Small and medium-sized enterprises (SMEs)
4 minute read
Background
Small and medium-sized enterprises (SMEs) are an important bedrock for the UK economy, acting as drivers of innovation and job creation employing around 16.5m workers. The UK's long-term economic success requires an environment that supports these businesses to start-up, scale-up and succeed.
Given the important role of audit in businesses securing capital needed to grow and scale, the FRC launched its campaign to help small and medium-sized enterprises (SMEs) access appropriate audit services and to assess, and where possible reduce, the reporting burdens these businesses experience.
Audit
Market Study
Overview
In March 2026, the FRC published the final report from its market study to better understand how effectively the audit market serves the needs of SMEs and any challenges they face in securing appropriate audit services.
In the FRC's view, the audit market for SMEs is broadly functioning well with strong competition and good availability of audit services. Additionally, most SMEs have reported no issues in finding an auditor, and those the FRC interviewed as part of the market study described the audit fees they paid as representing good value for money.
In undertaking the market study, the FRC heard there were opportunities to support more efficient and proportionate audits of SMEs. Specifically, there are concerns that the regulatory requirements for delivering SME audits, combined with the supervisory environment for the auditors delivering these services, can lead to more work being done than is necessary relative to the complexity of these businesses
While the SME audit market is functioning well, these issues, if resolved, can result in meaningful improvements for SMEs and those who provide audit services to them.
Findings and FRC activity
Regulatory requirements
There is a perceived lack of scalability of auditing standards and a belief that further support would be useful to aid proportionality in auditing standards.
The FRC published Practice Note 28: Guidance for audits of small and medium-sized entities in March 2026 following a consultation launched in July 2025. Practice Note 28 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 small and medium-sized entities in a scalable, proportionate, and effective way.
| Name | Practice Note 28: Guidance for audits of small and medium-sized entities |
|---|---|
| Publication date | 24 March 2026 |
| Type | Practice note |
| Format | PDF, 4.0 MB |
The FRC Professional Body Supervision (PBS) team's forthcoming working group involving representatives from the Recognised Supervisory Bodies (RSBs), including their inspection teams, will be responsible for facilitating the embedding of Practice Note 28 into the RSBs' supervision of SME audits.
The FRC launched a call for views on the International Standard for Auditing for Less Complex Entities (ISA for LCE) to inform its ongoing engagement with the International Auditing and Assurance Standards Board. The FRC is seeking to better understand stakeholders’ views on the ISA for LCE, including desired amendments for the standard at an international level.
The FRC's Audit and Assurance Sandbox has an ongoing initiative exploring materiality judgements in SMEs. It aims to understand how judgements are made and the challenges faced when applying materiality in the context of SMEs, and to provide confidence in the proportionate application of the International Standards on Auditing (ISA) UK.
Regulatory requirements
The Ethical Standard might impact the ability of SME auditors to provide additional services to their audited entities; but some audit firms may not be taking advantage of the existing exemptions to the Standard’s requirements.
In 2026 the FRC will work with stakeholders operating in and overseeing the SME audit market to identify misunderstandings relating to the Ethical Standard and, where relevant, application of the Provisions Available for Audits of Small Entities (PAASE). The FRC will develop additional supporting and educational material to address these misunderstandings.
The FRC will use its PBS working group with representatives from the RSBs as the initial forum for this activity.
Regulatory supervision of SME audits
The existing supervisory framework for SME audits may discourage some auditors from adopting a more proportionate approach to audits leading to additional work being performed.
The FRC PBS team is establishing a working group in collaboration with the RSBs which is focused on ensuring consistency in supervisory approaches taken by the RSBs, particularly in respect to enabling proportionate audits. This working group will also have an important role in identifying, and working to address, where steps taken to enhance audit quality in the Public Interest Entity audit market may have unintended consequences for smaller audits.
The FRC will publish a report on the activities of the working group in 2027.
Technology
Smaller audit firms may lack resources and technical knowledge to implement and customize technology. This can limit smaller audit firms' ability to invest in audit-related technology, and if they do, they rely on “off-the-shelf” third-party solutions.
The FRC will launch a Technology Sandbox as part of its Innovation and Improvement Hub which will include supporting smaller audit firms to explore, test and critically evaluate the adoption of new technologies.
The audit product
While audits offer value for money to SMEs, they may not always represent the most proportionate course of action for all SMEs.
Knowledge and resource constraints
Understanding and knowledge of audit varies across the SME audit market.
The FRC will, in collaboration with the RSBs through the PBS team's working group, develop further supporting materials highlighting the value of audit to SMEs and how best they can utilise and prepare for the audit process to derive further benefits.
Any further materials developed will build on existing supporting material which the FRC has published to help SMEs confidently and effectively engage with the annual audit process.
Reporting
SME Discussion Forum
The FRC has launched a new discussion forum for stakeholders to share and discuss insights from applying FRS 102. This forum will provide an opportunity for industry colleagues, including SME preparers and those providing accounting or auditing services to SMEs, to engage with members of the FRC's policy team responsible for setting and updating the standard.