New Qualifying Criteria For Audit Exemption

The Companies Commission of Malaysia (SSM) introduced 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 the Practice Directive 3/2017, which was published on 4 August 2017 and became effective for financial periods ending on or after 31 December 2017.

Objectives

1. To reduce the financial burden faced by micro and small companies, as well as the cost of preparing audited accounts.
2. In line with the government’s policy to help companies in Malaysia reduce the overall cost of doing business.
3. Encouraging business growth by reducing regulatory burdens, small businesses can focus more on business development and expansion rather than compliance costs.
4. Optimizing Regulatory Resources by exempting small companies from audits allows regulatory authorities to focus on larger corporations and high-risk entities that require more stringent financial oversight.
5. 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.

Current Criteria

1. Dormant companies: Companies must have either been dormant since the time of incorporation, or dormant during the immediate past and current financial year
2. 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

    3.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 fulfils any two (2) of the following criteria:

1. The annual income of the company during the current financial year and in the immediate past two (2) financial years does not exceed RM3,000,000;
2. The total assets of the company in the current statement of financial position and in the immediate past two (2) financial years does not exceed RM3,000,000; or
3. The number of employees at the end of the current financial year and in the immediate past two (2) financial years does not exceed thirty (30).

Implementation Stages

1. The threshold criteria for audit exemption will be implemented in a gradual approach over three (3) years.
2. The thresholds for revenue, assets and number of employees will increase incrementally over three (3) years.
3. The new qualifying criteria is applicable for financial statements with annual periods commencing on or after 1 January 2025.
4. Criteria under current Practice Directive will remain in force until 31 December 2024.

Other Conditions

1. Companies which are dormant since the time of incorporation, or dormant during the immediate past and current financial year will also be EXEMPTED from audit requirement.
2. The exemption under this Practice Directive will not be applicable to: 

• an exempt private company which has opt to lodge a certificate relating to its status as an exempt private company to 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.Where a company ceases to be qualified for audit exemption, it shall thereupon cease to be exempted but the company shall remain exempted in relation to the accounts for the financial years in which it qualifies.

* The other conditions remain the same as those outlined in the existing practice directive.

Implication

• An estimated 42% of active companies are expected to immediately benefit from this first-phase
• Several factors need to be considered that might cause lower number of eligible companies, i.e.:
• Employee Thresholds 

         Number of eligible companies under this proposal does not take into consideration the number of employees employed by companies.

• Financial Institutions Requirements

         Companies with existing commitments to those institutions or plans to secure funding facilities may need to continue auditing financial statements to fulfil their obligations. Based on statistics as of October 2024 on           charges registered with SSM, 34% of active companies are having unsatisfied charges and may continue to audit their financial statements.

• Regulatory Requirements

         Certain agencies such as government or other relevant authorities might have regulatory requirements that mandate submission of audited financial statement regardless of company or financial status.

• Other Legal Obligations

         Certain legal obligations such as contracts or grant might stipulate the need for audited accounts, making the company opt to continue with audit.

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