Starting from January 1, 2025, Malaysia has introduced new qualifying criteria for audit exemption aimed at providing financial relief to micro and small businesses. The government’s objective is to reduce the costs of compliance and auditing for smaller companies, enabling them to focus on growing their operations. These changes align with the government’s policy to help businesses reduce operational costs and improve the ease of doing business in Malaysia. The new criteria also aim to encourage entrepreneurship and ensure that businesses, especially SMEs, remain competitive in a dynamic market.
This policy change follows the legislative framework outlined in the Companies Act 2016 and the Companies Commission of Malaysia Act 2001. Specifically, Section 267(2) of the Companies Act 2016 provides provisions for the Registrar to grant an audit exemption to qualifying private companies under certain conditions.
Understanding the New Qualifying Criteria
Under the new rules, private companies can be exempted from the requirement if they meet any two of the following three criteria for the current financial year and the immediate past two financial years:
- Annual Income: The company’s annual income does not exceed RM3,000,000.
- Total Assets: The total assets of the company must not exceed RM3,000,000.
- Number of Employees: The company employs 30 or fewer employees.
By meeting two out of these three conditions, companies will be eligible for an audit exemption. This exemption is specifically designed to ease the regulatory burden on small businesses that do not have the financial capacity to bear the costs of a statutory audit.
It is important to note that while the criteria make it easier for certain small businesses to avoid the additional costs of audits, they are not automatically exempted. Companies must assess whether they meet these criteria each year based on their financial performance and employee count over the current and two prior financial years.
Implementation of the New Criteria
To allow businesses time to adapt to these new requirements, the Companies Commission of Malaysia has implemented a phased approach over three years. This gradual implementation will give companies the necessary time to adjust to the new thresholds, which will progressively increase in the coming years. By implementing the exemption criteria in phases, Malaysia is ensuring that even smaller businesses, which may have more difficulty meeting the thresholds, are still able to benefit over time.
The transition begins in 2025, with the criteria taking full effect for financial years starting on or after January 1, 2025. Prior to this, companies will continue to operate under the existing criteria outlined in the previous practice directive, which will remain valid until the end of 2024.
This phased approach ensures flexibility for businesses of varying sizes and allows for a smoother transition as they align with the new exemptions.
Eligibility for Audit Exemption
While the new criteria open up opportunities for many small businesses, not all companies are eligible for the exemption. To be eligible, a private company must satisfy two out of the three qualifying criteria. However, certain companies do not qualify for the audit exemption, including:
- Subsidiaries of public companies: These companies are still required to appoint auditors regardless of their size.
- Foreign companies: Companies incorporated outside Malaysia do not qualify for this exemption.
- Exempt private companies: Companies that are classified as exempt private companies and have filed a certificate relating to their exempt status are also excluded.
- Dormant companies: While companies that have been dormant (i.e., not conducting any business or operations) can qualify for audit exemption, certain requirements for dormant companies are also laid out in the regulations.
If a company ceases to meet the qualifying criteria, it will lose its audit exemption status. However, the company will remain exempt for the financial years it was eligible for, ensuring that the exemption applies only for the period in which the company met the criteria.
Impact on Small and Micro Enterprises
The introduction of the new audit exemption criteria will have a significant impact on Malaysia’s small and micro-enterprises. One of the most notable benefits is the reduction in compliance costs. Audit fees, which can be substantial for small companies, will no longer be a mandatory expense for businesses that qualify for exemption. This provides companies with more financial flexibility, allowing them to allocate resources toward growth, development, or innovation.
- Financial Relief: For many small businesses, the cost of auditing can be a major burden. By reducing this requirement, the government is allowing businesses to save on administrative costs, which is particularly important for companies operating on tight margins.
- Operational Efficiency: With the removal of the mandatory audit requirement, businesses can streamline their operations and focus on their core activities. This is particularly important for startups and micro-enterprises, which often have limited resources.
- Encouraging Growth and Development: The exemption also encourages small businesses to expand without the added pressure of costly audits. As companies grow, they can still be subject to audits once they surpass the criteria, ensuring that larger businesses remain compliant with regulations.
Conclusion: The Future of Audit Exemption in Malaysia
The introduction of the new qualifying criteria for audit exemption is a step toward improving the ease of doing business for small companies in Malaysia. By providing financial relief to micro and small businesses, the government is fostering an environment that encourages entrepreneurial activity, economic growth, and innovation.
As the criteria evolve over the next few years, more businesses will be able to benefit from reduced compliance costs. This shift allows smaller companies to thrive without the administrative burden of audits while ensuring that larger companies remain properly regulated.
The long-term impact of this policy will be a more vibrant and competitive business environment in Malaysia, where smaller businesses can focus on expansion and innovation without unnecessary financial constraints. For businesses that meet the criteria, this exemption represents an opportunity to allocate resources more effectively and enhance their long-term viability.
