Despite still part of an ongoing consultation, the Financial Reporting Council’s (FRC) SME Audit Market Study Emerging Findings has pulled back the curtain on some of the biggest challenges that are facing SMEs at the moment.
Having looked through the report, I have identified some of the key aspects that business owners should be aware of, as well as some vital considerations for keeping competitive in this climate.
You can read the full statement from ICAS, but I will highlight the most important points here.
What are the biggest challenges facing SMEs?
You’re not alone if you find audits confusing or costly.
Over the past decade, roughly one in five firms that used to audit the smallest SMEs have exited the market.
That means fewer choices for you and auditors charging more as they juggle heavier workloads.
At the same time, many owners still see audits as a tick‑box exercise, missing out on the real benefits of stronger governance and easier access to finance.
This has been paired with packs of detailed IFRS-style requirements covering a range of topics from leases, revenue recognition and fair‑value measurements that can feel quite overwhelming for small teams.
The rate at which these changes are being made is staggering and can catch many businesses and firms off guard if they are not keeping an eye on official correspondence.
As many SMEs fail to understand the full complexity of an audit, they often request an audit far too close to the deadline, resulting in frantic, last-minute tenders that push the resources of auditors to the limit.
What can SMEs do to avoid auditing issues?
The best thing that businesses can do is to start the conversation early.
While this is especially true for businesses that face mandatory audits, any business should plan ahead and make contact with an auditor as early as possible.
If you are able to agree on scope and deadlines in good time, your auditor can plan resources, and you may benefit from a more streamlined and minimally disruptive audit experience.
You should work to educate everyone involved in running your business on the value of audits.
We kicked off the Tax Year with an article discussing the benefits of audits for small firms, which is definitely useful for any directors who may be on the face about it.
Business owners should see audits as an opportunity to work with auditors to pinpoint genuine areas of risk, such as inventory counts, revenue cut-offs, or contract valuations, so you’re not paying for procedures you don’t need.
What role can technology play in the future of audits?
Digital tools and data analytics promise to speed things up, but dive in too quickly and you could end up with half-baked processes and wasted spend.
I would advise businesses to pilot small projects.
This helps them to learn the process while getting clear guidance on whether the measures are helping or hindering progress.
Phasing in AI-driven platforms should only be done once you’ve proven your basics are solid, otherwise you won’t know if they are doing the job well.
It still takes a keen human eye to understand financial workings, and AI optimisation is only as good as the person who programmes it.
With that in mind, don’t be disheartened if you feel that AI implementation will be too costly for your business right now.
You can still be successful without it, and should probably focus on building that working knowledge regardless.
What might the future of audits look like for SMEs?
ICAS is urging the FRC to develop a bespoke auditing standard for Less Complex Entities, stripping out unnecessary steps and aligning procedures with real SME risks.
We could also see “audit‑light” ethical reliefs and more readable report formats geared to smaller companies.
For charities, higher exemption thresholds and tailored reliefs are on the table, which is good news if you support not-for-profits.
While waiting for official change to come, businesses can work within the existing framework to improve processes where possible.
You should keep your audit engagement letter up to date and make sure that it outlines the scope, fees and timelines.
This should be reviewed annually to make sure it still fits with your business’s best interests.
Remember to file your audited accounts with Companies House within nine months of your year-end to avoid fines.
If you are interested in the future of audits, which you should be, be sure to check back in later this year when the full report is officially released.
