Malaysia’s New Audit Exemption: What SMEs need to know

More small and medium-sized businesses (SMEs) can now take advantage of regulatory relief according to a recent amendment to the audit exemption qualification criteria issued by the Companies Commission of Malaysia (SSM). In an effort to lower compliance costs and promote company expansion, private enterprises with yearly turnover under RM3 million may be eligible for audit exemptions starting on 1 January, 2025.

Under the Companies Act 2016, certain categories of private companies have been granted audit exemption, provided they meet specific financial and operational criteria. In previous year, the companies will be granted for audit exemption when they fulfilled these criteria:

1.    Dormant companies: Companies classified as dormant are those that have not operated since their incorporation or have not been active during the fiscal year.
2.    Zero-revenues companies: These are businesses that haven't made any money in the last two fiscal years and have assets under RM300,000.
3.    Threshold-Qualified Private Companies: In the past, businesses that made less than RM100,000 and had less than RM300,000 in total assets for two years in a row were qualified. 

Nevertheless, SSM has raised the revenue barrier considerably in the most recent update, using a phased deployment strategy:

1.    Phase 1 (1 January 2025–31 December 2025): Beginning on 1 January 2026, companies with sales under RM1 million, total assets under RM1 million, and fewer than 10 workers would be exempted from audit.
2.    Phase 2 (1 January 2026–31 December 2026): Beginning on 1 January 2027, companies with sales under RM2 million, total assets under RM2 million, and fewer than 20 workers would be exempted from audit.
3.    Phase 3 (1 January 2027–31 December 2027): Beginning on 1 January 2028, companies with sales under RM3 million, total assets under RM3 million, and fewer than 30 workers would be exempted from audit.

This phased approach allows businesses and auditors to gradually adapt to the new exemption criteria while ensuring a smooth transition. Even though the new requirements provide more extensive exclusions, certain businesses are still not qualified for audit exemptions:

1.    Exempt Private Companies – Companies that have opted to lodge a certificate relating to their status as an exempt private company under Section 260 of the Companies Act 2016.
2.    Private Companies That Are Subsidiaries of Public Companies
3.    Foreign Companies Operating in Malaysia

Additionally, companies that no longer meet the qualifying criteria will cease to be exempted from audit but will retain exemption status for the financial years in which they qualified.

For Malaysian SMEs and companies, the extension of the audit exemption offers substantial advantages. Since companies who meet the exemption requirements won't need to hire auditors, one of the biggest benefits is the decrease in compliance expenses. Businesses may now devote funds to growth projects like talent development, digital transformation, and corporate expansion thanks to this cost-cutting approach.

Additionally, the exemption simplifies the need for reporting. Companies will no longer be subject to statutory audits, although they still need to generate unaudited financial statements and submit them to SSM. To avoid any legal ramifications, firm directors must make sure that tax compliance and financial transparency are upheld.

The revised audit exemption framework also enhances Malaysia’s business attractiveness for startups and investors. By removing the mandatory audit requirement for small businesses, the new criteria foster a more business-friendly environment, making it easier for entrepreneurs to establish and operate companies without excessive regulatory burdens. This is particularly beneficial for foreign investors who may have been deterred by stringent audit obligations.

Although the audit exemption offers substantial regulatory relief, company owners still need to be aware of a few important considerations in order to guarantee compliance and preserve their financial integrity.

One critical consideration is whether to opt for voluntary audits. Although exempted from mandatory audits, companies may still choose to undergo audits to enhance their financial credibility. This is particularly relevant when applying for bank loans, securing business partnerships, or attracting potential investors, as audited financial statements provide greater transparency and assurance to stakeholders.

Another crucial element is still tax compliance. Companies are nonetheless subject to their responsibilities under the Income Tax Act of 1967 despite the audit exemption. Companies may still be asked to provide appropriate financial evidence to the Inland Revenue Board (LHDN) in order to validate tax returns. As a result, keeping correct financial records is crucial to preventing future tax issues or fines.

Directors must also continue to carry out their statutory obligations with relation to financial reporting and annual reports. Financial statements must be correctly kept and presented to SSM in accordance with regulatory standards even in the absence of a required audit. If this isn't done, the business may face legal repercussions or reputational hazards.

The expansion of the audit exemption threshold, with a structured phase-in process, marks a significant regulatory shift that will benefit SMEs in Malaysia. While this exemption reduces compliance costs, companies must continue to maintain sound financial management practices to ensure transparency and business sustainability. Business owners are advised to consult with professional accountants and company secretaries to determine whether they qualify for the exemption and to ensure compliance with all legal requirements.