In Conversation: Supporting growth through proportionate regulation
Published: 14 November 2025
10 minute read
Join Kate O'Neill, Director of Stakeholder Engagement and Corporate Affairs, Dhruve Shah, Deputy Director of Professional Bodies Supervision, and Laura Warren, Director of Market Intelligence & Insights, as they discuss some of the work the FRC has been doing this year to support growth through proportionate regulation, such as helping auditors tailor their approach to match the size and complexity of each client, because not all large companies are complex, and not all small ones are simple.
Transcript
00:00:09:20 - 00:00:31:19
Kate O'Neill
Hello there and welcome to another FRC In Conversation podcast. My name is Kate O'Neill. I'm the director of stakeholder engagement and Corporate affairs here at the FRC. And today's topic is an update on some of the major projects that have been underway for at least a year, if not more, here at the FRC. In relation to so many elements of our work at the FRC.
00:00:31:20 - 00:00:55:07
Kate O'Neill
Today I'm joined by Dhruve Shah, who's the deputy Director of Professional Body supervision, and Laura Warren, director of Market Intelligence and Insights here at the FRC. Welcome Dhruve and Laura, and I guess this is a good time to update our listeners on some of the progress of some of the big projects underway, like the future of audit supervision.
00:00:55:09 - 00:01:35:08
Kate O'Neill
Some elements of our E2E consultation that's currently underway, and the SMEs market study, which has been a really interesting project as it looks at that very important part of the UK economy. For me, a lot of people do think means micro companies, but in fact some very large employers and manufacturers across Britain are in fact caught by that small medium enterprise definition in the Companies Act, the law just don't get starting with you, because I know your team and I currently preparing their annual update on competition in the whole of the audit market, not just the larger end.
00:01:35:11 - 00:01:49:10
Kate O'Neill
So how do you look at this publication? Because I know you've been talking about this for a number of years through this publication. How do we improve choice, cost and availability of audit for the whole of the UK corporate market?
00:01:49:12 - 00:02:18:05
Laura Warren
Okay. It's great to be here, great to have the opportunity to provide an update. You're absolutely right. We're gearing up for our fourth annual competition update publication, which we traditionally publish in December. Really good opportunity for us to set out in a brief snapshot for our stakeholders, the latest available data on market dynamics. What is our approach to competition and developments in the market, and all the things that the FRC has been doing over the last year to promote a more vibrant and resilient audit market?
00:02:18:07 - 00:02:40:01
Laura Warren
So we are definitely focused on choice, cost and availability in that respect, and we've set out some of the key indicators for things like that audit firm, market share, switching rates and audit fees. And we've traditionally focused at the updates on the Footsie 350 and the wider pie audit market in relation to the data, because that's traditionally where we've focused.
00:02:40:03 - 00:03:04:18
Laura Warren
But we make clear in these competition updates. So as you said, we are considering the whole of the audit market. And last year's competition update. We were very clear about that. We set out that our solving approach is all about ensuring that we focus as the competent authority for audit in the UK on the entire audit market to ensure it functions effectively, and we really want to make sure that every UK company, big or small, has access to a good audit.
00:03:04:20 - 00:03:16:03
Laura Warren
And as you mentioned, some of our recent work, not least our SMEs Audit Market study over the last year demonstrates our interest and our commitment to improving the functioning of the whole audit market.
00:03:16:05 - 00:03:44:20
Kate O'Neill
Thanks, Laura and Dhruve. I guess people sometimes forget how important it is for not just making sure their accounts are in order and representing the true situation of their company going concern, etc. but audit helps companies access capital, whether it's through a bank loan, whether it's through the public or private market. So I guess it's easy for people to think audit is just maybe a function, but it's an important one in helping companies thrive and grow.
00:03:44:22 - 00:04:03:20
Dhruve Shah
Yeah, that's definitely true. So as we've engaged in the SMEs market study, we spoke to a couple provided by the lenders by the investment bank. And they've all flagged they see audit as a critical hygiene factor. So a high functioning company often comes with a true and fair audit opinion. So audit is incredibly valued by the wider sector.
00:04:03:22 - 00:04:33:21
Kate O'Neill
Hi. Good for both of you. I mean obviously it all starts with the audit standards, some of which are set at an international level. But the information that you're seeing in the SMB market study project, and I guess truth in the future of audit supervision, it's timely to review how both practitioners, but also companies are engaging with each other over what the requirements of the standards are and how to apply them in a proportionate way to reflect the nature of the companies.
00:04:33:21 - 00:04:51:16
Kate O'Neill
The type of activities they undertake and the sectors they work in. I mean, if you're looking at the part of the audit market on behalf of the FRC, the delegates to the responsible bodies who supervise and regulate the smaller end of the market, how important is that proportionality?
