New Audit Exemption Criteria For Private Companies
Is your Company Qualified?
Audit exemption means that certain companies no longer need to have their financial records checked by an auditor every year, as required by the Companies Act 2016. This is designed to save time and money for small and medium-sized businesses.
On 16 December 2024, the Companies Commission of Malaysia (CCM) announced new rules for which private companies can skip these audits. These new rules start applying from financial years beginning on or after 1 January 2025.
The main changes made are as follows:-
New Criteria: Instead of using the old criteria for audit exemption (like dormant companies, zero-revenue companies, etc.), the new criteria will be based on the company’s turnover (income), assets, and number of employees.
Eligibility: To qualify for the audit exemption, a company must meet any two of the three criteria (turnover, assets, and employees). However, this does not apply to foreign companies, public companies, exempt private companies, and private companies that are subsidiaries of listed companies.
Gradual Rollout: The new criteria will be introduced gradually over a 3-year period to help companies adjust. The thresholds for qualifying will increase step-by-step during this time.
| Year | 2025 (Phase 1) | 2026 (Phase 2) | 2027 (Phase 3) |
|---|---|---|---|
|
Financial Period |
Commencing on or after 1 January 2025 until 31 December 2025 |
Commencing on or after 1 January 2026 until 31 December 2026 |
Commencing on or after 1 January 2027 |
|
Threshold: |
|||
|
Turnover |
RM1,000,000
(maximum threshold) |
RM2,000,000
(maximum threshold) |
RM3,000,000
(maximum threshold) |
|
For a company to qualify for an audit exemption under the new criteria, its annual revenue for the current financial year and the two previous financial years must not exceed the maximum threshold set for the respective phase. |
|||
|
Assets |
RM1,000,000 (maximum threshold) |
RM2,000,000 (maximum threshold) |
RM3,000,000 (maximum threshold) |
|
Under the new audit exemption criteria, for a company to qualify, its total assets as reported in the current financial statement and the two previous financial years must stay below the maximum threshold set for the respective phase. |
|||
|
Number of Employees |
10
(maximum threshold) |
20
(maximum threshold) |
30
(maximum threshold) |
|
To qualify for an audit exemption, a company must ensure that the number of full-time employees (excluding directors, shareholders, and individuals with irregular wages like family members or friends) does not exceed the maximum threshold set for the respective phase at the end of the current financial year and the two previous financial years. |
|||
For illustration – Company ABC is having a December 31 year end. The financial information about its turnover, total assets and number of employees for the financial years 2022 to 2025 are summarised below:-
| Financial Year | Turnover | Total Assets | Number of Employees | Criterias | ||
|---|---|---|---|---|---|---|
|
31 Dec 2023 |
200,000 |
400,000 |
5 |
✔️ |
✔️ |
✔️ |
|
31 Dec 2024 |
400,000 |
800,000 |
8 |
✔️ |
✔️ |
✔️ |
|
31 Dec 2025 |
800,000 |
1,200,000 |
12 |
✔️ |
❌ |
❌ |
Company ABC will implement the new audit exemption criteria for the first time with its 2025 financial statements.
However, Company ABC’s 2025 financial statements do not meet the audit exemption requirements as it has not fulfilled at least two (2) of the criteria, despite meeting all criteria in the previous two (2) years. Consequently, Company ABC will also be ineligible for audit exemption for the financial years 2026 and 2027.
Nonetheless, Company ABC can reassess its eligibility for the 2028 financial statements.
Pros and Cons of the Audit Exemption
Increasing the audit exemption thresholds would allow many start-ups and SMEs to avoid having their financial statements audited. However, some companies might opt not to apply for the audit exemption if they are required to provide audited financial information, such as requirements set by the banks from which they have secured loans.
Pros:
- Cost Savings: Companies save on expenses by not having to engage auditors for the annual audit, allowing financial resources to be allocated to other business needs. Additionally, companies might reduce their accounting division size by outsourcing certain functions.
- Reduced Administrative Burden:Audits are time-consuming and management spends significant time fulfilling auditors’ requests. The audit exemption allows companies to focus more on core business activities.
Cons:
- Difficulty in Securing Financing: Banks and financial institutions typically require audited financial statements for due diligence to assess creditworthiness. Without audits, companies may face challenges in obtaining external funding due to higher scrutiny and borrowing costs.
- Impaired Creditworthiness:Companies opting for audit exemption might receive lower credit ratings and trust from investors, suppliers, and business partners, affecting their ability to raise capital, secure credit terms, and enter contracts.
- Tax Compliance Issues:The increase in revenue and total asset thresholds may attract tax authorities’ attention to unaudited financial statements used for annual tax returns. This could undermine tax agents’ confidence and create difficulties in appointing tax representatives.
- Regulatory Compliance Issues:The absence of audits raises the risk of undetected fraud and errors in financial information, potentially resulting in fines and penalties. For example, companies may underpay customs duties and Sales and Services Taxes (SST) to the Royal Malaysian Customs Department without a statutory audit. SMEs may also struggle with navigating regulations and requirements.
The new Practice Directive aims to benefit SMEs by reducing audit compliance costs and promoting growth. While the audit exemption offers advantages, it also brings practical considerations regarding the accuracy, reliability, and transparency of unaudited financial statements. Therefore, the decision to apply for an audit exemption should be carefully weighed.
We Can Give You a Helping Hand
At EMS Group, our experienced Business Outsourcing team, Assurance team and Corporate and Indirect Tax professionals are dedicated to offering your business tailored and client-centric services that align with your specific needs.
We strive to effectively identify and manage your company’s accounts and taxation matters, thus ensuring optimal outcomes for your business.
Our Business Outsourcing team can help you with:-
- Provide accounting outsourcing services – Updating chart of accounts and preparing monthly or quarterly management accounts.
- Prepare annual unaudited financial statements in a format acceptable under the Malaysian Approved Accounting Standards – You can use the annual unaudited financial statements to lodge with the CCM and circulate the same to shareholders during the annual general meeting.
- Provide financial information compilation services – The schedules and listings could be used for various tax and SST returns.
- Assist in the SST return checking before submission to the Royal Malaysia Customs Department.
- Prepare monthly or quarterly cash flow forecasts for funding purposes.
Our Assurance department can help you with:-
- Provide review or special audit engagements thereby increasing the level of creditability and reliability in financial reporting. You could use the report for many purposes such as to support the figures in the corporate tax return, for loan applications and renewal, and for circulation to shareholders during an annual general meeting.
Our Corporate Tax and Indirect Tax professionals can help with:-
- Prepare and file corporate tax returns.
- File tax estimates to tax authorities.
- Offer advice on tax compliance matters.
- Assistance with tax audits.
- Apply for tax refunds and tax instalment schemes.
- Liaison with tax authorities on tax issues
- Manage indirect tax exposure and liabilities.
Contact us today to learn more