Supporting UK SMEs to grow and scale
Published: 29 January 2025
9 minute read
Kate O'Neill, Director of Stakeholder Engagement and Corporate Affairs, is joined by Richard Moriarty, CEO, Mark Babington, Executive Director of Regulatory Standards, and Miranda Craig, Director of Strategy and Change to discuss the launch of a year-long campaign to help small and medium-sized enterprises (SMEs) access audit services and reduce reporting burdens where possible to support their growth ambitions.
Transcript
0:11
Hello there and welcome to the latest FRC in Conversation podcast.
0:15
My name is Kate O'Neill.
0:16
I'm the Director of Stakeholder Engagement and Corporate Affairs at the FRC.
0:20
And this morning, we're talking about a very important project that the FRC is launching today and about how the FRC can support the very important role of small and medium sized enterprises in the UK.
0:35
This morning, I'm joined by our Chief Executive Officer, Richard Moriarty, Mark Babington, Executive Director of Regulatory Standards and Miranda Craig, our Director of Strategy and Change.
0:46
Welcome all.
0:48
And first question to you, Richard.
0:50
This project's been referenced in our recently published strategy plan and budget.
0:56
Do you want to give some colour as to why it's such a key project for the FRC?
1:02
Thanks Kate.
1:02
The first thing I would say as to why this is so important is to recognise that SMEs are a really important bedrock for the UK economy and job creation and innovation.
1:14
Something like half of all business turnover in the UK is generated from SMEs and between them they account for nearly 17,000,000 jobs.
1:23
And I'm really keen that the Financial Reporting Council does its bit to support their growth and their ability to compete and scale.
1:32
And I think there are a number of areas of our strategy and our work that relate to this.
1:38
And first is in relation to audit.
1:42
I'm really keen to make sure that the market for audit for SMEs is vibrant.
1:47
SMEs need good quality and proportionate audit to not just access capital to allow them to grow, but also for many of them.
1:55
It's a statutory requirement.
1:57
So making sure that market and understanding that market works is really important to us.
2:02
And also the audits generate high quality outcomes but are proportionate and affordable to those that need them.
2:11
We also have another role at the FRC to make sure that the UK GAAP and the financial reporting requirements are proportionate and we keep those under review and that is something we will be looking at as well.
2:24
So I'm really excited about this work that we are doing and I think it's really important that we do all we can to help those businesses, you know, prosper in the future.
2:35
So Richard, when you talk about this project, I mean, how do you think about it?
2:39
Because it would be easy for people to focus on large companies that operate out of the bigger cities.
2:45
How do you think about it in terms of the whole of Britain and as you said, SMEs being such of the backbone of employment turnover growth.
2:53
So how are we thinking about that approach?
2:56
The important point for me, Kate here is not just the economic significance of the SME sector in terms of 17,000,000 jobs and supporting half of all business turnover in the UK.
3:10
It's that SMEs reach all parts of the UK and are very critical to all regions of the UK.
3:17
And I'm really keen that the FRC continues to support their growth and development.
3:22
Richard, this FRC project of course, is aligned to some of the ongoing work that the government's undertaking in, I guess what some people are classifying the smaller end of the UK business market.
3:34
That's right, Kate.
3:35
This work really complements the work that Jonathan Reynolds, the Business Secretary, is doing to lift the burden of reporting, particularly on the very smallest businesses and looking at reporting thresholds.
3:47
So I think there is a broad suite of measures which between the government and the FRC will really, hopefully, when they're delivered, help in terms of the proportionality and cost for those smallest businesses up and down the country.
4:01
We've spoken not just in the strategy, but quite often about maybe reminding people.
4:06
But the FRC is responsible in a number of different ways for the whole of the audit market ecosystem.
4:12
Because, yeah, there may be some people out there, Richard, who think, yeah, but you guys are just about the big auditors, big companies.
4:18
Why is helping the smaller enterprises access audits so important?
4:24
Well, you're right, Kate.
4:25
I mean, a lot of our work does focus on large businesses and big corporates, but also we must remember that the FRC, we have a responsibility for the whole of the audit market.
4:36
And also back to the point I made earlier, SMEs generate over half of the business turnover in this country, generating 17,000,000 jobs and a lot of them doing really innovative work.
