Audit Exemption Malaysia: New Qualifying Criteria

The Companies Commission of Malaysia (SSM) has introduced an audit exemption to reduce costs for small companies, with new rules on turnover, assets, and employees phased in over three years. Certain companies, such as public company subsidiaries, remain ineligible. While the exemption offers benefits, companies should assess its impact on governance and transparency, as explained by the Ecovis experts from ECOVIS Malaysia.

The Companies Commission of Malaysia (SSM) introduced the audit exemption under the Companies Act 2016, which came into effect on 31 January 2017. However, the specific guidelines on audit exemption were issued later through Practice Directive 3/2017, which was published on 4 August 2017 and became effective for financial periods ending on or after 31 December 2017.

What are the Objectives?

• To reduce the financial burden faced by micro and small companies, as well as the cost of preparing audited accounts.
• To align with the Government’s policy to help Malaysian companies reduce the overall cost of doing business.
• To encourage business growth by reducing the regulatory burden, allowing small businesses to focus on business development and expansion rather than compliance costs.
• To optimise regulatory resources by exempting small companies from audits, allowing regulators to focus on larger companies and high-risk entities that require closer financial supervision.
• To aligning with global best practices. Many countries have introduced audit exemptions for small companies. Malaysia follows similar international standards to remain competitive and business-friendly.

What are the Current Criteria?

• Dormant companies: Companies must have either been dormant since the time of incorporation, or dormant during the immediate past and current financial year.
• Threshold Qualified Companies: Companies must fulfil the following requirements for the current Statement of Financial Position as well as in the immediate past two financial years:
  • Annual revenue not exceeding RM100,000
  • Total assets of RM300,000 or less
  • Has not more than five (5) employees
• Zero Revenue Companies: Companies must fulfil the following requirements for the current Statement of Financial Position as well as in the immediate past two financial years:
  • Revenue = NIL
  • Assets = do not exceed RM300,000

NEW Qualifying Criteria

A private company qualifies for audit exemption if it meets any two (2) of the following criteria:

• The annual income of the company for the current financial year and the immediately preceding two (2) financial years does not exceed RM3,000,000.
• The total assets of the company in the current statement of financial position and in the immediately preceding two (2) financial years does not exceed RM3,000,000.
• The number of employees as at the end of the current financial year and in the immediately preceding two (2) financial years does not exceed thirty (30).

Implementation Stages

1. The audit exemption threshold criteria will be phased in over a three (3) year period.
2. The thresholds for revenue, assets and number of employees will increase incrementally over three (3) years.
3. The new qualifying criteria will be effective for financial statements with fiscal years beginning on or after January 1, 2025.
4. The criteria under the current Practice Directive will remain in effect until 31 December 2024.

Other Conditions

1. Companies which have been dormant since their incorporation or have been dormant during the immediate past and the current financial year are also EXEMPT from the audit requirement.
2. The exemption under this Practice Direction does not apply to:
   • An exempt private company that has elected to file a certificate of its exempt private company status with the Registrar pursuant to section 260 of the CA 2016;
   • A private company that is a subsidiary of a public company; and
   • A foreign company.
3. If a company ceases to qualify for exemption from audit, it will cease to be exempt but will remain exempt in respect of the accounts for the financial years in which it qualifies.

* The other conditions remain the same as in the existing Practice Direction.

Implication

1. An estimated 42% of active companies are expected to benefit immediately from this first-phase.
2. Several factors need to be considered that could result in a lower number of eligible companies, i.e:
   1. Employee Thresholds
      The number of eligible companies under this proposal does not take into account the number of people employed by companies.
   2. Financial Institutions Requirements
      Companies with existing obligations to these institutions or plans to secure financing facilities may still need to continue to have their financial statements audited in order to meet their obligations. Based on the statistics as of October 2024 on the charges registered with the SSM, 34% of active companies have unsatisfied charges and may continue to have their financial statements audited.
   3. Regulatory Requirements
      Certain agencies, such as governmental or other relevant authorities, may have regulatory requirements that mandate the submission of audited financial statements regardless of the company or financial status.
   4. Other Legal Obligations
      Certain legal obligations, such as contracts or grants, might stipulate the need for audited accounts, and the company may opt to continue with the audit.

While providing certain benefits, the audit exemption also raises certain practical considerations regarding the concerns of various stakeholders regarding the accuracy, reliability and transparency of the unaudited financial statements. The decision to apply for an audit exemption should be carefully considered based on the company’s size, financial complexity, stakeholder needs and future business plans. While an audit exemption reduces compliance costs, companies must ensure that financial governance remains strong to maintain trust and transparency.