In Conversation: Findings and remedies from the FRC's SME audit market study
Published: 28 August 2025
9 minute read
In this In Conversation podcast episode, Kate O'Neill, Director of Stakeholder Engagement and Corporate Affairs, discusses the FRC's emerging findings of its market study examining how small and medium-sixed enterprises (SMEs) engage with the audit market alongside Laura Warren, Director of Market Intelligence and Insights, Dhruve Shah, Deputy Director of Professional Bodies Supervision, and Peter Kitson, Audit and Assurance Project Director.
Kate, Laura, Dhruve and Peter speak about the importance of proportionality and scalability in audit standards, how the FRC has facilitated this by developing a practice note to help auditors apply ISAs more proportionately to smaller entities, and the various other proposed remedies emerging from the study's findings.
Take part in the next steps of the FRC's year long campaign to support SME's access to audit by registering your interest in joining the upcoming roundtables beginning 9 September 2025.
Transcript
00:00:00:00 - 00:00:35:07
Kate O'Neill
Hello there and welcome to an FRC In Conversation podcast. My name is Kate O'Neill. I'm the director of stakeholder engagement and Corporate affairs here at the FRC. And today we're speaking on an important project that the FRC has been working on in relation to the all important sector of small medium enterprises, also known as SMEs, and how do they engage with the audit market?
00:00:35:09 - 00:01:01:22
Kate O'Neill
And we've undertaken a market study to really delve into some of the drivers of maybe some past behaviours and trends emerging and what's planned for the future. Out of this market study. Today, I'm joined by Laura Warren, director of Market Intelligence and Insights. Dhruve Shah, deputy director of professional bodies supervision, and Peter Kitson, project director, Audit and Assurance Policy.
00:01:02:01 - 00:01:04:23
Kate O'Neill
Welcome, Laura, Dhruve and Peter.
00:01:05:00 - 00:01:05:24
Laura Warren
Great to be here, Kate.
00:01:06:04 - 00:01:07:14
Dhruve Shah
Thanks so much for having me, Kate.
00:01:07:16 - 00:01:10:00
Peter Kitson
Thank you very much for this opportunity. Kate.
00:01:10:02 - 00:01:31:04
Kate O'Neill
Great. And I guess we've been very busy on this very important project. But I think today we're really going to look at what the emerging findings are, because I think starting with you, Laura, you know, these market studies are not supposed to kind of always find concrete outcomes. They're really to explore what's going on in the market.
00:01:31:06 - 00:02:02:14
Laura Warren
That's absolutely right, Kate. So in this case, the SME audit market study was aiming to examine whether any challenges faced by SMEs in relation to audit and reporting, including if practitioners have difficulties in auditing SMEs and understanding the decision making process for SMEs who procure, audit services when sometimes they're otherwise exempt. Not every SMEs needs to have an audit, so it's really an interesting opportunity for us to explore part of the audit market that we've not really explored in detail before.
00:02:02:16 - 00:02:17:00
Laura Warren
And so we've been quite broad and open in the first phase of the market study to really understand what might be any issues for both those that are receiving the audit, the SMEs and those that are providing the audit, the small audit firms, the practitioners.
00:02:17:02 - 00:02:32:13
Kate O'Neill
Thanks, Laura and Peter. We've recently done a couple of podcasts on, you know, the difference between statutory audit and assurance, but also, you know, what's involved in an audit and how audit practitioners can make it scalable depending on the entity that they're auditing.
00:02:32:15 - 00:03:10:06
Peter Kitson
Yes, certainly. And I think this is one of the things that we've been aiming to do with the practice note, which is associated with the market study. I mean, the focus is slightly different because the auditors are always to focus primarily on risk. And risk is a function of complexity. Size is imperfectly correlated with complexity. So what we've tried to do is leverage those existing requirements in and application guidance that exists in the auditing standards already to support practitioners in applying the professional judgment to make their audits more proportional and scalable.
00:03:10:08 - 00:03:31:16
Kate O'Neill
And I guess, Dhruve, I mean, for some of the SMEs, they may not understand some of the nuances of an audit, you know, what's the bare necessities and what they actually need from their auditors. So do you think these emerging findings are revealing that actually some better knowledge for both SMEs and their auditors is required?
00:03:31:18 - 00:03:56:13
Dhruve Shah
Through our conversations, we asked directly what are the benefits of an audit? And these questions were asked to venture capitalists, angel investors, finance directors and people often talked about an audit being a good indicator of general hygiene factors or an overarching health check. But actually, when we try to get into specifics about what an audit could offer, there was perhaps a limited understanding as to what an audit is seeking to achieve.
