited, the relevant provisions “aren’t consistently used and aren’t always used well”.

Final guidance is expected to be published by the end of the year.

In the third strand, the FRC will publish materials throughout 2025 to help SME owners understand audit requirements, and how they are applied to their businesses. The materials will also provide tools to enable SMEs to engage in audit tendering – and the audit process itself – with greater knowledge and confidence.

It all sounds reasonably positive and helpful. But is the watchdog leaving a much wider context out of the equation?

Passing the buck?

“We welcome the FRC’s initiative,” says Katharine Bagshaw, ICAEW Senior Manager, Auditing Standards, Audit and Assurance. “However, smaller audits have been challenging for a very long time. It’s to do with the auditing standards themselves and how they’ve grown in length and complexity over many years.”

When the FRC withdrew Practice Note 26, it said that the guidance no longer supported the requirements of a high-quality audit.

Passing the buck somewhat, the watchdog said in its withdrawal notice: “As smaller entity audits are usually subject to the inspection and oversight regimes of the UK Professional Accountancy Bodies, further guidance in this area may better fall with those bodies to develop.”

That left smaller entities without helpful guidance, specifically tailored to their needs.

“There have been calls for many years for standard setters to do something specific for SME auditors,” says Bagshaw, “because the standards as a whole, which have to accommodate the largest of audits, are widely perceived as difficult to apply to smaller audits.”

An overlooked standard

While the auditing standards promulgated by the FRC are intended to be proportional and scalable, there is a widespread belief in some quarters that they are overengineered. “For a long time, we at ICAEW, and many others, have been calling for the FRC and the International Auditing and Assurance Standards Board (IAASB) to do something about this,” says Bagshaw.

Almost a decade ago, the Nordic Accountant Federation (NAF) drafted a standard for the audit of smaller entities. Unusually, it published the draft in English and invited comment from around the world. Shortly afterwards, the IAASB undertook to develop its own version. Fast forward seven years, and the result is the IAASB’s auditing standard for Less Complex Entities. 

“ICAEW strongly supported this initiative,” Bagshaw says. “While the standard isn’t perfect, we would very much welcome some discussion of it as part of the FRC’s project.”