Blog
22/07/2025
Small and Medium Enterprises (SMEs) play a critical role in the health of the UK economy, representing more than 99% of all private-sector businesses and employing more than 16 million workers. Access to high-quality audit services is critical to their ability to raise capital and enjoy long-term success.
The Financial Reporting Council (FRC) has undertaken a campaign to understand the top issues facing SMEs in their audit activities and reduce existing barriers to achieving audit success. Earlier this year, the regulatory body solicited input from industry stakeholders on the topic, and Inflo was proud to contribute its opinions and observations. Inflo gathered its feedback through a roundtable discussion with both industry leaders and customers, surfacing first-hand insights from those directly involved in SME audits.
The FRC recently issued its findings from its consultation, revealing key issues facing SMEs in their audit experiences. Many of these findings align with Inflo’s contributions, indicating a clear consensus between Inflo and the FRC on what issues exist and how to work toward finding meaningful solutions.
The FRC found that SMEs are often frustrated by their audit experience due to a lack of standards appropriate to their size and needs.
“All audit firms, smaller practitioners, and Recognised Supervisory Bodies (RSBs) told us that they felt the International Standards on Auditing UK (ISAs (UK)) are drafted with reference to larger and more complex, corporate audits. As a result, auditors, particularly smaller firms, may struggle to scale the standards appropriately for SME audits,” wrote the FRC. “Several stakeholders stated a view that firms who struggle to scale requirements may ‘over audit’ to ensure compliance with these standards and to meet inspection expectations.”
Such disproportionate application may lead to additional costs for SMEs and a longer time period to complete audits than is necessary, the FRC added.
This finding aligned with Inflo’s submission on the matter, which stated: “The International Standards on Auditing were widely described (by roundtable participants) as being designed for large or more complex entities, with assumptions that do not hold in the SME space. Applying them wholesale to SMEs often results in procedures and documentation that are disproportionate to the risks involved and burdensome relative to the size of the entity.”
This disconnect, Inflo added, “leads auditors to spend more time documenting procedures that may have little or no relevance to the audit opinion, rather than focusing on value-adding audit activities.”
The FRC found that many stakeholders reported SMEs often expect their auditor to provide a range of services alongside the audit, including tax advisory, financial reporting, or other advisory services. However, the SMEs “did not understand why their auditor could not do this because of the Ethical Standard and the Codes of Ethics maintained by each of the RSBs.”
This reflects the opinion Inflo offered the FRC: “Ethical standards and independence rules were noted as a barrier to more flexible service delivery. SME clients often expect their accountant to serve as a multi-service advisor alongside the audit, including accounts preparation, forecasting, and tax. Current restrictions often prevent firms from offering the integrated support SMEs want, even where the risk to objectivity may be negligible.”
This, Inflo asserted, “has led to frustration on both sides: clients who feel underserved, and auditors who feel constrained in their ability to deliver practical value.”
The FRC found that “while audits can offer value to SMEs, they may not always represent the most proportionate course of action for all SMEs.”
This pointed to the issue of audit cost and return on investment for SMEs. The FRC added that some stakeholders “suggested that the costs of an audit can often be disproportionate for smaller SMEs and will typically outweigh the value added by the audit.”
Indeed, rising audit costs, with limited perceived return from the perspective of SMEs, was identified by Inflo in its contribution to the FRC. This challenge is helping to contribute to an environment “where SMEs often view the audit as a costly burden rather than a meaningful exercise that supports business health or external confidence.”
The FRC found that many smaller audit firms believe regulators expect them to do more work for SME audits than may be necessary. “The current approach to regulation leads auditors, particularly smaller firms, to prioritize resource-intensive ‘checklist’ adherence that disincentivises proportionate approaches to SME audits.”
Several audit firms, the FRC added, said a more proportionate approach to audit supervision for lower-risk and smaller audits would ease pressure on the SME market.
These findings reflected the opinions expressed at Inflo’s stakeholder roundtable, in which several participants described how audit complexity, driven by standards designed for larger entities, imposes procedural requirements that deliver little incremental insight or assurance for SMEs. This includes planning and completion sections, formal and rigorous risk assessments, or controls testing that may not reflect the entity’s operating reality.
On the technology front, the FRC findings noted that smaller audit firms may lack resources and technical knowledge to implement and customize technology, “resulting in overreliance on third-party technology that may limit innovative approaches to SME audits.”
Inflo’s customer roundtable also highlighted challenges in this area, primarily on the client side, asserting that many SMEs lack mature financial systems or internal controls that allow for advanced data-driven audit techniques. “While firms are investing in analytics and AI, their use is often constrained by client-side limitations, such as disorganized records, manual processes, or lack of integration.”
In the next phase of the FRC’s SME initiative, the organization says it will help facilitate conversations between audit firms, RSBs, and technology firms “so that current thinking and ideas can be shared, including on tools aimed at supporting smaller firms.”
The FRC also reported that understanding and knowledge of audit varies across the SME audit market. Many stakeholders said that, due to resource and time constraints, SMEs may find it challenging to stay up to date with legislative, financial reporting, and audit requirements. SMEs’ limited resources can also “adversely affect their scope to prepare for audits and/or engage with audit processes. This may result in inefficiencies with SME audits, resulting in higher audit fees and delays,” the FRC stated.
During Inflo’s roundtable, auditors consistently noted that SME clients often do not understand what an audit entails or why certain evidence is required. The result is misaligned expectations, especially around the time, cost, and boundaries of the service.
“It is therefore important,” Inflo asserted, “for firms to create an attractive value proposition for clients. This can include moving away from time-based billing to a more value-based approach.”
In the next phase of its study, the FRC plans to carry out further, targeted stakeholder engagement to gather more information and develop remedies to address the issues identified to date.
Inflo remains committed to supporting continued engagement with the FRC and the profession as practical reforms take shape, ensuring SME audits become more proportionate, valuable, and future-ready.
More information about the FRC’s emerging findings on the SME market can be found on its website.
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