Small Companies in Malaysia Do Not Need Auditors under the Companies Act 2016
On 4 August 2017, the Companies Commission of Malaysia (CCM) issued a Practice Directive pursuant to Section 20C of the CCM Act 2001 and subsection 267 (2) of the Companies Act 2016 (CA 2016). The objective of the directive is to set out the qualifying criteria for private companies from having to appoint an auditor in a financial year (audit exemption). Under Subsection 267 (1) of the Companies Act 2016, every private company needs to appoint an auditor for each financial year of the company for purposes of auditing its financial statements. However, pursuant to subsection 267(2) of the CA 2016, the Registrar may exempt any private company from having to appoint an auditor according to the criteria and conditions set out in the Practice Directive. Companies qualified for audit exemption include dormant companies; zero revenue companies; and threshold qualified companies. Where a company which is exempted from audit requirements ceases to be so qualified, it shall thereupon cease to be so exempt but it shall remain so exempt in relation to accounts for the financial years in which it qualifies.
The Practice Directive takes effect in the case of a dormant company where the company is incorporated on or after 31 January 2017, the financial statements with annual periods commencing on or after 31 January, 2017 and where the company is incorporated on or before 30 January, 2017, the financial statements with annual periods commencing on or after 1 September, 2017. In the case of zero revenue companies, for financial statements with annual periods commencing on or after 1 January, 2018; and in the case of threshold qualified companies, for financial statements with annual periods commencing on or after 1 July, 2018.
The audit exemption under the PD will not be applicable to an exempt private company which has chosen to lodge a certificate relating to its status as an exempt private company to the Registrar pursuant to section 260 of the CA 2016. Prior to the issuance of the Practice Directive, in early November last year, the Companies Commission of Malaysia (CCM) issued exposure drafts of regulations, guidelines and other documents to support the implementation of the Companies Act 2016, which replaces the Companies Act 1965. Most were fine with the idea that companies with zero business activity don’t need audited financial statements. However, it seems impossible to achieve consensus on audit exemption for small companies and while the SME community is quite happy about not having to pay audit fees, the audit industry was worried about a shrinking revenue base.
And there’s another layer of disagreement over the definition of a small company. The CCM has chosen three indicators: a full-year revenue of RM100,000 or less, year-end assets of RM300,000 or less, and a year-end headcount of no more than five employees. To qualify for audit exemption in a financial year, a company must satisfy ALL these three criteria in the current as well as each of two previous financial years. Some respondents say the thresholds are too low, while others say the bars should be set higher, while there are also those who argue that different yardsticks ought to be used or who just want more clarity on the criteria. In explaining the need to extend the consultation on the draft Practice Directive, the CCM says it’s still receiving comments and the “valuable feedback is critical in formulating the most appropriate policies to be adopted”.
The Malaysian Institute of Accountants (MIA) responded vigorously to the draft Practice Directive. It wrote to the CCM to argue that exempting small companies will hinder the SMEs from producing accurate financial statements. In addition, the move will lead to inaccurate tax submission, which in turn will have an impact on society. “Whilst we supported audit exemption for dormant companies, we strongly disagree with the proposition to apply it to small companies and we are of the view that an impact assessment has to be done before a final decision is made by the CCM,” says the MIA on its website.
This is a tremendous test of the CCM’s ability to engage effectively with stakeholders and to intelligently weigh disparate views and interests before coming up with sturdy policies that will ultimately benefit the country. As many have argued, auditing does not provide total assurance, in fact it is based on sampling and there have been numerous fraud case despite an audit being performed. Even the big four auditing firms in the country are unable to give a total assurance.
Is such accuracy really matters, then some have questioned why not get all sole proprietors, partnership or even Limited Liability Partnership (LLP) to be audited as well before taxes are submitted. LLP is an alternative business vehicle regulated under the LLP Act 2012 which combines the characteristics of a company and a conventional partnership. LLP offers advantages similar to a private limited Company (Sdn Bhd) such as Limited Liability, Perpetual Legal Existence but cheaper compliance costs due less statutory compliance – not compulsory to have audited accounts and appoint qualified Company Secretary. The whole purpose of the CCM is to help cut costs, and if LLP can be exempted from audit, why not small company SMEs? We do agree that listed companies, big companies, or medium sized companies which involve public interest have to be audited as it affect many stakeholders, but for someone who sells hawker food or runs a small coffee shops, the same should not apply. 3E welcomes CCM’s launch of the audit exemption which will benefit many small family businesses and SMEs. Although the starting threshold is very low, we know it will increase in future for sure as that is the direction to promote easier to do business in Malaysia and enrich more citizens in the long run. This will help Malaysia achieved a developed nation status by 2020. Good job CCM!