00:03:56:14 - 00:04:03:06
Dhruve Shah
So part of the market study does explore whether alternative assurance arrangements could be a route forwards.
00:04:03:08 - 00:04:20:03
Kate O'Neill
And Peter, I guess technology I know all we have to hear about is AI, but technology, including AI adoption could represent an opportunity, but perhaps some challenges for these smaller practitioners who are operating in this SMB audit market.
00:04:20:05 - 00:04:48:00
Peter Kitson
Oh, absolutely. Kate, I think there are opportunities as well as challenges. I mean, the opportunities, I think, for a more efficient audit approach are obviously there with new and emerging technologies. But the sort of the constraints are obviously around, you know, you're only as good as the entity that you're auditing in terms of their own adoption of technology, if they're still, you know, not learning when it's still there anymore, but pen and paper, in terms of record keeping, I think you're constrained in terms of what you can do there, obviously.
00:04:48:03 - 00:04:57:16
Peter Kitson
And there's you know, in terms of scalability and size, a smaller practice may not have the bandwidth, really, or the resources to be able to adopt this new technology.
00:04:57:18 - 00:05:23:14
Kate O'Neill
And Laura, this is the third market study that the FRC has carried out now. I mean, we talked about how market studies are a particular tool for regulators to really explore developing trends. I mean, how many stakeholders did you speak to in this market study? I mean, Dhruve named a few of the investors side, but who are the types of people you talk to obviously, other than SMEs and their auditors.
00:05:23:16 - 00:05:58:01
Laura Warren
Actually. So you've mentioned some we've spoken, I think, to over 500 stakeholders so far, wide range as mentioned, capital providers, angel investors, SMEs, their representatives, auditors, those that are providing the services to SMEs and really, crucially, professional bodies who have a real key role to play. I would like to take your opportunity to say a huge thank you to all those who have contributed so far, whether through providing us with written submissions or attending a round table or a 1 to 1 meeting, or potentially participating in our survey of SMEs, we're really grateful for the contributions.
00:05:58:01 - 00:06:09:06
Laura Warren
That's what makes for a good market study a good, rich set of insights and findings generated from great stakeholder engagement, and look forward to further contributions and the second phase of the market study.
00:06:09:11 - 00:06:31:24
Kate O'Neill
And Dhruve, Laura mentioned RSB's, which are the professional bodies who typically oversee the operations of smaller audit firms that ultimately are overseen by the FRC itself. I mean, do you think that the fees understand some of the challenges that their practitioners are facing in supporting the SMEs market?
00:06:32:01 - 00:06:53:00
Dhruve Shah
So 99.9% of the SMEs audits in this country are regulated by the professional bodies and rather than directly by the FRC. So yeah, it's definitely fair to say that the first two bodies absolutely understand the challenges. And I see the role of the professional bodies in supporting the market studies of three factors. So the first is around thought leadership.
00:06:53:01 - 00:07:14:01
Dhruve Shah
There's lots of areas where we'll be working closely with the professional bodies in driving forward some of the possible remedies we've covered in the market study. The second area will be a convening role with the professional bodies can facilitate roundtables, for example, on technology, where we can bring audit practitioners together to discuss some of the shared challenges. And then the third aspect is that regulatory aspect.
00:07:14:01 - 00:07:33:03
Dhruve Shah
So a part of the market study talks about small audit firms believe regulators expect them to do more work for SMEs audits than is necessary. These regulators are the professional bodies, and we're working closely with the professional bodies to understand whether there could be a more proportionate approach to supervision of SMEs audits.
00:07:33:05 - 00:07:49:00
Kate O'Neill
Thanks. And Peter, you talked about the practice note. I mean, that's been a key part of, as you said, as part of this whole market study. I mean, that has really been focused on this proportionality and scalability of the standards regarding smaller entities.
00:07:49:02 - 00:08:20:00
Peter Kitson
Absolutely. I think what we're trying to do with the practice note is to create a space really for practitioners to be confident in the application of professional judgments rather than, you know, essentially sort of going through a checklist and saying, oh, we've got to do this, we've got to do this using their judgment to focus their work effort on the things that really matter and are really material to the financial statements, rather than thinking about it as purely a compliance exercise with a tick box mentality.
00:08:20:06 - 00:08:25:10
Peter Kitson
Not saying that that is something that happens all the time, but that it's a pitfall that we wish to report.
00:08:25:12 - 00:08:48:22
Kate O'Neill
And as you said before, audit is predicated on looking at risk. And that has to be linked to complexity. So that has to be applied as not every entity has the same risk profile as another one. So, the practice note, that's a key part of the SME project. What are some of the other remedies that we're proposing as part of the market study?
