ICAEW has welcomed a commitment by regulator the Financial Reporting Council (FRC) to better understand the SME audit market and improve SMEs’ audits – a move that ICAEW believes could boost the growth prospects of UK plc. 

Emerging findings of a study into the market for SME audits conducted by the FRC and published today have highlighted widespread stakeholder concern about a lack of scalability and proportionality in auditing standards, which do not meet the needs of the SME audit market.

At the same time, many smaller audit firms believe regulators expect them to do more work for SME audits than may be necessary, according to the report. The FRC says it plans to engage with recognised supervisory bodies and audit firms to understand what a proportionate supervisory approach to SME audits would look like and how best to achieve them consistently.

The emerging findings report also warns that smaller audit firms may lack resources and technical knowledge to implement and customise technology. This may lead to an over-reliance on third party technology that may limit innovative approaches to SME audits.

Iain Wright, ICAEW’s Chief Policy and Communications Officer, says using SME audits as a tool for growth could help address the UK’s productivity and growth challenges. “SMEs are crucial to the UK economy and local communities, and can be at the vanguard of addressing and solving the UK’s productivity and growth challenges. We strongly support FRC’s initiative to help SMEs access audit services and, in turn, help them secure the capital they need to innovate, scale and grow.

“We are pleased to see clear recommendations, and the FRC’s acknowledgment of its own role in these challenges. We encourage the FRC to ensure its own regulatory approach improves audit quality while having a vibrant and growing audit ecosystem for companies of all sizes as part of its Future of Audit Supervision Services Strategy (FASS) review. The FRC's role as an improvement regulator is key to securing growth for the whole economy.” 

ICAEW believes the role of auditing standards in decline in the SME audit market has been underplayed. The absolute number of registered auditors has been falling since the early 1990s, when audit regulation was first introduced. Much of this can be attributed to hikes in audit exemption limits, but disproportionate regulatory burdens – especially in the form of longer and much more complex auditing standards designed for larger entities – have made the situation worse. 

Katharine Bagshaw, ICAEW Senior Manager, Auditing Standards, Audit and Assurance, says: “Smaller audits have been challenging for a long time because auditing standards have become lengthier and more complex in response to corporate scandals. Revising the Practice Note will certainly help but not solve this problem.” 

And despite welcoming the measures proposed, ICAEW says it is disappointing that the FRCs SME audit market campaign has failed to engage in any real public debate about how the International Standard on Auditing for Less Complex Entities (ISA for LCE) – a standalone global auditing standard designed specifically for smaller and less complex businesses – might be made fit for purpose in the UK.

“There is still time during this year-long campaign for the FRC to take advantage of the opportunity it provides to respond properly to calls for a full public discussion about the ISA for LCE, rather than just explaining why that discussion is not necessary,” Bagshaw says. “We look forward to engaging with the FRC and our members to make progress towards a healthier, more resilient SME and non-SME audit market.”

Read the FRC’s exposure draft of guidance for audits of smaller and/or less complex entities.