FMM: Review low threshold of SMEs’ eligibility for audit exemptions

PETALING JAYA: The Federation of Malaysian Manufacturers (FMM) is seeking a review of the threshold of eligibility for audit exemptions for small and medium enterprises (SMEs), after the Companies Commission of Malaysia (SSM) allowed audit exemption for dormant and zero-revenue companies, and those earning less than RM100,000 revenue and holding at most RM300,000 worth of assets.

A dormant company is one which has been inactive for at least two years; a zero-revenue company is one which has not been generating revenue for the last three years and has no more than RM300,000 in assets for the last two years; and a threshold company is one which generates less than RM100,000 in revenue for the last thee years and has total assets of RM300,000 in the last two years.

FMM said setting the qualifying limit too low makes the exemption inaccessible to the more capable SMEs, especially those in the manufacturing sector which should be supported in the reduction of the cost of doing business.

“This issue is important for small companies. Mandatory audits for those companies serve no purpose, resulting in unnecessary additional costs. It would be good if SSM could compare and share percentages of SMEs manufacturers who are among the estimated 50,000 companies eligible for the exemption and those qualified because of their tighter thresholds.

SSM should review and raise these thresholds, or at least maintain at the Practice Directive 1/2017 levels so that more SME could qualify,” FMM said in a statement on Friday.

A previous directive had set the threshold at an annual revenue of not more than RM300,000 and total assets below RM500,000.

FMM also hopes that Section 77a of the Income Tax Act, which requires submission of company tax returns based on audited accounts, has been synchronised to facilitate SSM’s audit exemption.

Meanwhile, SSM, in justifying its move to go ahead with the much debated audit exemption for selected companies, said in a separate statement that it came to the decision based on a combination of both economic structure and size of leading jurisdictions which have successfully implemented an audit exemption policy, in addition to the consultation conducted by SSM for four months, ending on Feb 28, 2017.

Feedback from stakeholders comprising 61% audit/accounting/related professional firms and 39% from the public, showed that more than 65% of the respondents agreed with the audit exemption proposal.

SMEs have been exempted from mandatory audits in places such as Hong Kong, Singapore, the United Kingdom, Australia, New Zealand and the United States.

Additionally, SSM said the criteria adopted by it are coupled with safeguards of allowing shareholders holding not less than 5% of the total voting shares to require the company to have its accounts audited, and for SSM to have the power to direct companies to have their accounts audited.

SSM said while it understands the importance of auditing company accounts in promoting accountability, accuracy and transparency, there is also a need to revisit the value and necessity of an audit towards balancing between the needs of the company and that of its stakeholders.

SSM said it is an undeniable fact that the majority of small companies are “owner-managed” or “family-run” businesses where the shareholders and directors are typically the same individuals. For these small firms, due to the unique structure of their business model, the cost for a conventional audit mandated by law which provides negligible value added to their business may not be justifiable, it explained.