Companies Act 2016: Small Companies Do Not Need Auditors

Under the Companies Act 2016, it appears that dormant companies and small private companies will no longer need to appoint auditors. This audit exemption will allow startups and SMEs to enjoy further cost savings in the running of their businesses.

Allowing for audit exemption also brings Malaysia in line with practices in other countries like the UK, Australia and Singapore.

[edit: The Companies Commission of Malaysia has now published the feedback it has received on the public consultation on the proposed audit exemption. I have written about it here.]

audit1
Image from NY – http://nyphotographic.com

As a starting point, section 267(2) of the Companies Act 2016 allows the Registrar of Companies to exempt any private company from the requirement to appoint an auditor for each financial year.

Now, the Companies Commission of Malaysia (CCM) has initiated a Public Consultation of Subsidiary Legislation under the Companies Act 2016. On its website, there are several draft guidelines and a draft consultation document, including the  draft Practice Directive (Audit Exemption) 2017.

It is proposed that there will essentially be two categories of private companies which will enjoy audit exemption. The information below is still subject to the final Practice Directive to be issued.

Dormant Companies

A private company will be exempted from having to appoint an auditor if:

(i) it has been dormant since the time of its formation; or

(ii) it has been dormant for three consecutive financial years.

A company is treated as being dormant when there has been no accounting transaction.

As a safeguard, any member or members holding at least 5% of the total issued shares, or at least 5% of the members, can still require such a dormant company to carry out an audit of its accounts for that financial year.

Small Companies

There is now a category known as a small company. This would be very relevant to startups and SMEs, since many may fall within the treatment of a small company. A small company need not appoint an auditor to audit its financial statements.

A company qualifies to be a small company by satisfying two of the three criteria for the period of two financial years immediately before the financial year:

(i) Revenue: Does not exceed RM300,000.00 for each financial year.

(ii) Total Assets: Does not exceed RM500,000.00 for each financial year.

(iii) Employees: Not more than 5 employees.

There are also references to how to treat the parent company, subsidiary or a group of companies as a small company or a small group of companies. This will allow such companies to also enjoy exemption from having to appoint an auditor.

Briefly as well, exempt private companies can enjoy such audit exemption if these companies comply with the above criteria for a dormant company or a small company as well.

Finally, although these companies may be exempted from audit, the companies must still lodge their financial statements with the Registrar of Companies. So these financial statements would be in its unaudited form.

Concluding Thoughts

The introduction of audit exemption for certain company is welcomed. It provides more options for companies to keep their costs low. The audit profession may see a hit to their fees however, where many small companies can avoid the need for having to engage an auditor. From the experience from other jurisdictions that exempt small companies from the need for an audit, the various thresholds also continue to climb after a few years so that more and more companies enjoy the audit exemption.

On the flip side, it will be interesting to see how the financial institutions and funders react. Would they still insist that the SMEs or startups provide them with audited financial statements? So for instance, that may require an ad hoc audit to be carried out when the small company is applying for financing.

 

Advertisements

6 thoughts on “Companies Act 2016: Small Companies Do Not Need Auditors

  1. Tan 1 December 2016 / 8:57 am

    The exemption is open for discussion. Your article the way you write seem to be final.

    The registar has the power to exempt any Co fm audit. But im diagreed with the view that the sentences of small co do not need audit

    Like

  2. Bose Dasan K Palasingam 21 December 2016 / 9:16 pm

    A long standing chartered accountant working in UK said the biggest mugging taking place is the statutory audit requirement. He can’t see much value in reporting to key shareholders what they already know especially in small owner controlled companies. We need to progress and truly implement value added services as the author suggests. Rubber stamping and collecting audit fees without a statement saying you can rely on the audit statement as an accurate indication of value. Please adopt all the arguments as provided by this author. .

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s