Response 5 - SME Alliance Limited

Part One – Regulatory Strategy

Question One: Regulatory Strategy

Do you have any comments on the UKEB's 2026/27 (Draft) Regulatory Strategy? Please provide your rationale and any supporting comments, as necessary.

1Extremely clear and easy to work with. Thank you. Date of May 2021 also helps.

2Every publicly issued document should be capable of being read on a “stand-alone” basis, free of any acronyms unless explained.

3Each body referenced must also be explained as well as their relationship to each other, including from inception. For example ONS has confirmed in reply to an Fol request (Fol is Freedom of Information Act) that FRC (Financial Reporting Council) is Central Government, and integral part of the DTI, BERR, BIS, BEIS and whatever trade and employment departments have followed. Therefore each body created, influenced by, reporting to, etc the FRC is part of the same.

4It is unquestionably the case that FRC ought to have been part of the DTI, BERR, BIS etc audit by the NAO (National Audit Office) otherwise the result was wholly incomplete and seriously unreliable. An adjustment needs to be made from at least 2005, in order to conclude, or even address the question, of this separation and whether the objectives of the department without FRC and the FRC were pulling in diametrically opposite directions, with the FRC becoming a defacto voice for vested interests (which fund it) and not the law enforcer, standard setter and policeman the public expected and paid for through extortionate charges (fee rates) imposed by the assurance reporters, tax agents etc the FRC was expected to force to work properly. "Competent Authority" is a loaded term to live up to.

5All communications with the SoS (Secretary of State) should be publicly available unless there is some national security over-ride. A public consultation should always explain how one got to the status quo, and how moving forward is part of a thought out continuum. It should not be a mechanical churning of ephemeral slogans, uttered in lieu of thought-out, articulated policy, of which there is a dearth.

6Moreover, it is crucial to go back to the very first standard on any topic and to be able to publish the whole set from the start, with a commentary (contemporaneous) as to why changes were made. Warning flags there is a brewing problem include taking guidance based on principles and making it so specific, that it then mediates in favour of a robotic approach in order to tick boxes. This is hopeless. Equally dangerous are developments over time which cause dilution of the Companies Acts, thereby rendering reporting unsafe with chaotic and unpredictable consequences. The FRC has no publicly accessible library or professional librarian making this all accessible to the public, so they can know what they are doing when they contemplate contracting with a potential assurance reporter. Moreover there is still no parity in standards between assurance reporting, direct access (colloquially “audit”) and assertion based reporting.

7The result of that last comment is that an assertion based report may say "internal controls exist but they have not been audited by us" and an auditor's report may be published which omits the statement, "there was reliance by us on the assertion based report and the internal controls were not explicitly tested”. This can be significant for example PwC report to FSA, started before PwC incorporated in 2002, on HBOS, reporting to FSA in July 2004. KPMG were auditor. There is no record of this report being public until January 2009. Bank of Scotland customers would have wanted it. PwC customers would have wanted it. KPMG customers would have wanted it. LBG customers, investors, bondholders, everyone else would have wanted it. SME Alliance Ltd (SMEA) members would have wanted it. It is very hard to imagine who would not have wanted it.

8The question of the boundary around the entity that reports and its auditor has become extremely intricate due to interdependencies and entities investing in each other, for example with insurance companies and the insuring or underwriting of components of a balance sheet. Tied agents, incentivized, operating off balance sheet, to eliminate risk of comeback in respect of unbooked liabilities, should properly be included in the accounts, with group VAT registration. They are not and have separate employer PAYE number.

The natural outcome in a capitalist environment, is that what should be a failure, carries on, but must continue to incentivise third parties and continue, essentially as predator, until the risk of accountability is wholly eliminated.

These models are not captured in standards. They should be. Similarly the whole of the critical supply chain should be identified and risk of supply side disruption and mitigation included in narrative.

9The reports that oil, gas and other critical suppliers make to regulators, for national defence and other reasons, are crucial learning material for what must be in accounts. Global turbulence does not stop for a frozen set of standards. Issues of national security and economic stability should be first and second priorities.

