The Practice Directive No. 10/2024 issued by the Companies Commission of Malaysia (SSM) outlines new criteria for audit exemptions for certain private companies, such as:

• • increasing the annual revenue threshold from RM100,000 to RM3 million;
• • increasing the total assets threshold from RM300,000 to RM3 million; and
• • increasing the employee count threshold from five to 30.

For financial statements with annual periods commencing on or after 1 January 2025, Practice Directive No. 10/2024 also loosens the requirements to qualify for audit exemption. Upon implementation, only the fulfilment of 2/3 criteria (e.g. annual revenue, total asset or employee count threshold), as opposed to all three criteria as previously imposed, is required to qualify for audit exemption.

For Malaysian private companies unsure on whether to forgo an audit this year (i.e., for their financial statements for year 2025), this may seem like an immediate relief. However, businesses are advised to tread cautiously, as the implementation of the new thresholds is phased and not immediate. This article seeks to explore the details of the new criteria and explain why companies should not rush to drop their audit preparations just yet.

The New Audit Exemption Criteria: A Closer Look

To be eligible for audit exemption under the Practice Directive No. 10/2024, a company must meet at least 2/3 of the following criteria:

1. 1. Annual Revenue: The company’s annual revenue during the current financial year and the immediate past two financial years should not exceed RM3,000,000.
2. 2. Total Assets: The total assets of the company in the current statement of financial position and the immediate past two financial years should not exceed RM3,000,000.
3. 3. No. of Employees (excluding directors and shareholders who are also employees): The number of employees at the end of the current financial year and the immediate past two financial years should not exceed 30.

Dormant companies, as with the previous practice directive, continue to be exempted from the audit requirement. However, the category of “Zero-Revenue Companies” has been removed from the latest practice directive. These companies are now treated as any ordinary private company and are required to fulfil 2/3 of the audit exemption criteria to qualify for an exemption.

The audit exemption does not apply to:

• • exempt private companies, as with the previous practice directive;
• • public companies and public listed companies, including their subsidiaries which are private companies; and
• • foreign companies.

Phased Implementation: A Gradual Transition

The implementation of the new thresholds is not immediate but rather phased over a period of three years, with the thresholds for annual revenue, total assets, and number of employees increasing incrementally over the period as follows:

Companies will only qualify for audit exemption based on the thresholds applicable to the specific phase. Importantly, companies must ensure that the threshold components for the current as well as the immediate past two financial years do not exceed the maximum threshold specified for the respective corresponding phase.

In other words, for companies unsure on whether to forgo an audit this year (i.e., for the financial period 2025), a company qualifies for audit exemption under Phase 1 if:

• • annual revenue and total assets do not exceed RM1 million at the end of 2023, 2024 and 2025; or
• • their annual revenue and/or total assets of the company do not exceed RM1 million and the company employs 10 or less than 10 employees, at the end of 2023, 2024 and 2025.

Companies who do not meet the above requirements for Phase 1 will not qualify for an audit exemption for the financial period 2025.

Cautionary Notes:

1. 1. Members or Registrar May Request Audit

Before deciding to forgo an audit, it should be kept in mind that a company that qualifies for an audit exemption may still be required to undergo an audit if requested in writing by:

• any member or members eligible to vote and holding not less than 5% of the total number of issued shares of the company or any class of those shares;
• not less than 5% of the total number of members eligible to vote in the company; or
• the Registrar of SSM, who may direct the company to have its accounts audited,

provided that any such request be received not later than one month before the end of that financial year which is subject to the audit request.

2. Audit Exemption ≠ Reporting Exemption

Even if a company qualifies for audit exemption, it must still lodge its unaudited financial statements with the Registrar of SSM. These statements must comply with the applicable approved accounting standards and be accompanied by an audit exemption certificate, directors’ report and statement, statutory declaration and any other reports or documents required to be lodged under the Companies Act 2016. Failure to do so could result in fines up to RM50,000.

Conclusion

The Practice Directive No. 10/2024 offers a pathway for Malaysian private companies to potentially reduce their audit burdens. A peculiar advantage of the new criteria may also be that, given the substantially higher thresholds, the fact that a company is audit exempted can no longer be used to show poor financial standing of a party in a court of law, in for instance applications for stay of execution, security for costs, or bankruptcy or winding up petitions where financial standing may be a factor of consideration.

Nevertheless, given the phased implementation and the potential complexities, companies are reminded not to prematurely halt their audit preparations. Companies should conduct thorough assessments and evaluation of the company’s financial metrics against the current phase thresholds and be prepared for any requested audits even if the audit exemption applies, whilst continuing to comply with ongoing statutory obligations relating to circulation and lodgement of financial statements.

A copy of the Practice Directive No. 10/2024 is available here.

About the authors

Shaun Lee Zhen Wei
Senior Associate
Corporate & Investor Services
Halim Hong & Quek
shaun.lee@hhq.com.my

.

Sherzanne Lee
Associate
Corporate & Investor Services
Halim Hong & Quek
sz.lee@hhq.com.my

.

Carmen Lee Kar Mun
Associate
Corporate & Investor Services
Halim Hong & Quek
carmen.lee@hhq.com.my

More of our Tech articles that you should read:

• • Malaysia’s Digital Asset Momentum: The Rise of Stablecoins and What It Means for the Market
• • Key Impacts of the Online Safety Bill 2024
• • The Symbiotic Relationship Between Cyber Insurance and Compliance in Navigating Data Breaches and Cyber Security Incidents