Understanding Audit Exemption for SMEs in Malaysia: Why, What, and FAQs

 

Audit exemption is becoming a widely discussed topic among SMEs in Malaysia, especially with the latest updates by the Companies Commission of Malaysia (SSM) through Practice Directive (PD) 10/2024, effective from 1 January 2025.

 SME owners need to clearly understand what audit exemption entails, the rationale behind it, and whether opting for exemption genuinely translates into tangible compliance cost savings.

Why Audit Exemption—The Rationale

The audit exemption framework in Malaysia was originally introduced on 4 August 2017 and recently expanded under the Practice Directive 10/2024. Its main purpose is clear:
    • To reduce the financial and administrative burdens of compliance, especially for micro and small private entities.
    • To streamline administrative processes, improve efficiency, and enhance Malaysia’s competitive advantage as a business-friendly environment.
    • To address auditors' shortage, as evident by a disproportionately high "auditor-to-company" ratio. According to the World Bank ROSC (Report on the Observance of Standards and Codes), Malaysia previously faced considerable challenges in maintaining audit quality due to the excessive demand on auditors.

What is the New Audit Exemption Framework?

Under the current framework (effective from financial periods beginning on or after 1 January 2025), a private company in Malaysia can choose not to have its financial statements audited, provided it meets any two of the following three criteria:
Criterion Threshold (as of 2027)*
Annual Revenue RM 3,000,000 or less
Total Assets RM 3,000,000 or less
Number of Employees 30 or fewer
Scenario Audited (RM Annual) Unaudited (RM Annual)
Audit fees RM8,500 – RM18,000 Nil
Financial Statement Preparation RM2,500 – RM6,000 RM2,500 – RM6,000
Total Costs RM11,000 – RM24,000 RM2,500 – RM6,000
Potential Savings RM8,500 – RM18,000
*Note: The threshold is gradually increasing over three years, starting from RM1,000,000 in 2025, RM2,000,000 in 2026, and RM3,000,000 in 2027, making audit exemption increasingly accessible.

Who Does NOT Qualify?

Despite meeting criteria above, some private entities cannot claim exemption, notably:
    • Subsidiaries of public companies
    • Exempt private companies that lodge an Exempt Private Company (EPC) certificate instead of financial statements
    • Foreign companies

What Must You Do if You Elect for Audit Exemption?

Companies choosing audit exemption must lodge with the Registrar of Companies:
    • Unaudited financial statements
    • Directors’ report
    • A Certificate of Compliance (confirming preparation in accordance with applicable standards)
All these documents must be submitted within 30 days of financial statements circulation (per Section 254, Companies Act 2016).

Frequently Asked Questions (FAQs)

1. How do SMEs determine "Number of Employees"?

Employees are counted as full-time paid workers working at least 6 hours daily for 20 days per month (or 120 hours monthly). Excluded are directors/shareholders who are full-time employees, and family or friends who aren’t receiving consistent wages.

2. Do SMEs need to apply for audit exemption with SSM?

No formal application is needed. Companies simply elect the exemption if they meet established criteria, making compliance hassle-free.

3. What if conditions change and SMEs exceed thresholds later?

If your business surpasses thresholds, you will no longer qualify for exemption in future financial years but remain exempted for years you did qualify previously.

4. Are unaudited financial statements acceptable for income tax purposes (IRB/LHDN)?

Yes. Inland Revenue Board of Malaysia (LHDN) clarified that subsection 77A(4) Income Tax Act 1967 (audit submission requirement) does not apply if SSM does not require audited statements. SMEs benefit from streamlined compliance both for corporate reporting (SSM) and tax filing (LHDN). More Information on LHDNM’s Clarification

Are There Real Savings in Compliance Cost?

For SME owners, the critical concern is, does audit exemption translate into meaningful cost reductions? The answer is an unequivocal yes. Obtaining an audit is an expensive routine process for smaller companies. Professional auditor fees range widely based on company revenue, complexity, and region. Typically, SMEs face annual audit costs between RM5,000 to RM20,000 per year or possibly more, depending on their complexity. Forgoing audits would directly eliminate these fees. However, consider the following cautions:
    • Unaudited companies must still produce accurate financial statements compliant with Malaysian Private Entities Reporting Standards (MPERS) or Malaysian Financial Reporting Standards (MFRS).
    • Companies opting for exemption will still engage accountants or professional services for financial statement preparation, thereby reducing—but not completely removing—compliance costs.

Illustration of Cost Impact

Scenario Audited (RM Annual) Unaudited (RM Annual)
Audit fees RM8,500 – RM18,000 Nil
Financial Statement Preparation RM2,500 – RM6,000 RM2,500 – RM6,000
Total Costs RM11,000 – RM24,000 RM2,500 – RM6,000
Potential Savings RM8,500 – RM18,000

Important Considerations Before Deciding

Apart from immediate savings, SME owners should carefully consider:
    • Credibility and Trust: Audited financial statements provide assurance to banks, investors, and partners. If seeking external loans or funding frequently, exemptions may be disadvantageous.
    • Internal Financial Discipline: An external audit improves internal controls and financial discipline.
    • Long-Term Planning: If growth objectives involve future expansions, strategic partnerships, investors or IPOs, continuing regular audits makes transitioning into conditional financial scrutiny simpler.

Conclusion

Audit exemption undeniably creates a substantial opportunity for SMEs to benefit economically through reduced compliance obligations, increased efficiency, and reduced financial burden. Nonetheless, SMEs must evaluate their unique positions, gauging both the economic benefits and strategic long-term advantages of regular audits. The framework provides flexibility, empowering business owners to tailor their choices in alignment with their financial realities and goals. Ultimately, well-informed SME owners will be better placed to maximize their benefits under Malaysia’s business-friendly environment fostered by the evolving audit exemption framework. For further clarity on qualifying criteria and compliance specifics, refer to: Armed with comprehensive understanding, SMEs can effectively navigate their audit compliance obligations, making decisions that promote sustainable economic growth and stability for their businesses.
Location: Malaysia

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