Many different perceptions exist as to what constitutes a "smaller" entity. Some think of a local, family-owned hardware store or corner bakery as a typical small business. Others may think of a not-for-profit entity that generates several million dollars in annual donations. Others may consider a small entity in the context of a company that has been public for many years manufacturing an innovative product, and which now generates annual revenue of several hundred million dollars with hopes that future growth will catapult it to the Fortune 500 category. Depending on perspective, any or all of these may be considered "smaller" entities.

The Framework does not provide a definition in terms of revenue, capitalization, or other factors; that is the role of regulators or other parties. Instead, the term "smaller" rather than "small," suggests there is a wide range of entities to which these considerations apply. The focus here is on smaller entities that have many of the following characteristics:

The last bulleted item, limited ability to maintain deep resources, is a frequent cause of smaller entities being lower on the economies-of-scale curve. Often, but not always, smaller entities have a higher per unit cost of producing a product or providing a service. On the other hand, many smaller entities achieve competitive advantage in cost savings through innovation, lower overhead (by retaining fewer people and substituting variable for fixed costs via a part-time workforce or variable compensation plans), and narrower focus in terms of product, location, and complexity.

Economies of scale is often a factor affecting support functions, including those that directly support internal control. For example, establishing an internal audit function within a hundred-million-dollar entity likely would require a larger percentage of economic resources than would be the case for a multi-billion-dollar entity. Certainly, the smaller entity's internal audit function would be smaller, and might rely on co-sourcing or outsourcing to provide needed skills, where the larger entity's function might have a broad range of experienced personnel in-house. But in all likelihood the relative cost for the smaller entity would be higher than for the larger one.

None of the above characteristics by themselves are definitive. Certainly, size, by whatever measure—assets, revenue, spending, personnel, or other—affects and is affected by these characteristics, and shapes thinking about what constitutes "smaller."