On 2 February 2023, the Companies Commission of Malaysia (CCM), also known as Suruhanjaya Syarikat Malaysia (SSM) in Malay, proposed an increase in the audit exemption threshold. Before delving into the proposed changes, let's explore the three criteria that must be met for Audit Exemption:
There are three categories of private companies eligible for exemption from appointing an auditor to audit their financial statements for each financial year, based on the relevant qualifying exemption criteria. These categories are Dormant Companies, Zero-Revenue Companies, and Threshold-Qualified Companies.
(1) Dormant Companies: Companies must have either remained dormant since their incorporation or been dormant throughout the immediate past and current financial years.
(2) Zero-Revenue Companies:
a. No revenue during the current financial year and the two immediate preceding financial years; and
b. Total assets do not exceed RM300,000 for the current Statement of Financial Position and the two immediate preceding financial years.
(3) Threshold-Qualified Companies:
a. Annual revenue does not exceed RM100,000 during the current financial year and the two immediate preceding financial years;
b. Total assets in the current Statement of Financial Position are RM300,000 or less, and the same for the two immediate preceding financial years; and
c. The company has no more than five employees at the end of its current financial year and during the two immediate preceding financial years.
In the proposed changes, the following modifications have been introduced:
1. Zero-revenue companies with total assets up to RM500,000 for the current financial year and the two immediate preceding financial years will be eligible for audit exemption. (This is an increase from the previous threshold of RM300,000.)
2. Threshold-qualified companies with revenue less than RM1 million, total assets less than RM1 million, and no more than 30 employees during the current financial year and the two immediate preceding financial years will now qualify for audit exemption.
(The previous requirements were RM100,000 in revenue, RM300,000 in total assets, and a limit of 5 employees.)
Statutory Audit Overview
For the benefit of those who may not be familiar, it's important to note that all companies in Malaysia (with the exception of those eligible for audit exemptions) are mandated to undergo a statutory audit during each financial period.
This process necessitates the appointment of an external auditor, typically on an annual basis. The role of the external auditor is to meticulously examine the company's books and records, subsequently delivering an informed perspective on the accuracy and credibility of the financial statements.
This perspective serves as valuable insight for shareholders, offering an assessment of the integrity of the company's financial records.
Audit Exemption Overview
The audit exemption is a provision that grants eligible companies the discretion to either undergo a statutory audit or opt out of it. If the proposed changes are approved, the criteria for qualifying for audit exemption will be as follows:
1. Dormant Companies: Companies falling under this category must either have remained dormant since their incorporation or have been dormant throughout the current financial year and the immediate preceding financial year.
2. Zero Revenue Companies: Companies with zero revenue and total assets not exceeding RM 500,000 during the current financial year and the two immediate preceding financial years.
3. Threshold-Qualified Companies (typically active companies): Companies meeting the following criteria are eligible for audit exemption:
Revenue less than RM 1 million
Total assets less than RM 1 million
No more than 30 employees during the current financial year and the two immediate preceding financial years.
It's important to note that dormant companies, as defined by the Malaysian Accounting Standards Board (MASB), are entities that do not engage in business activities or have any accounting transactions, with the exception of compliance adjustments and costs.
However, it's worth keeping in mind that even if a company qualifies for audit exemption, an audit may still be required if a letter is issued by the Companies Commission of Malaysia (CCM) or by shareholders holding at least 5% of the voting rights. This letter must be received by the company no later than one month before the end of the financial year.
Submission of Financial Statements Overview
In the absence of the audit exemption, it is imperative to ensure that the audited financial statements are distributed to all shareholders within six months from the conclusion of the financial year. Following the circulation, these financial statements are then required to be submitted to the Companies Commission of Malaysia (CCM or SSM) within 30 days.
For companies that qualify for audit exemption, a comparable procedure is followed for the submission of unaudited financial statements. The same statutory requisites and timelines are upheld. However, a notable distinction is that alongside the submission of unaudited financial statements, an Audit Exemption Certificate must also be provided to the Companies Commission of Malaysia (CCM or SSM).
Conclusion
The proposed revision to the audit exemption thresholds is a positive step forward, should it be approved. The initial threshold for threshold-qualified companies was notably restrictive, potentially excluding a significant portion of businesses in the contemporary landscape. This adjustment reflects a more realistic assessment of modern business dynamics and is likely to provide relief to not only small enterprises but also some medium-sized businesses, particularly considering the escalating cost environment.
It's important to acknowledge, however, that an increase in the number of businesses qualifying for audit exemption may inadvertently heighten the risk of fraud for shareholders. External auditors play a pivotal role as impartial evaluators of a company's financial records, a role many shareholders appreciate. This is particularly pertinent when shareholders lack direct involvement in the company's day-to-day operations. In such instances, it becomes incumbent upon shareholders to exercise their authority in mandating a statutory audit when circumstances deem it necessary.
As we navigate this evolving landscape, maintaining a judicious balance between audit exemption and ensuring accountability to shareholders remains crucial.
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References
Official announcement by SSM: https://www.ssm.com.my/Lists/Press%20Release/DispForm.aspx?ID=283&Source=https%3A%2F%2Fwww%2Essm%2Ecom%2Emy%2FPages%2FPublication%2FPress%5FRelease%2FPress%2DRelease%2Easpx&ContentTypeId=0x010098952881AC48D34C9D9967E0232CDB0B
Practice Directive – Audit Exemption: https://www.ssm.com.my/Pages/Legal_Framework/PDF%20Tab%202/pd3_2017-qualifying_criteria_for_audit_eemption_for_certain_categories_of_private_companies_0.pdf