The Companies Commission of Malaysia (SSM) today issues a Practice Directive highlighting the categories of private companies that qualify for audit exemption.

Although in general all companies are required to prepare and audit the financial statements, the Companies Act 2016 empowers the Registrar to exempt certain categories of private companies from having to appoint an auditor and to impose the criteria and conditions accordingly.

In this regard, the following categories of private companies are exempted from the audit requirement:

1. Dormant companies;
2. Zero-Revenue companies; and
3. Threshold-Qualified companies.

A dormant company qualifies for audit exemption if it has been dormant from the time of its incorporation; or it is dormant throughout the current financial year and in the immediate preceding financial year.

A zero-revenue company is qualified for audit exemption if it does not have any revenue during the current financial year; it does not have any revenue in the immediate past two financial years; and its total assets in the current Statement of Financial Position (FS) does not exceed RM300,000 as well as in the FS of the immediate past two financial years.

A threshold-qualified company is qualified for an audit exemption if it fulfills the following criteria-

1. It has revenue not exceeding RM100,000 during the current financial year and in the immediate past two (2) financial years;
2. Its total assets in the current Statement of Financial Position does not exceed RM300,000 and in the immediate past two (2) financial years; and
3. It has, at the end of its current financial year and in each of its immediate past two (2) financial years’ end, not more than five (5) employees.

The rationale for the criteria adopted by the Registrar are based on the approaches that comprised a combination of both economic structure and economic size espoused by leading jurisdictions which have successfully implemented audit exemption policy more than a decade ago. The criteria adopted by the Registrar is also coupled with safeguards of allowing shareholders holding not less than 5% of the total voting shares to require the company to have its accounts audited. In addition, the Registrar is also given the power to direct companies to have their accounts audited.

Notwithstanding the audit exemption, companies are required to lodge a full set of an unaudited financial statements accompanied with a statement that the company is qualified for audit exemption and that the company receives no request from its shareholders that audit must be conducted for a particular year.

SSM reiterates the importance of keeping accounting records and preparing financial statements as required under the Companies Act 2016 and such requirements are mandated to all companies irrespective whether they qualify for audit exemption or otherwise.

“Financial statements are still required to be prepared and lodged to the Registrar by all companies and these must be prepared in accordance with the approved accounting standards, hence the dispensation of audit will not undermine the quality of financial statements prepared. As regards to lodging financial statements which are fraudulent, section 593 of the Companies Act 2016 makes it an offence and prosecution action will be taken against errant companies and directors for lodging false and misleading statements to the Registrar,” says Dato’ Zahrah Abd Wahab Fenner, Chief Executive Officer of SSM.

“To this end, SSM has been vigilant and conducted continuous enforcement as reflected in the number of cases with respect to fraudulent information lodged with the Registrar. For this year alone, as at 30 June 2017, a total of 189 investigation papers have been opened, 32 cases have been concluded and 4 cases have been prosecuted,” she adds.

She further elaborated that audit exemption must be looked from the perspective of facilitating small companies towards reducing compliance costs especially in cases of owner-managed companies. As the auditor is responsible to report to the shareholders on the financial statements prepared by the directors, the value of audit is less significant where the directors and shareholders are the same people. As such, the Parliament has exercised its wisdom when passing the law which allows audit exemption for certain categories of private companies and therefore, the parameters of audit exemption should be where there are minimal risks of fraud coupled with appropriate safeguards for shareholders’ protection.

COMPANIES COMMISSION OF MALAYSIA
2 August 2017