Recognizing the large number (1.3 million) of small and emerging entities (SME), the United Kingdom’s Financial Reporting Council (FRC) conducted a market study to determine the characteristics and impact of their access to audit providers. In February 2025, over 500 SMEs were selected for evaluation with respect to engagement from the 2,000 audit firms that perform some 70,000 annual audits in the country.
The report on the first phase of the study, published in July 2025, focused on emerging findings and potential remedies in five areas:
1. Regulatory requirements relating to SME audits.
2. Regulatory supervision of SME audits.
3. Technology used for SME audits.
4. The appropriateness of the audit product to certain SMEs.
5. Potential knowledge and resource constraints within SMEs.
For regulatory requirements,
1. Many stakeholders perceive a lack of scalability and proportionality in auditing standards and think the standards do not address the needs of the SME audit market.
2. Many stakeholders consider that the Ethical Standard restricts choice and provision of services to SMEs that are disproportionate to the risk, but there may be a lack of understanding of the Ethical Standard by audit firms.
A consultation, Guidance for audits of smaller and/or less complex entities - Practice Note Exposure Draft, released in July 2025, “provides guidance to auditors on how to apply the requirements of the International Standards on Auditing (ISAs) (UK) to the audit of financial statements of smaller and/or less complex entities in an effective, scalable, and proportionate way.” The proposed Practice Note considers less complex entities (LCE) and SMEs as those where:
"- Ownership and/or control of the entity is concentrated in a small number of individuals (sometimes a single individual) who are actively involved in managing the business; and
- the operations are uncomplicated with few sources of income and activities; and
- business processes and accounting systems are simple; and
- internal controls are relatively few and may be informal.”
Also, efforts will be made to provide better clarity and understanding of the Ethical Standard as to what services the auditor may perform while maintaining appropriate levels of independence, integrity, and objectivity.
For regulatory supervision,
- Many smaller audit firms believe regulators expect them to do more work for SME audits than may be necessary.
In the FRC’s 2025-26 Annual Plan and Budget, one of the objectives was to: “build on our deep understanding of corporate reporting and the audit and actuarial markets we oversee, and by being agile, we will identify and prepare for opportunities and challenges on the horizon.” The Market Study was a result of this objective as well as the need to “develop guidance to encourage auditors to apply the ISAs (UK) in a proportionate and scalable way.”
For technology,
- Smaller audit firms may lack resources and technical knowledge to implement and customise technology resulting in overreliance on third party technology that may limit innovative approaches to SME audits.
Typically, smaller auditors rely on off-the-shelf programs, with limited ability to modify for other than standardized applications. Assistance from the FRC could be helpful for supporting smaller auditors’ collaboration with technology firms.
For the appropriateness of the audit product,
- While audits can offer value to SMEs, they may not always represent the most proportionate course of action for all SMEs.
In some cases, the procedures required by an audit may be overkill, and not produce otherwise useful information. A targeted procedure may prove more beneficial. Alternative services, such as compilation, review, agreed-upon procedures, and other unaudited reports are available.
For potential knowledge and resource constraints,
- Understanding and knowledge of audit varies across the SME audit market.
Smaller audit firms often have less funds for keeping up on technical knowledge, and may not be able to devote adequate time to continuing education. A lack of sophistication and awareness limits the usefulness of the audit function.
In the United States, under the new administration, reduced emphasis has been announced for SEC audits, which should improve access for firms.
The second phase of the study will seek to gain input from the interested parties on these initial results, to chart future steps that will enhance opportunities for SMEs.
Further details can be found at SME Audit Market Study Emerging findings.
