FRC takes action to support effectiveness of audit market for SMEs
News types: Consultation Announcement
Published: 17 July 2025
The Financial Reporting Council (FRC) has today published emerging findings from its market study examining how effectively the audit market serves small and medium-sized enterprises (SMEs) and has launched a consultation on new guidance to help auditors deliver more proportionate audits of these businesses.
This guidance and the emerging findings report are part of the FRC’s year-long campaign to help SMEs access audit services and reduce reporting burdens where possible.
The SME audit market is substantial, with around 2,000 firms undertaking over 70,000 statutory and non-statutory audits annually, generating fees of approximately £1.5 billion. While the FRC found that most SMEs can currently find audit services when needed, the study identified several challenges that could impact market effectiveness.
The emerging findings – produced following engagement with more than 500 stakeholders including SMEs, capital providers, auditors and professional bodies – include:
- Auditors perceive a lack of scalability in auditing standards for smaller businesses
- Smaller audit firms believe that regulators expect them to do unnecessary work on SME audits
- Technology adoption presents both opportunities and challenges for smaller practitioners operating in this market
- Statutory audits may not always be the most proportionate approach for all SMEs seeking assurance
- Knowledge and resource constraints affecting both SMEs and auditors may be impacting the efficiency of the audit process
Actions taken by the FRC
The FRC is already engaging the whole UK audit ecosystem to take action in response to these findings. Alongside the interim report, the FRC has launched a consultation on a Practice Note providing guidance for auditors on applying standards in a more proportionate and effective way for SME audits.
The FRC has also agreed with Recognised Supervisory Bodies (RSBs) to work together to ensure a more consistent and proportionate regulatory approach across the statutory sector.
Additionally, the FRC will convene stakeholders to explore and develop technological solutions tailored for smaller audit firms.
Miranda Craig, Director of Strategy and Change at the FRC, said:
"SMEs are vital to our economy, employing around 16.5 million people and driving innovation across the UK. Access to audit often helps these businesses secure the capital they need to grow and succeed.
"We've listened carefully to stakeholders across the audit market and are supporting the system to take immediate action to address their concerns. Our Practice Note consultation launched today will help auditors apply standards more proportionately, while our work with supervisory bodies will ensure more consistent regulation.”
Paul Wilson, Policy Director at the Federation of Small Businesses, said:
“The FRC’s report makes a number of sensible and practical suggestions to bear down on regulatory costs for SMEs, which will provide multiple benefits to small firms themselves and to the overall economy when implemented.
Small businesses have a tendency to over-comply when they are unsure how rules should be interpreted, so extra guidance on what compliance could look like should avoid wasted time and help cut costs. The proposals should reduce audit red tape and streamline processes, while still ensuring useful outcomes from the audit process for small firms, investors, and regulators.”
Martin Clapson, Chairman of the APA, a Managing Partner Association of 20 leading professional service firms, said:
“SMEs form a vital part of the real economy driving jobs and growth across the whole of the UK, so this Market Study is a welcome piece of analysis which provides valuable perspectives on the needs of these important businesses which we fully support.
Ensuring these businesses, many of which are owner managed and entrepreneurial, benefit from an audit regime that is proportionate and scalable, will help enable them to remain competitive and support their long-term sustainable growth.”
Read the emerging findings report.
Read the Exposure Draft for the Practice Note for audits of smaller and/or less complex entities and the invitation to comment.
Explore the emerging findings at a glance with this summary.
Registrations are open for the FRC’s upcoming webinar to discuss the Practice Note on 30 July. Attendees will hear from Kate O’Neill, Director of Stakeholder Engagement and Corporate Affairs, Mark Babington, Executive Director of Regulatory Standards, James Ferris, Director of Audit and Assurance, and Dhruve Shah, Deputy Director of Professional Bodies Supervision.