New Audit Exemption Criteria for Micro, Small and Medium Enterprises (MSME)

The Companies Commission of Malaysia (SSM) recently introduced Practice Directive 10/2024 (PD 10/2024), marking a significant shift in the audit exemption framework for micro, small, and medium enterprises (MSMEs). This initiative aims to reduce the financial burden on small businesses, promote ease of doing business, and ensure financial accountability.

What is Audit Exemption?

Audit exemption allows eligible private companies to forgo statutory audits of their financial statements, provided they meet specific criteria. This measure was first introduced in 2017 under Practice Directive 3/2017 and is being updated in PD 10/2024 to better reflect the evolving needs of businesses.

Qualifying Criteria

Effective from 1 January 2025, private companies can qualify for audit exemption if they meet at least two of the following criteria for the current and preceding two financial years:

1. Annual Revenue: Does not exceed RM3,000,000.
2. Total Assets: Does not exceed RM3,000,000.
3. Number of Employees: Does not exceed 30.

These thresholds will be introduced in three phases:

• Phase 1 (2025): RM1,000,000 turnover, RM1,000,000 assets, and 10 employees.
• Phase 2 (2026): RM2,000,000 turnover, RM2,000,000 assets, and 20 employees.
• Phase 3 (2027): RM3,000,000 turnover, RM3,000,000 assets, and 30 employees.

Definitions

To ensure clarity, PD 10/2024 provides specific definitions for the qualifying criteria:

1. Annual Revenue: Includes revenue received and receivable during the year but excludes:

   • Credit entries for reversal of accounting entries from earlier periods.
   • Accounting entries related to taxation.
   • Reversals of previously made provisions.
   • Gains on derecognition of property, plant, equipment, and investment property.

2. Total Assets: Refers to current and non-current assets as defined in the applicable approved accounting standards.

3. Full-Time Employees: Refers to paid workers meeting one of the following criteria:

   • Working for at least six (6) hours a day for at least 20 days a month.
   • Working for a total of at least 120 hours a month.

• Directors who are also full-time employees.
• Shareholders who are also full-time employees.
• Family members or friends working without pay or receiving irregular wages.

Non-Application

The exemption from audit under PD 10/2024 will not apply to the following categories of companies:

• Exempt private companies that have opted to lodge a certificate relating to their status as an exempt private company with the Registrar pursuant to section 260 of the Companies Act 2016.
• Public companies, including listed companies.
• Private companies that are subsidiaries of public companies.
• Foreign companies.

Requirements for the Submission of Accounts

Any company that has elected to be exempted from audit must lodge its unaudited financial statements with the Registrar, accompanied by the required certificate in compliance with sections 258 and 259 of the Companies Act 2016.

Standards for Preparing Unaudited Reports

The unaudited financial statements must adhere to the following requirements:

1. Compliance with Approved Standards: Unaudited financial statements must comply with the applicable approved accounting standards as specified under subsection 244(1) of the Companies Act 2016.
2. Audit Exemption Certificate: The unaudited financial statements must be accompanied by an Audit Exemption Certificate. This certificate must be signed by a director certifying, to the best of their knowledge and belief, that the company is entitled to audit exemption under section 267(2) of the Companies Act 2016. If the director is not primarily responsible for the financial management of the company, the name of the responsible person must also be stated.

Additional Considerations

• Companies must continue to prepare unaudited financial statements, accompanied by directors’ reports and certificates of compliance.
• Dormant companies, which have no business activities or accounting transactions, are also eligible for audit exemption.

Impact on the Business Landscape

The new criteria aim to alleviate administrative burdens on MSMEs, enabling them to redirect resources toward growth and innovation. By addressing the auditor-to-company ratio, which was highlighted as a concern in the World Bank’s 2013 Report on Observance of Standards and Codes (ROSC), this initiative is also expected to enhance the quality of audits conducted for larger businesses.

How to Elect for Audit Exemption

Eligible companies need not apply formally but must ensure compliance with the criteria outlined in PD 10/2024. The election is made by filing the required unaudited financial statements with SSM within the stipulated timeframe.

Looking Ahead

With the implementation of PD 10/2024, Malaysia is taking a progressive step toward a more dynamic and inclusive regulatory framework. MSMEs are encouraged to review their financial practices and evaluate their eligibility for this audit exemption to benefit from reduced costs and streamlined compliance processes.