Sometimes, a public consultation can produce a sequel. In early February 2023, the Companies Commission of Malaysia floated a proposal to enlarge the pool of small companies that qualify for audit exemption. Stakeholders were invited to give comments, but to date, the rules for exemption have yet to change. Instead, the commission last month initiated a second consultation after deciding that the existing exemption criteria, introduced in August 2017, should be relaxed beyond what was put forward last year.
It is apparent that the government is intent on freeing many more small and medium-sized enterprises (SMEs) from the longstanding statutory obligation to file audited financial statements.
Thresholds
Currently, companies that don’t have to appoint external auditors are those that are dormant, have no revenue, or are small enough not to exceed three thresholds in the current financial year and the immediate past two financial years. These thresholds are annual revenue of RM100,000 (US$21,000), total assets of RM300,000 and a headcount of five.
The audit industry needs to work hard to raise awareness of the value of audit
Last year, the commission proposed increasing both the revenue and assets thresholds to RM1m and the employee threshold to 30. The consultative document explained that these criteria needed to be reviewed to ensure their relevance to the objective of audit exemption, ‘which is to facilitate companies towards reducing compliance costs, especially in cases of owner-managed companies’.
Overhaul
According to the commission, the feedback received during the first consultation prompted another review of the exemption criteria. This time, it is more of a revamp.
The proposed thresholds are now RM3m (for both revenue and assets) and 30 for number of employees. To be eligible for audit exemption, a private company needs to fulfil any two of the three thresholds, instead of all three as is required currently. The exemption categories of dormant and zero-revenue companies will be eliminated, with qualification for audit exemption based on the thresholds only.
A case can certainly be made for a measured implementation of the new criteria
If these new rules are put into effect, no micro enterprise or non-manufacturing small enterprise, as defined by SME Corporation Malaysia, will need to have their accounts audited. The commission’s records as of last July show that 77.4% of all Malaysian companies had turnover of less than RM3m, while 74.3% had assets of less than RM3m. Another thing to bear in mind is that, going by 2022 figures from the Department of Statistics Malaysia, an SME here on average employs fewer than seven people.
These numbers have raised the spectre of audit jobs disappearing almost overnight, so naturally, there is consternation among small and medium-sized accounting practices (SMPs), many of whose audit clients are SMEs.
Not so fast
Very few people are disputing the idea that not all companies should be required by law to appoint external auditors.
Companies eligible for exemption can opt to have their financial statements audited
However, many are arguing against the pace and extent of the loosening of the audit mandate as laid out in the March 2024 consultation document. And yes, a case can certainly be made for a gradual and measured implementation of the new criteria.
Meanwhile, there is a counterargument that cannot be ignored. Companies eligible for audit exemption can nevertheless opt to have their financial statements audited. They just need to be convinced that the benefits from doing so significantly outweigh the costs.
What of the opportunities for accountancy practices? SMPs are businesses too, and businesses thrive by consistently supplying value that people want and appreciate.
Through the individual efforts of practitioners and the collective weight of professional bodies, the audit industry needs to work hard to raise awareness of the value of audit. A change in the rules does not diminish what an audit opinion means to the many who rely on it.
