The UK’s Financial Reporting Council (FRC) has released the findings of its market study on the audit services provided to small and medium-sized enterprises (SMEs).  

The report acknowledges that SMEs generally have access to audit services when needed.  

However; the study also identified multiple challenges that could affect the efficiency and effectiveness of the audit market. 

These challenges include a perceived lack of scalability in auditing standards for smaller businesses, smaller audit firms’ concerns about regulatory expectations of unnecessary work, and the dual opportunities and challenges presented by technology adoption for smaller practitioners. 

The audit market for SMEs is around 2,000 firms conducting more than 70,000 audits annually and generating fees of approximately £1.5bn ($2bn). 

Additionally, the study suggests that statutory audits might not be the most appropriate form of assurance for all SMEs, and highlights the impact of knowledge and resource constraints in the audit process for both SMEs and auditors. 

FRC Strategy and Change director Miranda Craig 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.” 

The study, which is part of the FRC’s ongoing efforts to support SMEs and streamline reporting processes, has led to a consultation on new guidelines to enhance the delivery of audits. 

The FRC has launched a consultation on a Practice Note that provides guidance for auditors on applying standards in a more tailored way for SME audits.  

The FRC is also collaborating with Recognised Supervisory Bodies (RSBs) to promote a more proportionate regulatory approach within the statutory audit sector. 

This follows the FRC’s recent Annual Review of Audit Quality, which evaluates audit firm performance in the UK Public Interest Entity (PIE) market.