00:04:51:18 - 00:05:11:16
Dhruve Shah
Yeah, okay. I think the proportionality is absolutely critical. So here are the embassy. We regulate 30 odd Pi audit firms from the largest entities within the UK employing hundreds, thousands of individuals, delivering thousands of audits every year. At the smallest end to the market, you might have entities with a handful of staff that conduct 5 or 6 audits a year.
00:05:11:21 - 00:05:23:05
Dhruve Shah
And I think it's critical that the FRC audit regulation supervision model is proportionate and scalable to make sure that the smallest end of the market receives fit for purpose regulation.
00:05:23:07 - 00:05:47:11
Kate O'Neill
Law of the Pi definition public interest entity was put in place by the government some 16 years ago or so, and that was to very much a product of its time, recognizing some of the challenges in the corporate market at the time. But there is a difference between how Pi audits are undertaken and on Pi, which are usually smaller, perhaps less complex entities.
00:05:47:13 - 00:06:20:11
Laura Warren
Yes, absolutely. And it's clear from our SME audit market study that there are concerns about the perceived lack of scalability and proportionality in the auditing standards that were discussed, and also that many smaller audit firms believe the regulators are expecting them to do more work for SMEs. Audits that may be necessary. We have got quite a confused picture here, and this is why it's really helpful for us to do market studies such as this, to understand the entirety of the market and how it's functioning, and then think about what we can do in response to some of these findings.
00:06:20:11 - 00:06:51:24
Laura Warren
And I think there is more we can be doing, and we are now in the process of reviewing all the evidence we've gathered during the market study to think, what can we do next? Obviously, we've already put out the practice note, but there is more potentially. And so now, thanks to all the helpful submissions and evidence we've gathered from stakeholders, we're in a good position to think more carefully about what else we can be doing to support, as you said, this part of the market, rather than just the part the market focused on the public interest, the audits or indeed 4350 audits.
00:06:52:01 - 00:07:15:13
Kate O'Neill
And I'll come back to the practice note. I mean, I guess when the Pi definition came into existence, there wasn't such a dominant part of investment from private capital in the UK. So, Dhruve, there are some companies that are privately owned or invested in who are considered PiS, but in fact the same size or the same type of company as public interest entities.
00:07:15:15 - 00:07:44:15
Dhruve Shah
Yeah, absolutely. Okay. So I'm sure everyone listening to this UK supermarkets, two of the largest UK supermarket chains, our public interest entities listed on relevant stock exchanges, two of the largest UK supermarkets are privately owned and those will be directly supervised by the professional bodies, as opposed to the listed entities which you see provided by the FRC. So that's a really clear example where the Pi definition has artificially split entities that are actually in substance incredibly similar.
00:07:44:17 - 00:08:07:21
Kate O'Neill
But also the truth. Not every Pi entity has to be complex. I mean, they can be pi entities that do not have a particularly complicated business model. They don't operate in a risky sector. So I guess the FSA and the bodies have to look at the proportionality, but also drive. So much of this supervisory work is based in inspections which parts of the FRC do.
00:08:08:01 - 00:08:35:08
Kate O'Neill
Obviously the professional bodies undertake as well. Under the Future of Audit Supervision Strategy project that's underway and has been worked on during the whole of 2025. How is the FRC looking at the inspection regime? Because there are different aspects of inspection coming into play as a result of Ifcn one. And I'm leaving it to you, Dave, to explain to people what that acronym is, or maybe remind them of what that acronym means.
00:08:35:10 - 00:09:09:02
Dhruve Shah
Yeah, certainly. Okay. So I'll start with the acronym definition. So I assume one stands for International systems of Quality management. These are the procedures typically employed at a audit firm that support quality management. So these are elements of what you might Schwab as controls. So for example if you're taking on a large complex engagement, what oversight does the central management of an audit firm have in understanding whether there are any ethical conflicts, for example, or whether the audit firm has the expertise and capacity to absorb such a large, complicated audit?
00:09:09:04 - 00:09:38:09
Dhruve Shah
When we think about inspections with regards to audit supervision, I think people typically think about a graded foreign inspection. So that's when an inspector from a regulator, whether it's the FRC or a professional body, will take a copy of the firm's audit file and they will, for the most part, risk assess which areas they might want to look at based on underlying risk complexity, understand what documentation is in place on the audit file and form conclusion as to whether the audit meets quality expectations.
