What are the risks?
Small and medium businesses often ask: why do audits matter for SMEs, what are the risks of not auditing your business, or whether small businesses should get audited voluntarily. In practice, the value of an audit extends far beyond compliance. For many SMEs, a small business audit becomes a key part of their governance, growth and risk-management strategy.
The audit of a set of financial statements is not only important for large multinational organisations but can also be very useful for small to medium sized businesses. Unlike in the UK or many other jurisdictions, in Jersey private companies have the choice to have an audit in terms of the Companies (Jersey) Law 1991. Many people are not aware of the benefits of having an audit and the value it can add to your business and to stakeholders:
As the Financial Reporting Council (FRC) notes, ‘Independent assurance plays a vital role in supporting trust in business and financial markets;’ a message that applies equally to smaller privately-held companies as it does to listed ones.
I have set out below the key questions to consider on why small and medium sized businesses should not ignore audits.
What is at Risk when you Avoid a Business Audit?
Small to medium sized businesses are often more susceptible to internal fraud or error due to the limited oversight and limited segregation of duties due to the nature of the business. The risks of not auditing your business are often underestimated, yet these can have both short-term and long-term consequences.
An audit ensures compliance with laws, regulations and industry standards directly impacting the financial statements. This reduces the risk of fines and penalties and builds trust with stakeholders including investors, lenders, government, suppliers and clients. Avoiding or ignoring an audit increases the risks, particularly where key controls have never been independently reviewed.
By lowering your business risk, it will likely attract more investors or secure more loans compared to a similar business that has not had its financial statements audited. Many finance providers follow risk-based lending practices, and an SME that follows audit best practices may be viewed more positively by lenders.
When SMEs do not subject their records, controls or financial reporting to independent review, the risks of not auditing your business may include:
- Undetected fraud due to lack of segregation of duties
- Inaccurate or incomplete financial statements
- Weaknesses in key processes such as revenue recognition or expense approval
- A reduced ability to access finance or investment capital
- A loss of credibility when onboarding major clients or suppliers
- Missed regulatory obligations, which may result in penalties
The risk of ignoring audits is therefore not only operational but strategic, it can hold back the business at each stage of its lifecycle.
Why Audits Are More Important Than You Think
These are some of the key reasons why audits matter for SMEs, especially those aiming for sustainable growth and improved internal governance.
Being audited leaves stakeholders with the impression that you are trustworthy, transparent and embrace good governance in the way you conduct your business. This is one of the core audit benefits for growing companies, especially those seeking to scale or expand.
An audit will lower the risk profile of your business in the eyes of stakeholders when compared to a business that does not have any assurance work performed on their financial statements. This improves credibility with banks, suppliers, regulators and investors.
It also means that financial statements are accurate and comply with financial reporting standards. This will ensure that an audit will reveal any material misstatements. For SMEs considering international growth or cross-border transactions, this reassurance is important when working with new partners.
An audit can also provide insights that can help an owner of a small to medium sized business make informed decisions, plan for expansion and understand the financial health and business risks more concisely. This is why the importance of audits for small businesses extends to strategic planning, not only historical financial reporting.
Nicholas James, Audit Director, PKF Channel Islands explains: ‘An audit gives SME owners more than verified numbers, it gives them peace of mind. When you have an independent set of eyes assessing your controls and financial reporting, you gain clarity on where your business stands today and confidence in where it can go next.’
If you are considering selling your business, merging with another company, onboarding a major client or succession planning, then historic audited financial statements also help counterparties gain comfort. A track record of audited financial statements, which further provides the counter party with further comfort and assurance around the financial aspects of your business, which in turn can increase the value of your business, lowering the risk for the counterparty.
Furthermore, investors and lenders will usually require an audit or some sort of assurance before entering an investing or a lending arrangement, which could support your businesses’ sustainable growth going forward.
When Is a Statutory Audit Required for an SME?
In Jersey, statutory audit requirements differ from those in the UK. The Companies (Jersey) Law 1991 allows most private companies the choice of whether to have a statutory audit, unless specific conditions apply.