10The Companies Acts are the solid benchmark. The Companies Act 2006 made up a term "Recognised Professional Bodies". This is a fiction. It should be removed from the Act to see what the Act does without it, if anything, beyond creating a void where the 1985 Act used to be. Counsel has settled that if a new Act is this uncertain, there cannot be a void, and one reverts to the previous. This needs to be clarified in the Administrative Courts (or Companies Court) (task to do).

Part Two – Research topics

For background and context for the research topics included in questions one to three below, please refer to the Annex of this document.

Question One: Accounting for Intangible Assets

Do you agree with the proposed approach of the UKEB:

• continuing to develop an understanding of what information is most useful for stakeholders;
• developing potential principles-based accounting treatments; and
• considering potential connectivity issues with ISSB Sustainability Disclosure Standards

Yes ☑ No ☐

Please provide an explanation for your response as well as any alternative suggestions.

1Companies which floated under Companies Act 1985, must report at least to that standard.

2Signatures and dates must be shown. Addresses must be given. Companies filings must be signed by named person and office. The cancellation of annual returns must be evaluated, especially given companies investing in each other. Who can decide where to put their pension money in an overhyped tech market?

3The term "stakeholder" has no true meaning. It is important to say who is meant. For example an employee contemplating accepting a job offer and wondering whether the employer will be there in a year's time or whether the job is likely to require them to compromise their own personal moral and ethical standards?

4The extraordinarily high threshold before an auditor must be appointed. Suppliers to someone who has not been audited should be worried. An auditor who takes advantage of the exemption, renders themselves wholly obsolete. Then what?

5Hypothesising what notional stakeholders want, is speculative. What a reliable supplier must prove to be registered, also clarity on his supply chain, is crucial.

6Principles based accounting treatment has withstood the test of time (existence, matching, consistency, prudence). It cannot be refined further. Existential risk, to humanity, on the horizon with the next, or soon iteration of advanced AI, is incorrectly being ignored. Most businesses now fact huge threats. Focus is needed. Those profiting cannot be expected to have public interest foremost in their minds.

The FRC is not addressing these issues but is doing road-shows on digital accounts. The public needs these to be right, whether on parchment or anything else that cannot just be wiped out.

7Sustainability is a world of its own. The consultation closing 30 November 2025 showed how complex it has been made to be. Fundamentals are missed. FRC asked for input to its reply. However it will not hand out what it received.

Question Two: Carbon and Other Environmental Credits

Do you agree with the proposed approach of the UKEB:

• documenting the current schemes, disclosures and approaches adopted in the UK;
• considering potential principles-based accounting treatments; and
• assessing any potential connectivity implications for the financial statements from ISSB Sustainability Disclosure Standards.

Yes ☐ No ☐

Please provide an explanation for your response as well as any alternative suggestions.

NB Tried to press “yes” but not working

1Document from inception plus statement on objectives at the start and success.

2Yes but consider cases of rogue or opportunistic operators and develop improvements. There are examples in the courts. This is a cross border issue.

3The standards should be developed in parallel and be wholly consistent. “Connectvity" is the wrong word in this context.

Question Three: Fundamental issues or gaps with IFRS

Are there IFRS Accounting Standards that need to be developed or require fundamental revisions to ensure they continue to remain relevant in the contemporary business environment? Can you suggest a principles-based approach to address the issues you have identified?

Yes ☐ No ☐

Please provide an explanation for your response and any principles-based approaches that could address them.

NB Tried to press "yes" but not working

1Volume is not the issue. Streamlining and consistency is. Principles should be stated, then guidance on applying. Explanatory notes must be informative.

Question Four: Relative priority of research topics

Please indicate your view of the priority of research topics (1 Highest to 5 Lowest) considering their pervasiveness, feasibility, relevance to the UK and urgency. Please also add any alternative topics in the response box below the table.

Please provide an explanation for your rankings and a detailed description of any alternative topics.

Accounting for Intangible Assets (1)

Alternative: Unbooked fatalities omitted from cost of sales particularly on incorporation, reconstruction or group formation (1) -corollary to above:

Carbon and Other Environmental Credits (3)

– need to study market and rogue activities and cases in court to get to grips with issues as a precursor project. Three weeks by two experienced industry people is enough as they will collate the specialist reports.

