Have your say in the future of the SME market

At the beginning of January, the Financial Reporting Council (FRC) highlighted in its annual update to the Secretary of State for Business and Trade, Rt Hon Jonathan Reynolds MP, on what it has been doing to fulfil its remit during 2024 and also its plans for 2025. It noted five priorities to support economic growth, of which one was ‘embedding proportionality and reducing unnecessary business burdens’.

Fast forward a few weeks and the FRC then launched a campaign to support UK small and medium-sized enterprises (SMEs) to grow and scale. This campaign is designed to last all of 2025 and is intended to support SME access to audit services and reduce reporting burdens where possible. The drive aims to improve access to capital and to support growth ambitions.

The FRC has noted that it is aware of some challenges faced by SMEs to secure audit services at a proportionate cost, which may affect their ability to grow, and in how auditing standards are interpreted and applied.

The FRC is committed to three strands of activity over the year:

1. Market study on SMEs
2. Guidance to support the proportionate audit of SMEs
3. Support material for SMEs

Market study

This week, the FRC announced its market study into the SME market, and we would encourage all audit firms involved in the audit of the SMEs to get involved. Here at Mercia Group, we will submit our own responses to the market study which will hopefully help consolidate our clients’ thoughts and views, but every audit firm will have their own personal opinions which we recommend voicing! It is a bit of a once-in-a-lifetime opportunity to impact the audit profession from an SME perspective, so please do think about getting involved. There are six consultation questions (respondents only need to answer the questions they are happy to answer):

1. How well is the UK audit market currently functioning for SMEs?
2. What are the reasons for SMEs obtaining financial audits? What are the primary drivers in instances where an audit may not be mandatory to an SME?
3. What, if any, challenges do SMEs experience in relation to audits (e.g. in finding an auditor, engaging with the audit process)?
4. What, if any, challenges do audit firms experience in relation to audits for SMEs?
5. What, if anything, would you like to see change in relation to SME audits? (For example, any regulatory/policy changes and/or any specific actions taken by the FRC, government, firms, companies or others.)
6. What, if any, forthcoming developments might the FRC want to consider as part of this market study?

The latter three being the relevant questions for audit firms. If you would like your views to be included in Mercia’s response, please reach and we will look to waeve into our response.

Auditor guidance

One area that has always been close to my heart is the development of the auditing standards themselves, in which I am involved, through the ICAEW ISA Panel. Historically I took a particular interest in and focus on the development of the ISA for LCEs (less complex entities) at the international level and sat on the ICAEW working group and found it hugely disappointing that the FRC was not keen to take forward in the UK. If ISA for LCEs isn’t an area to be developed then as a bare minimum, additional guidance and support regarding documentation expectations would be exceptionally helpful to the market. The withdrawal of PN 26 back in 2018 left a big gap for the profession as auditing standards evolved and no further guidance as to what is and is not reasonable for those audits of smaller entities. As a file reviewer for Mercia, documentation is a key issue that we find problematic across the audit profession, in particular for audits of SMEs (or LCEs!) due to the balancing act of ensuring compliance with the relevant rules and regulations versus some of the commercial sensitivities that firms need to navigate. When auditing non-corporates, this can be even more problematic.

It is pleasing to see that by the end of 2025, the FRC plans to publish its final Practice Note to support auditors identify opportunities to proportionately apply auditing standards. To support this, in spring 2025 the FRC will publish a consultation on the intended Practice Note. The FRC has noted that the International Standards on Audit (ISAs) are a framework of standards which ensure that financial statements are audited consistently and transparently. While they are designed to be scalable so that they can be applied proportionately to the size of the company audited, it is noted that these scalability provisions aren’t consistently used and aren’t always used well. This can only be helpful for the audit profession.

Support for SMEs

In addition to the guidance for auditors, the FRC will publish material to support owners and managers of SMEs to be able to better understand auditing requirements, and how they are applied to their particular businesses and provide some helpful tools for SMEs to engage in the audit tendering and process itself more confidently and knowledgeably.

Useful links

FRC - Small and medium-sized enterprises market study

FRC launches campaign to support UK SMEs to grow and scale