This makes understanding statutory audit thresholds for SMEs especially important. According to the JFSC, the Companies Law requires a company to have reasonable accounting records but a private company is not required to have its accounts audited.
However, a company must have an audit if:
- It is a public company
- Its shareholders request it
- Its articles of association require it
For many privately-held businesses, this creates a decision point: should small businesses get audited even if the law does not mandate it? In many cases, the answer is yes, particularly where the business is growing, seeking finance, considering a sale, or looking to tighten internal controls.
Understanding the audit requirements for private companies in Jersey can help directors make informed decisions and many Jersey SMEs choose voluntary audits as part of their long-term governance approach.
Internal vs External Audits: What’s Right for You?
An internal vs external audit for small businesses comparison is useful when SMEs consider how best to strengthen control environments.
An audit will help ensure business processes and internal controls in areas which pose the most significant audit risk to your business are reviewed in detail and any deficiencies or weaknesses identified are reported to the business in the ISA 260 letter. This provides clarity to business owners on where risks exist, and what needs improvement.
Businesses can then put the necessary safeguards in place to address those deficiencies and weaknesses before any damage or significant loss occurs due to fraud or error and embed a culture of accountability in your business.
For an early-stage company, an external audit for startups can also demonstrate maturity in governance far earlier than competitors. For more established companies, a regular small business audit cycle helps maintain discipline, transparency and clear processes.
In practice:
- Internal audit is focused on continuous monitoring of risks, controls and processes
- External audit provides independent assurance over financial statements
- Many SMEs benefit from a combination of both approaches
What to Look for in a Trusted Audit Partner
Choosing the right audit partner is a significant decision for any growing business, and this is where experienced audit support services for SMEs become important. A firm that understands the industry landscape, the pressures faced by business owners and the nuance of relevant regulation can make the entire process more efficient and far more valuable.
When choosing an audit firm for SMEs, it is worth looking for a team that not only understands the SME business model but can also identify realistic and practical control improvements that suit the way you operate. The most effective SME audit advisors take a relationship-based approach rather than a checklist mindset, offering clear reporting that owners and boards can understand and use. They should also be able to support audit readiness for SMEs on an ongoing basis, helping you prepare your finance records, governance structures and internal controls well ahead of the actual audit.
Some helpful indicators of a strong audit partner include:
- Familiarity with regulatory environment and its impact on private companies
- The ability to provide practical, proportionate recommendations rather than theoretical commentary
- Clear, accessible reporting that supports day-to-day decision-making
- A proven track record working with SMEs, start-ups and family-owned businesses
A trusted partner will not only meet the audit requirements; they will help you strengthen your controls, improve confidence with stakeholders and support your long-term growth ambitions.
How PKF Channel Islands Can Help
Many people underestimate the value add that an audit brings to their business. As an owner of a small to medium sized business, having an audit can at times seem like a time-consuming, costly exercise. However, an audit is an independent set of eyes looking over your financial statements, your business processes and internal controls. This will give you peace of mind that your business is on the right track and where weaknesses or areas of improvement are identified, they are being highlighted to you, allowing you and your business to react to them in a timely and appropriate manner.
At PKF Channel Islands, we support clients across all stages of growth – from early-stage start-ups to long-established businesses. Our team provides:
- Voluntary and statutory audits
- Assurance reviews where a full audit is not required
- Control and process recommendations
- Support with governance improvements
Learn more about our Audit Services and if you would like to discuss an audit or assurance review for your business, please get in touch with Nicholas James at NicJ@pkfci.com or on +44 1534 883017
Frequently Asked Questions
What are the risks if my SME never gets audited?
The risks of not auditing your business include undetected fraud, inaccurate financial reporting, poor control systems, and reduced access to finance.
Do SME audits take a lot of time?
With good record-keeping, the process is straightforward. Preparing early and following audit best practices for small business significantly reduces disruption.
What if cost is a concern?
If cost is a concern, consider an assurance review, which provides a lower level of assurance than an audit. This option is suitable for some SMEs and can still support lenders’ requirements.
Why do some SMEs avoid audits?
Common reasons include cost, perceived complexity, or not understanding the benefits. These are common audit myths for small business owners. In reality, an audit often saves money over time by reducing risk.