Fundamental gaps and issues in IFRS Standards (2)

this is a permanent item. The whole set should hang together and not be intimidating to pick up and read.

Question Five: Any Other Comments

The UKEB welcomes any other feedback on this overall consultation.

Thank you for the chance to contribute SME Alliance Limited members' hopes for an industry that encourages transparency in its own operations, and which serves us, both quoted and private, in UK and cross border, with our interests at heart.

The FRC has not started to honour the commitment made to SMEs a year ago nor attempted any meaningful contact. This is a disappointing loss of opportunity given what it says in its notice about the contribution of SMEs to the economy.

FRC launches campaign to support UK SMEs to grow and scale News types: Generic Announcement Published: 29 January 2025

The Financial Reporting Council (FRC) has launched a year-long campaign to help small and medium-sized enterprises (SMEs) access audit services and reduce reporting burdens where possible. The initiative in turn aims to improve their access to capital and to support their growth ambitions.

SMEs are the backbone of the UK economy representing more than 99% of all private sector businesses with a shared turnover of around £2.75 trillion (52% of total UK business turnover) and employing around 16.6 million workers.

Access to audit is often important in supporting SMEs to secure the capital they need to scale, creating wealth and jobs. However, the FRC 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.

While the FRC's focus has traditionally been on the largest businesses, we believe there is more we can do to help SMEs too. As set out in the FRC's draft 3-year strategy published in December 2024, the campaign will examine how SMEs undertake financial reporting, use and access audit to access capital, and how the FRC can help audit firms apply audit standards proportionately to these smaller, lower risk and less complex companies.

This campaign will feature extensive and open engagement with our stakeholders including SMEs and their representatives, their capital providers, auditors who provide services to SMEs, and their professional bodies.

Further demonstrating this commitment, the FRC launched a consultation in December 2024 on proposed amendments to the Financial Reporting Standard (FRS) 101, aimed at enabling more cost-effective financial reporting group components that require less disclosure . This consultation closes 7 March 2025.

Richard Moriarty, Chief Executive, said: “SMEs are an important bedrock for the UK economy as drivers of innovation and job creation with their ability to access capital often dependent on having audited accounts. I'm keen that the FRC does what it can to support their growth and their ability to scale up.

This campaign across 2025 is focused on analysing how the audit market is working for SMEs, including the reporting and audit requirements they face, and ensuring they are audited proportionately including considering any steps the FRC can take to support this vital part of the UK economy. We look forward to engaging and listening from SMEs and those who represent them, their capital providers, and others with an interest in this important work."

Listen to the FRC's latest In Conversation episode where 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 the campaign. Activity across the year As part of this campaign, the FRC is announcing three strands of activity: Market study on SMEs

• On Monday 3 February, the FRC will launch a market study which will examine the issues affecting SMEs, including the audit and reporting requirements they must comply with.
• Market studies are a useful regulatory tool for exploring issues in a market, and can lead to a range of outcomes including richer insights about issues and proposals to improve how the market functions for SMEs.
• This exploratory market study will focus on the challenges faced by SMEs in relation to audit and reporting, where practitioners have difficulties in auditing SMEs, and understanding the decision-making process for SMEs who procure audit services when otherwise exempt.
• The FRC will be engaging with SMEs, their capital providers, audit practitioners who provide audit services to SMEs and the professional bodies who represent them.
• The FRC plans to publish early findings in the spring, and its final report later this year.

Guidance to support the proportionate audit of SMEs

• In spring 2025 the FRC will publish for consultation a Practice Note to support auditors of SMEs.
• 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, these scalability provisions aren't consistently used and aren't always used well.
• Practice Notes are a form of guidance which help auditors identify opportunities to proportionately apply auditing standards.
• The FRC plans to publish its final Practice Note before the end of 2025.

Support materials for SMEs

• Across 2025, 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.

Question Six: Use of large language models

Yes ☐ No ☐

If you used a large language model in developing your responses, please disclose the model and the query used.

No