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. 

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. 

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

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

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

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 for each financial year.

(ii)               Total Assets: Does not exceed RM500,000 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.

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.

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