4:48
So I'm very keen that we support them.
4:50
And good quality audit is often a thing that is really necessary for these businesses to access capital, debt and equity to allow them to grow, to compete and trade internationally.
5:03
And I want to make sure that the FRC plays its full role in supporting those businesses.
5:08
When you've been out and about talking about this project, as we pulled it together, put it in the strategy, what's been the reaction from stakeholders around our ecosystem?
5:17
Very positive.
5:18
I mean, naturally they will like to see the detail, engage with us, but so far I'm getting a very positive reaction that this is a legitimate set of issues for the FRC to be tackling in 2025.
5:31
So Mark, your team sets standards.
5:33
I'm not reminding you of that.
5:35
I'm just reminding our listeners.
5:36
And those standards for those people, perhaps not as much in the know, are called ISAs.
5:41
So how are you thinking about that?
5:44
Because I guess people like to play the blame game saying oh it's the regulation's fault or it's the auditors' fault, that things are difficult, burdensome.
5:52
So how will the project support proportionality, as Richard mentioned, but also helping the perceived burden of reporting reduce?
6:02
So one of the things about the ISAs, Kate, is they include provisions to help with the scalability of their application.
6:10
So they're intended to be used in an audit regardless of whether you're a small or medium sized company or a big FTSE listed company.
6:18
The problem is that those scalability provisions aren't consistently used and aren't used well.
6:23
So we're going to be developing some guidance specifically designed for the SME sector to ensure that auditors are maximising the use and their application of scalability provisions.
6:36
And therefore they're not doing work that doesn't need to be done and they're making sure they're pitching it at the right level for the size and the complexity of the business they're auditing.
6:45
I guess for the auditors that's a useful tool.
6:48
But what about for the companies who are engaging auditors?
6:51
Because, you know, they're probably going to say we're not experts.
6:53
You know, the auditors sometimes know best.
6:55
How are we thinking about their role in this?
6:58
So we'll be working with you, Kate, because we want to be able to help owners and managers of SME-run businesses to be able to ask difficult questions of their auditors.
7:10
So when they say this is what your audit's going to cost and this is the work we're going to do, we want to help business owners be able to have a dialogue with their auditors and actually work out whether all of this work is really needed.
7:22
You know, are they actually taking advantage of the controls that a business has in place?
7:27
Are they designing their audit procedures in a way that is right for the size and complexity and risk of the entity that they're auditing?
7:36
I think too often there's a sort of one-size-fits-all and that's not really maximising the benefits of what the ISAs can do.
7:44
I guess.
7:44
Mark, yeah, we've talked a lot about audit and the audit market, but a lot of this is about financial reporting and general reporting as well.
7:52
And that of course, is in your area of the FRC, the accounting standards.
7:56
I mean, how are the accounting standards being used or developed to help smaller businesses who probably are less complex or have less need for the full requirement of some of the FRS standards?
8:11
So the largest businesses, Kate, are required to report under IFRS.
8:16
We develop a suite of UK GAAP standards, so reporting for UK businesses which are proportionate and which are a scaled down version of IFRS, but they allow you to meet the broad requirements.
8:29
So for instance, if you're a business that's consolidating into a group, you can report under UK GAAP and you'll still be able to consolidate.
8:39
But we don't just issue one UK GAAP standard. We have a suite of standards recognising that there are different types of businesses.
8:47
So FRS 105 for instance, has been specifically designed for reporting by micro companies and there are a lot more micro companies now since the Secretary of State's proposals have come through about increasing the thresholds.
9:02
So more companies fall into this term now that offers a very much reduced and less burdensome way of reporting.
9:10
We also issue FRS 101, which offers a reduced disclosure framework, so less information that companies have to provide so it's less burdensome on them, less information to audit, so it makes the audit more scalable too.
9:25
Are those two important linked areas financial reporting and audit?
9:29
I'm really going to be core to this part of the whole project in understanding the interplay between the two.
9:35
I think so absolutely, Kate.
9:36
And you know we've said many times before when we're talking with stakeholders about the importance of making that link between well-run businesses proportionate and effective reporting and good audit.
9:49
This allows it all to link together.
9:51
Yeah, very, very true.
9:52
Thanks Mark.
