New Audit Exemption Criteria For Private Companies

Are You Eligible?

Audit exemption refers to the elimination of mandatory audit requirements under the Companies Act 2016 for certain types of corporations. The main objective of this exemption is to lessen the regulatory burden and compliance costs on small and medium-sized enterprises (SMEs) from having their financial statements audited annually as these audits may be time-consuming and expensive when compared to the size of their operations.

Existing Audit Exemption Criteria

Presently, Practice Directive No. 3/2017 issued by the Companies Commission of Malaysia (CCM) sets out the audit exemption qualifying criteria for certain categories of private companies. The categories are:-

Dormant Companies

i. The company has been dormant from the time of its incorporation, or

ii. The company is dormant throughout the current financial year and in the immediate preceding financial year.

Zero-revenue Companies

i. The company does not have any revenue during the current financial year and in the immediate past two (2) financial years; and

ii. The company has total assets not exceeding RM300,000 in its statement of financial position for the current financial year and in the immediate past two (2) financial years.

Threshold-qualified Companies

i. The company has revenue not exceeding RM100,000 during the current financial year and in the immediate past two (2) financial years;

ii. The company has total assets not exceeding RM300,000 in its statement of financial position for the current financial year and in the immediate past two (2) financial years; and

iii. The company does not have more than 5 employees by the end of its current financial year and in the immediate past two (2) financial years.

New Audit Exemption Criteria

On 16 December 2024, the CCM issued a new Practice Directive No. 10/2024 “Qualifying Criteria For Audit Exemption For Certain Private Companies In Malaysia” which sets out the new audit exemption qualifying criteria. The exemption will take effect for financial reporting periods commencing on or after 1 January 2025.

The main changes made are as follows:-

To replace the existing exemption criteria based on the categorisation of dormant companies, zero-revenue companies and threshold-qualified companies with qualifying criteria based on turnover, assets, and employee thresholds.
A company may apply for the audit exemption if it fulfils any two (2) of the three (3) specified criteria below. However, the said criteria do not apply to a foreign company, a public company, an exempt private company and a private company that is a subsidiary of a listed company.

To ease the transition to the new audit framework, the threshold criteria for audit exemption will be rolled out in phases over a 3-year period and will increase incrementally as follows:-

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
Thresholds:
1. Turnover	RM1,000,000 (maximum threshold)	RM2,000,000 (maximum threshold)	RM3,000,000 (maximum threshold)
1. Turnover	The company’s annual revenue for the current financial year and the two (2) preceding financial years should not exceed the maximum threshold set for the respective phase
2. Assets	RM1,000,000 (maximum threshold)	RM2,000,000 (maximum threshold)	RM3,000,000 (maximum threshold)
2. Assets	The company’s total assets in the current statement of financial position and the two (2) preceding financial years should not exceed the maximum threshold set for the respective phase
3. Number of Employees	10 (maximum threshold)	20 (maximum threshold)	30 (maximum threshold)
3. Number of Employees	The number of full time employees (excluding directors, shareholders, and individuals with irregular wagers such as family members or friends) at the end of the current financial year and the two (2) preceding financial years should not exceed the maximum threshold set for the respective phase

For illustration – Company XYZ is having a December 31 year-end. The financial information about its revenue, total assets and number of employees for the financial years 2022 to 2025 are summarised below:-

Financial Year	Revenue	Total Assets	Number of Employees	< ------- Criterion --------- >
Financial Year	Revenue	Total Assets	Number of Employees	1	2	3
31 Dec 2023	RM 200,000	RM 400,000	5	√	√	√
31 Dec 2024	RM 400,000	RM 800,000	8	√	√	√
31 Dec 2025	RM 800,000	RM 1,200,000	12	√	X	X

Company XYZ will apply the new audit exemption criteria for the first time to its 2025 financial statements.

Based on the new qualifying criteria, the 2025 financial statements are not eligible for audit exemption because Company XYZ has not fulfilled the minimum number of two (2) criteria although it had fulfilled all the criteria in the immediate past two (2) financial years. As a consequence, Company XYZ is also not qualified for the audit exemption for the coming financial years 2026 and 2027. Nevertheless, Company XYZ can evaluate its eligibility again for its 2028 financial statements.

Pros and Cons of the Audit Exemption

Raising the audit exemption thresholds would enable a large pool of start-ups and SMEs to have their financial statements from being audited. However, some companies may choose not to apply for the audit exemption if they are required to furnish audited financial information due to certain reasons eg as stipulated by the banks from whom they have obtained loans.

The are some pros and cons of enjoying the audit exemption. These are: -

Pros

Cost savings – The audit exemption reduces the financial burden on companies by allowing them not to engage auditors to conduct the yearly audit. This would eliminate the costs associated with the statutory audit and companies could allocate more financial resources for other business needs. In addition, companies may reduce the size of their accounting division by outsourcing certain accounting functions to external parties.
Reduced administrative burden – Audit is a time-consuming activity which requires management to spend significant time to fulfil auditors’ requests. The audit exemption would allow companies to devote more resources on core business activities.

Potential problems

Difficulty in securing financing – Most banks and financial institutions require audited financial statements as part of their due diligence process to evaluate their customers’ creditworthiness and risk profile. Without audits, companies may face difficulties in obtaining external funding due to greater scrutiny and higher borrowing costs imposed by the banks and financial institutions.
Creditworthiness may be impaired – Companies that choose audit exemption may receive a lower credit rating and trust from investors, suppliers and other business partners. This could affect their ability to raise capital, extension of credit terms and entering into contracts with business partners.
Tax compliance issues – Due to the sharp increase in the revenue and total assets thresholds, the tax authorities may keep an eye on the accuracy and reliability of a company’s unaudited financial statements which are used for preparation of its annual tax return. This lack of accountability could also undermine the tax agents’ confidence and cause difficulties for the company in appointing its tax representatives.
Regulatory compliance issues – The absence of audits increases the risk of undetected fraud and errors in financial information resulting in fines and penalties from regulatory authorities. For instance, companies may under-pay customs duties and Sales and Services Taxes (SST) to the Royal Malaysian Customs Department which could be revealed if a statutory audit is conducted. Moreover, SMEs often lack comprehensive awareness and may struggle to navigate the intricate landscape of regulations and requirements.

The new Practice Directive aims to maximise the number of SMEs benefiting from the audit exemption by reducing audit compliance costs and promoting the growth of small businesses.

While the audit exemption offers certain benefits, it also raises certain practical considerations on various parties’ concerns about the accuracy, reliability and transparency of the unaudited financial statements. Hence, the decision to apply for an audit exemption should be carefully weighed. It remains to be seen how the adjustments will unfold in practice.

We Can Give You a Helping Hand

At Crowe Malaysia, our experienced Business Outsourcing team, Assurance division 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.

To understand more about these services, please click here.

Our Assurance division 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.