00:08:48:24 - 00:09:12:04
Laura Warren
Yes. So I think in relation to the five findings we've had, we've got remedies in respects of each. So some of them we've touched on already, but just to kind of give it recap. So practice note really hoping with guidance for the audits the smaller and less complex entities. And we're planning to have further discussions with the professional bodies and stakeholders about improving the understanding and application of the ethical standard.
00:09:12:06 - 00:09:49:15
Laura Warren
And then in respect of small audit firms expectations regarding SMEs audits, we've obviously got the ongoing FRC future of audit supervision strategy work, but we're going to have more discussions with the professional bodies and audit firms to explore the priority features of more proportionate supervisory approach on tech, which you were talking to Peter about earlier, will certainly facilitate further discussions between smaller firms, the professional bodies and technology developers to understand those challenges, but also the opportunities and explore the scope for more customized technologies and tools tailored to meet the needs of smaller firms.
00:09:49:20 - 00:10:13:11
Laura Warren
And then on whether or not the audit is the right course of action for SMEs. We're really keen to engage more with the SMEs in the second phase, to understand why they obtain an audit and engage with the capital providers to understand what SME related information they really need. And then we'll explore with the professional bodies, SMEs and others whether there are alternative forms of assurance services which may meet SMEs needs.
00:10:13:11 - 00:10:35:13
Laura Warren
And then finally, in relation to our findings about the variability in the knowledge and understanding of ordinary SMEs market, we think there could be scope for the bodies and other relevant bodies to develop targeted educational and explanatory materials and we want to really explore that, understand that and see what professional bodies and other stakeholders, including the SMEs themselves, think would be most useful.
00:10:35:15 - 00:11:10:23
Kate O'Neill
Well, it sounds like there is, as you said, drew a really important role for the professional bodies to play in this next stage of the market study. So we're kicking off some roundtables, the first on the 9th of September, last on the 7th of October. If I was saying, Laura to people, how do you get involved? I mean, we'll obviously have dates of all of that on our website, but when's the practice note, Peter, you can jump in here to and the final findings going to be released on what we propose would be some good remedies for this important market.
00:11:11:00 - 00:11:33:11
Peter Kitson
We're currently consulting on the practice notes at the moment, and I think the deadline is the 17th of October for responses, and we'd like to encourage people to send in responses. The consultation documents asks for input on a number of things and, you know, we're very keen to attract as much comment as we possibly can to ensure that the finalized product is as useful to practitioners as possible.
00:11:33:11 - 00:11:43:07
Peter Kitson
So I think the current timeframe there is because of finalizing the practice note, and I think the sort of final stage of the market study for release in early 2026.
00:11:43:09 - 00:11:54:04
Kate O'Neill
Great. Well, I guess the earlier the better. But, Laura, I mean, for people to get engaged and involved do go to our website, I suppose is the message you've sent to get those dates and sign up.
00:11:54:06 - 00:12:11:18
Laura Warren
Absolutely. So really easy encouragement for everyone who might be interested to sign up for any of the roundtables. Starting on the 9th of September, we're doing a whole set in relation to each of the sort of areas covered in the emerging findings. Opportunity to attend in person. The first one, I think, is in person on the 9th September.
00:12:11:23 - 00:12:47:05
Laura Warren
Looking at the regulatory requirements. But then we've also got online options for each one and alongside the roundtables, really keen for people to engage with the emerging findings in writing so as to the timings that Peter gave in relation to the practice note. Any comments on the emerging findings we welcome in writing by the 17th of October, and there's also always an opportunity to engage with this on a 1 to 1 basis, or potentially, if you're an SME, you may be being asked by our external research agency to contribute to our research and hold an in-depth interview with the agency.
00:12:47:05 - 00:13:01:12
Laura Warren
So really, really keen, as I said earlier, to continue our engagement with stakeholders and really keen for stakeholders to respond. So yes, please do check out our website. Please do sign up for the roundtables, and please do respond to our emerging findings in writing.
00:13:01:14 - 00:13:31:19
Kate O'Neill
All right. Well, good to catch up with you all on the next phase of this important project. As all of you referenced, this has got some intersectionality on other big projects that are underway at the FRC, including the Future of Audit Supervision strategy. So I guess we could say in summary, we're hoping that some of these interlinked parts really give SMEs and their audit providers some really important tools to get the best out of their audits, to really support their growth and ambitions for growth in the UK.
00:13:31:21 - 00:13:50:22
Kate O'Neill
So thank you Laura. Thank you Dhruve, and thank you Peter. And please do sign up to round tables on the topics that you're most interested in contributing to. Thanks for now.