9:53
Miranda, your team is going to play an important part by launching a market study into the audit market of SMEs and those market studies are great tools for regulators to use to really explore what's going on and come up with some recommendations.
10:10
So what do you think we're going to kind of be looking at?
10:13
And have you got any early expectations of what you think you're going to hear?
10:17
Yeah, well, thanks, Kate.
10:18
You're right.
10:18
The market studies are really important part of this and we're going to use it to inform the work that Mark's just described and make sure that our output in terms of guidance to support both audit practitioners and SMEs, it's really targeted at what they need.
10:32
You know, as you said, we're launching an exploratory market study.
10:35
That means going quite high and wide to start with quite broad questions.
10:38
And what we're looking to develop our understanding on is particularly the dynamics around their reporting and audit requirements.
10:45
You know, who are they obtaining audit from and what's driving that?
10:49
Because as Richard has pointed out earlier, there's a subset of this group that have to have an audit by law.
10:55
But quite a few of them are choosing to have an audit because they need that to supply to the bank or their investor, their provider of capital to support the business case, their strategy and to access that finance to grow.
11:07
So, you know, there could be very different reasons and needs behind seeking that audit from those two different groups.
11:14
What is the value they place on the audit and, and do they think they're getting that and you know, what role can we play as a regulator to smooth the way and make sure that the product that businesses are obtaining is the right one for the circumstances?
11:28
Richard, I mean, from what you've said in your opening remarks, this is a whole of the market and I mean the audit market issue because many of these smaller businesses most likely use smaller audit firms who are often in the first instance really under the remit of the professional body.
11:46
So I guess their part in this project is going to be key as well.
11:50
That's right, Kate.
11:51
And we will work very closely with the professional bodies to make sure that the whole audit market does work.
11:58
There are two other things that I'm keen that we consider this year, which I think hopefully will make a difference.
12:04
The first is where we've got smaller audit firms that are looking to scale up themselves to do more complex audits.
12:11
I'm very keen that the FRC works with them through our scale box and other initiatives to help build their capabilities and their capacity.
12:19
And the second thing that we want to do is develop a practice note for the audits of SMEs that auditors can use, which really hits the sweet spot between making sure the audit is of sufficient quality and integrity, but is proportionate and no more than it needs to be given the risk of the entity.
12:39
And we think that will help the market develop as well.
12:42
That's a really important point to make.
12:44
You know, these are lots of different types and sizes of firms involved.
12:48
So there's a number of work streams.
12:49
Mark, you've talked about where the standard setting area will be involved.
12:54
Also some myth busting, I guess to kind of, as you said, to say, this is what standards are, this is what they're not.
13:01
This is why they're important.
13:02
And Miranda.
13:03
With the launch of the market study, I guess stakeholders can look on our website for how to get involved because we'll be, I guess, looking for opportunities to speak to as many as possible through roundtables, webinars, et cetera.
13:17
Absolutely, the more the better.
13:18
And I think that's in three chunks.
13:20
So obviously, we want to hear from these small and medium enterprises specifically and the bodies that represent them.
13:26
We want to hear, as Richard said, from audit professional bodies and audit practitioners on their challenges.
13:31
But also we really would value hearing from those in the finance sector as well to understand what is it that they're looking for when they're seeking the audit of a business that they're lending to or they're investing in.
13:42
So yeah, we're going to publish an invitation to comment with those questions and we'll be holding round tables.
13:47
You can go to the website.
13:49
Any stakeholders who want further information can come to your team and contact them via [email protected].
13:59
Well, it's an exciting project to be kicking off the year, incredibly relevant in an environment where rightly growth is front and centre for not just the government but the whole of the UK economy.
14:11
Absolutely, Kate.
14:12
It's really important that we focus on growth, but actually for us, it's part of our core purpose.
14:18
The FRC stands for pursuing the public interest by upholding high standards of governance, financial reporting, audit and actuarial work that supports economic growth.
14:29
So this work that we're doing for SMEs is central to that mission.
14:34
Thank you all.
14:35
We will be coming back to listeners as the project progresses.
14:38
Keep an eye out for subscriber notes and on our website.
14:42
And of course, as Miranda says, if you want to be involved, we really welcome you contacting us.