The Financial Reporting Council (FRC) has opened a consultation aimed at making auditing processes more SME-friendly.
The regulator for the UKâs accountancy, auditing and actuary sector has announced the move as part of a year-long campaign to improve access to auditing services for small businesses and reduce the reporting burdens involved. It comes after the FRC published the findings of a market study into auditing services for SMEs which highlights the concerns and challenges many smaller operators face.
The FRCâs research concluded that, on the whole, the provision of auditing services for small businesses was good, and that companies could generally find support when they needed it. The study found that there are around 2,000 firms offering auditing services to SMEs in the UK, and that between them they carry out around 70,000 audits every year.
However, it also found a number of common concerns shared by a majority of stakeholders. Chief among them is the sense that current auditing standards are not readily scaled down to reflect the nature of smaller and less complex entities, and that the reporting requirements are therefore not proportional.
Firms providing auditing services to the SME market also argued that the usual regulatory caveat that compliance should not create unnecessary work wherever possible isnât reflected in the experience of many small businesses going through an audit.
The study also found that a majority of stakeholders believe statutory audits are not necessarily the most appropriate form of assurance for small businesses.
Reacting to the findings, the Institute of Chartered Accountants in England and Wales (ICAEW) endorsed the FRCâs intentions to review auditing guidelines for SMEs. It argued that the disproportionate burdens placed on SMEs going through audits donât just harm small businesses, but the whole auditing sector. It pointed to the decline in firms offering auditing services for SMEs since the 1990s, suggesting that the growth in the regulatory burden has made the market uneconomical.
When do SMEs need an audit? Small businesses have a general exemption from the legal requirement for private limited companies to have their annual accounts audited. As of April 2025, that exemption applies to any business with an annual turnover under £15m, assets worth up to £7.5m, or which employs 50 people or fewer.
However, small businesses can still be required to undertake a financial audit if at least 10% of shareholders request one. Some small businesses may also have auditing requirements built into their articles of association, making audits compulsory under company rules. Banks
and other lenders can also request audits as part of a loan covenant, especially if the debt is secured against company assets.
The UKâs audit and corporate governance regimes have come under scrutiny in recent years after a series of high-profile scandals and big backlogs in the system. This has prompted the government to promise wholesale changes to the system. Simplifying audits for SMEs, or switching to different assurance processes altogether, would help free up capacity in the system and make life easier for any small businesses going through an audit.
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