00:09:38:11 - 00:10:11:10
Dhruve Shah
You're right to flag the future of what is information. That's a credibly large project going on at the moment, and we sought views on inspections and we've also sought views on the future approach to system of quality management work that the FRC and the Rbnz might be doing. And we've also sought views on how the FRC and the professional bodies might collaborate further to harmonize the right tree regime, because at the moment, it's certainly fair to say there is a perception of a regulatory cliff edge between how the FRC deliver audit supervision and how the professional bodies deliver supervision.
00:10:11:12 - 00:10:41:05
Dhruve Shah
And in that vein, if you're seeking to tackle that head on. So I think just a little bit of context is really important as well. Therefore you work really closely with the professional bodies. So the FRC delegate audit supervision responsibilities to the professional bodies for 3500 odd lumpy audit firms. My team professional body supervision work really closely with the professional bodies to understand their processes and their policies, and how they discharge those processes and policies every year to ensure the supervision remains fit for purpose.
00:10:41:07 - 00:11:05:04
Dhruve Shah
And then, as we've seen, feedback responses to the Future of Audit Supervision program, you know, just to summarize some of them, so the majority of respondents called for closer alignment between the FRC and the RSP. They want to feel like our inspection regimes are consistent. So inevitably the FRC picks up the largest, most complicated audit. So, you know, their perceived might take longer on those assignments.
00:11:05:04 - 00:11:24:00
Dhruve Shah
But I think stakeholders want to understand that if there's an audit of similar size and complexity, regardless of who supervises it, whether it's the FRC or the SBS and what some can expect a similar amount of time, a similar amount of risk focus, and ultimately a similar grade. Despite who is regulating and supervising that audit.
00:11:24:02 - 00:11:45:03
Kate O'Neill
I guess if what you're saying is this important, work's been going on for some time, as it should, because it's a timely review of our supervisory approach. It should take the time to really come up with thoughtful suggestions and approach going forward. So I guess for our listeners, it's a bit of a watch this space on this project floor with the whole of the audit market.
00:11:45:03 - 00:12:18:20
Kate O'Neill
I mean, the audit market has very many different drives. As we talked about the PA regime driving some of the audit activity in the UK market, then I guess it's proportionality and scalability. What would you say to preparers who feel, well, I've been told I've got to do this. Do you think there should be richer conversations between the practitioners and the preparers on this risk based approach, the way in which to look at the complexity of an entity, what's really required, rather than just applying the standard in a blanket way.
00:12:18:22 - 00:12:53:20
Laura Warren
Solutely. So it's certainly an emerging finding from the SME audit market study that there is definitely a variability in the understanding and knowledge of audit across the SMEs and their auditors in respect of what might be relevant for an SMEs audit. As we set out in the market study emerging findings, we've been exploring the scope, but in the last few months, with professional bodies and others about whether there is an opportunity to develop targeted educational explanatory materials to help address that issue and to enhance the understanding, enhance the effectiveness and efficiency of audits.
00:12:53:22 - 00:13:17:21
Laura Warren
But I think I would just say we really need to be mindful here about companies, often, especially smaller companies that time and resource poor. So any in education any more we can do in relation to this, we need to be thinking about what's the most effective ways and what gives companies the best possibility of engaging with their auditors to make sure they're getting the right product for their size, their complexity in their business operations?
00:13:17:23 - 00:13:42:06
Kate O'Neill
Thanks, guys for the update. I mean, these projects, I think we'd be very much united in saying it's been fantastic to see how many parts of our stakeholder universe, not just practitioners, but preparers, SMEs, larger companies, everybody's really getting involved in both the same project, but also faster to really help us shape what our future supervisory model should be for the FRC.
00:13:42:11 - 00:13:52:24
Kate O'Neill
And I really like what you said about the inspection regimes being flexed to include other elements, particularly around quality management in them going forward.
00:13:53:01 - 00:14:10:12
Dhruve Shah
Yeah, definitely. And I'll probably just ask for a special shout out to the first bodies at this point, because their engagement has been fantastic. And, you know, we're really keen to collaborate with the professional bodies as we do currently, but going forwards as well, to make sure we've got that harmonized approach to audit supervision across the whole audit market.
00:14:10:14 - 00:14:37:20
Kate O'Neill
And I guess that's going to be something that really is an aim of this ongoing project. So watch this space, I guess. Lord, hear more about what the market findings look out for the excellent annual update on competition in the audit market. Andrew, there's going to be more engagement as the project continues. So I'd ask listeners today to watch out for those updates so you can get involved in helping us shape the future of audit supervision at the FRC.
00:14:37:22 - 00:14:57:12
Kate O'Neill
Thank you, Laura Warren and Dhruvee Shah for bringing us up to date on these important ongoing projects. And as I say, watch this space for more updates and not least the annual competition Review, which is scheduled for release in the next couple of weeks. And thanks for listening to another FRC in conversation podcast.