The rules that exempt dormant and small companies in Malaysia from statutory audits are in the spotlight again. Or at least they should be.
In early February, the Companies Commission of Malaysia (CCM) released a consultative document on its planned changes to the criteria for audit exemption. The primary objective is to make more small and medium-sized enterprises (SMEs) audit-exempt, helping them to save time and money.
The consultation period ended on 28 February. To date, the feedback has not been published and there is no indication that the commission has formally revised the criteria. The impact of a wider net for audit exemption will not be confined to the SME sector, with potential knock-on effects in banking and finance, the capital markets, government revenue, and yes, accounting and audit.
Planned changes
Malaysia’s audit exemption rules were introduced in 2017, preceded by a similar consultation process, which generated 217 pages’ worth of comments from 106 respondents. This time round, the reaction to the proposed changes seems muted although the latest consultative document offers a lot of information. Meanwhile, enough time has passed to allow stakeholders to formulate solid views on the good and bad of relying on the unaudited accounts of certain small companies.
Those eligible for audit exemption are classified as dormant, zero-revenue and threshold-qualified companies. The CCM’s changes are planned for the second and third categories. Currently, audit-exempt zero-revenue companies must have no turnover and under RM300,000 (US$65,000) in total assets. The CCM plans to raise the total assets ceiling to RM500,000.
The most consequential amendments are for the threshold-qualified companies, which are currently identified according to annual revenue (up to RM100,000), total assets (up to RM300,000) and number of employees (up to five). The proposed new (and significantly higher) thresholds are RM1m in both revenue and assets, and 30 employees.
Based on how the government defines SMEs, the CCM says the present thresholds benefit only some micro-enterprises. With the revision, all micro-enterprises and some small enterprises can opt for audit exemption.
In 2020, 94% of companies eligible for audit exemption still chose to issue audited accounts
Food for thought
The February 2023 consultative document includes key findings of an analysis of the take-up rate for audit exemption in Malaysia, along with a 2021 survey by the Malaysian Institute of Accountants (MIA), and a comparative study on audit exemption thresholds in the UK, Australia and Singapore. However, these three sets of highlights do not form a cohesive and persuasive argument either for or against the higher thresholds.
The analysis of 2020 financial statements submitted to the CCM shows that 94% of companies eligible for audit exemption still chose to issue audited accounts. This analysis excludes the headcount threshold because the financial statements do not contain that data. The CCM rules out lack of awareness as a factor for the low take-up rate. It provides a few other possible reasons but nothing definitive.
The MIA survey findings incorporated in the consultative document reinforce the ideas that lenders, creditors, customers and investors prefer accounts that come with audit opinions, and that companies save time and costs when they dispense with audits. Most of the respondents agreed with threshold increases.
The section on the comparative study makes the point that increasing the thresholds is in line with what has been happening in the UK, Australia and Singapore. That supports the case for the criteria revision, and is perhaps all that is necessary for now.
But in the future, if the authorities decide that even more Malaysian companies should qualify for audit exemption, a robust impact assessment should be done first.
There has to be a broader perspective on audit exemption. Is it truly a win-win?
Upside/downside
The proposed new thresholds are meant to boost growth across the country’s SMEs – especially micro-enterprises and small enterprises – by reducing their regulatory and financial burden. The CCM also thinks that more audit exemptions will help small and medium-sized accounting practices to ‘move up the value chain of professional services to better serve the needs of SMEs’, and ease the pressure caused by the audit talent shortage in Malaysia.
That is undoubtedly a valid justification but there has to be a broader perspective on audit exemption. Is it truly a win-win measure? Or will there be unintended consequences that ultimately work against the national interest?
In 2017, the Swedish National Audit Office studied the results of the country’s 2010 abolition of the audit obligation for small limited companies. Its focus was on whether the objective of the reform was achieved, what else was triggered by the abolition, and if the negative consequences had been managed well. The exercise resulted in it recommending a reintroduction of the audit requirement.
The Malaysian experience with audit exemption may well be the opposite. But it is important to determine the overall impact and address shortcomings and problem areas before any proposed changes cause lasting damage.
