Why fixing SME audit matters more than you might think

Small and medium-sized businesses are the engine room of the UK economy. They employ millions of people, drive innovation, anchor communities and generate the kind of economic activity that keeps the country moving. Yet for too long, the audit market that serves them has been a source of frustration for business owners, for auditors and for regulators alike.

That’s why the Financial Reporting Council’s (FRC) SME Market Study and its proposed reforms deserve more attention than they’ve received. Getting this right matters, not just for accountants and auditors, but for every small business owner trying to navigate an increasingly complex regulatory environment.

A market that works, but could work better

Let’s start with the good news. The FRC’s study found a well-functioning SME audit market. That’s an important baseline; it means we’re not starting from a position of crisis, but from a position of opportunity. The question isn’t how to fix something broken. It’s how to make something that works reasonably well work significantly better.

There is real room for improvement. The challenges the FRC has identified around regulation, supervision, technology and audit effectiveness are not new. They are issues that ACCA has been raising with regulators, with government and with the profession for some time. Seeing them reflected in the FRC’s findings and proposals is genuinely encouraging, as it signals that the regulator is listening and that the profession’s concerns are being taken seriously.

The proportionality problem

Here’s the core issue. The audit standards and regulatory requirements that govern how auditors work were largely developed with large, complex businesses in mind. Over decades, a framework built for FTSE 100 companies and multi-national corporations has been applied – sometimes awkwardly, sometimes disproportionately – to small and medium-sized businesses that are fundamentally different in their complexity, their risk profile and their needs.

The result? Higher costs. Fewer auditors willing to take on SME audit work. Confusion about how standards apply in practice and ultimately, it can reduce the quality and usefulness of the advice and assurance that SMEs receive…the very thing audit is supposed to deliver.

Why auditor choice matters

When the regulatory requirements for SME audit work are complex, time-consuming and unclear, fewer audit firms are willing to take it on. That limits your choice as a business owner, and limited choice rarely leads to better outcomes on price, quality or service.

The FRC’s proposals aim to address this directly. ACCA is particularly encouraged by the commitment to consult on the International Standard on Auditing for Audits of Financial Statements of Less Complex Entities – a dedicated auditing standard designed specifically for smaller, less complex businesses. This represents exactly the kind of proportionate, scalable approach that the profession has been advocating for, and that smaller businesses genuinely need.

If adopted in the UK, it could meaningfully increase the pool of auditors equipped and willing to work with SMEs which is good for competition, good for pricing and good for the quality of service you receive.

Ethics at the core

One area that deserves particular attention is the ethical standard and the FRC’s commitment to provide further practical guidance on its application is something auditors across the country will welcome.

The ethical standard continues to cause real issues and confusion in practice, particularly for smaller audit firms working with SME clients. This isn’t a reflection of any lack of commitment to ethical practice among auditors. Quite the opposite. ACCA has always emphasised that ethics is at the absolute core of what audit is and what it is for. But good intentions need clear guidance to translate into consistent practice.

Practical, accessible guidance on the application of the ethical standard should do three things: support auditors in navigating genuinely complex situations, increase the pool of auditors willing and able to take on SME audit work, and ultimately improve the quality and relevance of the advice and assurance that smaller businesses receive. All three outcomes matter enormously.

Technology and the audit of tomorrow

The FRC’s acknowledgement of technology as a challenge, and an opportunity, in the SME audit market is also timely. The pace of technological change is reshaping every aspect of business, and audit is no exception. Smaller audit firms and their SME clients face particular challenges in keeping pace…whether that’s adopting new audit tools, managing data securely or understanding how artificial intelligence and automation are changing what good audit practice looks like.

The profession needs support in navigating this landscape and regulators have a role to play in ensuring that the regulatory framework keeps pace with technological change, rather than inadvertently creating barriers to adoption.

A moment of genuine opportunity

ACCA will continue to work closely with the FRC as these proposals develop, feeding in the expertise and experience of our members, advocating for proportionate and practical reform and ensuring that the voice of the profession is heard clearly throughout the process.

But this isn’t just a matter for regulators and professional bodies. Every auditor working with smaller businesses, every SME owner who relies on quality audit and financial advice, and every stakeholder who cares about a healthy, competitive and well-functioning business environment has a stake in getting this right.

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