FRC Moves to Lighten the Audit Load for SMEs as New Findings Highlight Systemic Strains

Key Takeaways

• FRC Launches SME Audit Consultation: A new draft Practice Note aims to help auditors apply standards more proportionately for smaller and less complex entities.
• Systemic Challenges Identified: The FRC’s market study highlights issues around regulatory burden, supervision, technology access, and audit value for SMEs.
• Supervision and Standards Seen as Overly Rigid: Smaller firms report pressure to “over audit” due to one-size-fits-all regulatory expectations.
• Technology Barriers Limit Innovation: Many smaller audit firms lack the resources to implement or tailor audit tech, hindering efficiency.
• Ethical Standard Creates Confusion: Restrictions on non-audit services often clash with SME expectations, exposing an “expectation gap” that drives up costs.

Deep Dive

The UK’s audit watchdog is turning its attention to the backbone of the economy (small and medium-sized enterprises (SMEs)) with a new push to make audit requirements more proportionate and accessible. On July 17, the Financial Reporting Council (FRC) released emerging findings from its ongoing market study into the SME audit landscape, alongside a public consultation on draft guidance aimed at helping auditors take a more tailored approach with smaller businesses.

It’s part of a broader campaign by the FRC to reduce unnecessary reporting burdens while ensuring SMEs can still access the audit services they need to secure capital and grow.

SMEs may not always make headlines, but they drive employment and innovation across the UK. In 2023 alone, around 2,000 audit firms carried out over 70,000 statutory and non-statutory audits for SMEs, generating £1.5 billion in fees. And while the FRC found that nearly 90% of SMEs who needed audits were able to find auditors without significant difficulty, the story behind those numbers reveals a more complex and often frustrating experience for smaller firms and their clients.

A Market Straining at the Seams

The FRC’s findings, shaped by input from more than 500 stakeholders, paint a picture of a system designed with large corporations in mind, leaving small firms to navigate a maze of standards, expectations, and limitations that don’t always fit the scale or complexity of their work.

Many smaller audit firms reported feeling pressure to “over audit,” applying standards meant for large entities to SME clients simply to stay on the safe side of compliance. That can mean more work, more documentation, and higher costs for audits that may not always be necessary, or even helpful, for the smallest companies.

The FRC’s consultation centers on a draft Practice Note designed to provide practical guidance on how existing auditing standards can be applied more proportionately to smaller and less complex entities. It’s a technical fix with wide-reaching implications: get it right, and it could reduce costs, streamline work, and encourage more firms to serve the SME market confidently.

The findings also call attention to the regulatory environment itself. Smaller firms said they often felt supervisors expected the same level of rigour for SME audits as for large, high-risk engagements, regardless of the relative complexity or purpose of the audit.

The FRC is now working with Recognised Supervisory Bodies (RSBs) to explore how supervision can be better calibrated to risk and complexity, without compromising quality or independence. This work also ties into the FRC’s wider review of its audit supervision strategy, which aims to make oversight more agile and fit for the future.

The Tech Gap

Technology has become central to the modern audit, but many smaller firms say they’re being left behind. The study found that limited resources and technical know-how mean many firms are leaning heavily on off-the-shelf tools, tools that often aren’t designed with SME audits in mind.

To close that gap, the FRC plans to convene technology providers and audit firms to develop more tailored, cost-effective solutions. The goal is not just to digitize existing practices but to encourage innovation that reflects the unique needs of smaller entities.

Another key insight is that not every SME sees an audit as worthwhile. While audits can help with securing financing or enhancing governance, some businesses, particularly those not required by law to obtain one, view it as a box-ticking exercise with limited return.

Stakeholders suggested alternatives like limited assurance engagements, agreed-upon procedures, or higher-level financial reviews might offer better value in certain cases. The FRC is now exploring whether regulatory frameworks could support a wider range of assurance offerings, especially for smaller firms that don’t require a full statutory audit.

Mind the Gap

Finally, the report flags a persistent “expectation gap” between SMEs and their auditors. Business owners may expect auditors to provide broader financial advice—something restricted under the FRC’s Ethical Standard, or they may simply not understand the scope and purpose of an audit.

To help bridge this divide, the FRC is calling for more targeted education materials, case studies, and guidance aimed at both auditors and SME clients. The idea is to empower SMEs to better prepare for audits and engage more productively with the process, reducing inefficiencies on both sides.

This isn’t just about tinkering at the edges. As Miranda Craig, Director of Strategy and Change at the FRC, put it, “We’ve listened carefully to stakeholders across the audit market and are supporting the system to take immediate action to address their concerns.”

And support is already surfacing. Paul Wilson of the Federation of Small Businesses called the proposals “sensible and practical,” saying they should help cut red tape and reduce costs. Martin Clapson, Chair of the APA, welcomed the attention to proportionate standards, calling it “a vital step for owner-managed and entrepreneurial businesses across the UK.”

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