FRC Introduces Key Measures to Simplify SME Audits

SME audits are set to become more proportionate and efficient, according to the UK's Financial Reporting Council (FRC). The regulatory body announced a comprehensive package aimed at aligning audit processes with the scale and complexity of smaller businesses. The FRC plans to introduce new guidance to assist auditors in applying existing standards tailored to the needs of SMEs. Additionally, a renewed engagement program will support auditors in the SME market to enhance their comprehension and application of the guidance provided.

A significant part of the FRC's initiative includes the creation of a Technology Sandbox within its Innovation and Improvement Hub. This resource will help smaller audit firms adopt artificial intelligence and other technologies to elevate audit quality. For oversight, the FRC intends to form a working group with Recognised Supervisory Bodies to promote greater consistency in the supervision of SME audits.

Engagement with stakeholders will also focus on the international Less Complex Entities auditing standard, aiming to give UK participants a voice in its development. Richard Moriarty, FRC's chief executive, emphasised the importance of reducing complexity in regulations to maintain proportionality for UK businesses. "It’s crucial for regulators to evaluate where we might impose unnecessary burdens and implement measures to alleviate them," he stated.

Moriarty underscored the vital role SMEs play in the UK’s economy as engines of innovation and job creation. Thus, it's essential for the audit market to effectively support these companies as they seek capital for growth. This announcement follows an FRC market study, which garnered insights from over 500 stakeholders, including SMEs, auditors, and capital providers, to assess the functioning of the audit market and identify potential improvements.

The FRC's findings revealed that nearly 90% of audits are conducted by firms outside the largest UK audit companies. Most SMEs reported little difficulty in locating auditors and generally viewed audit fees as reasonable. However, some expressed a need for enhanced efficiency and proportionality in the audit process. The study indicated that existing regulatory requirements and supervision practices can lead to excessive workloads that outweigh necessity. Furthermore, there are indications that auditing standards may not scale effectively for smaller, less complex entities, alongside a demand for clearer guidance.

Maggie McGhee, executive director for strategy and governance at the Association of Chartered Certified Accountants, remarked on the FRC's findings as positive, stating, "While the market functions well overall, there’s still room for enhancements. We will collaborate with the FRC to refine regulatory requirements and the supervisory framework. We appreciate the guidance directed at auditing small and medium-sized entities and will integrate this into our inspection approach."

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Source: https://www.theaccountant-online.com/news/frc-outlines-measures-to-make/