Companies Commission of Malaysia issues Consultative Document on Audit Exemption Criteria for Private Companies
13 February 2023
Pursuant to section 267(2) of the Companies Act 2016, the Registrar of Companies issued Practice Directive No. 3/2017 – Qualifying Criteria for Audit Exemption for Certain Categories of Private Companies (‘
PD3/2017’) that sets out,
inter alia, three categories of private companies, namely Dormant Companies, Zero-Revenue Companies and Threshold-Qualified Companies, that are eligible to be exempted from appointing an auditor to audit their financial statements for each financial year and the relevant qualifying exemption criteria. A summary of the existing qualifying criteria in respect of each category of audit exempt eligible private companies is set out in column (3) of the Table below.
On 2 February 2023, the Companies Commission of Malaysia (‘
CCM’) issued a
Consultative Document on the Proposed Review of Audit Exemption Criteria for Private Companies in Malaysia (‘
Consultative Document’) seeking public feedback on its proposal to introduce new thresholds for several of the qualifying criteria for audit exemption set out in PD3/2017.
In formulating the proposals, the CCM considered the following:
- the CCM’s analysis of financial statements lodged for financial years 2018 to 2020 disclosed that only 4%, 7% and 6% of the companies that are eligible for audit exemption submitted unaudited financial statements in 2018, 2019 and 2020 respectively;
- the findings of a survey, ‘The Impact of Audit Exemption on Small Companies and Audit Firms’ by the Malaysian Institute of Accountants (MIA) in 2021; and
- the CCM’s comparative study of the position in three jurisdictions having similar audit exemptions, namely the United Kingdom, Australia and Singapore, showing that there has been a general trend in these jurisdictions to increase the thresholds in some of the qualifying criteria to enable more companies to qualify for audit exemption.
Having done so, the CCM proposed in the Consultative Document to change the qualifying threshold for audit exemption as follows:
- Zero-Revenue Companies: to increase total assets from RM300,000 to RM500,000 for the current Statement of Financial Position as well as in the immediate past two financial years; and
- Threshold-Qualified Companies: to increase: (a) the annual revenue from RM100,000 to RM1,000,000 during the current financial year and the immediate past two financial years; (b) the total assets in the current Statement of Financial Position from RM300,000 to RM1,000,000 as well as in the immediate past two financial years; and (c) the number of employees from not more than five to not more than 30 employees at the end of its current financial year and in the immediate past two financial years.
If the proposed changes in the Consultative Document are adopted, the revised qualifying criteria for audit exemption will be as set out in Column (4) of the Table below.
| QUALIFYING CRITERIA OF PRIVATE COMPANIES |
| (1) |
(2) |
(3) |
(4) |
| No. |
Type of private company |
Existing Criteria |
Proposed 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. |
No change |
| 2. |
Zero-Revenue Companies |
Companies must fulfil the following requirements:
| a. |
No revenue during the current financial year and in the immediate past two financial years; and |
| b. |
Total assets do not exceed RM300,000 for the current Statement of Financial Position and in the immediate past two financial years. |
|
Companies must fulfil the following requirements:
| a. |
No revenue during the current financial year and in the immediate past two financial years; and |
| b. |
Total assets do not exceed RM500,000 for the current Statement of Financial Position and in the immediate past two financial years. |
|
| 3. |
Threshold-Qualified Companies |
Companies must fulfil the following requirements:
| a. |
Annual revenue not exceeding RM100,000 during the current financial year and the immediate past two financial years; |
| b. |
Total assets in the current Statement of Financial Position of RM300,000 or less and in the immediate past two financial years; and |
| c. |
Has not more than 5 employees at the end of its current financial year and in the immediate past financial years. |
|
Companies must fulfil the following three requirements:
| a. |
Annual revenue not exceeding RM1,000,000 during the current financial year and the immediate past two financial years; |
| b. |
Total assets in the current Statement of Financial Position of RM1,000,000 or less and in the immediate past two financial years; and |
| c. |
Has not more than 30 employees at the end of its current financial year and in the immediate past two financial years. |
|
Comments on the Consultative Document are to be submitted by email to the SSM by
28 March 2023.
Comments
The proposal to increase the qualifying thresholds for certain criteria for audit exemption is a commendable initiative by the CCM. The increase in the qualifying thresholds will increase the number of private companies, including small and medium enterprises (SMEs), that will qualify for audit exemption and assist such companies to reduce their compliance costs and the time spent in the audit process. However, as acknowledged by the CCM in the Consultative Document, other factors such as the requirement by shareholders, lenders, major trade creditors and major customers for audited financial statements may continue to be a dampener to the take-up rate for audit exemption by private companies.
Alert by Sheba Gumis (Partner) and Tham Zhi Jun (Associate) of the Corporate Practice of Skrine.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.