PETALING JAYA: The proposal to apply the audit exemption provision in the Companies Act 2016 on small and medium companies has to be treated cautiously as there are a few possible drawbacks to SMEs, according to SME Corp Malaysia. Its CEO Datuk Dr Hafsah Hashim (pix) said SMEs may not be able to maintain proper accounting records, hence there is a need for an annual audit so that SMEs can have access to an independent finance professional. “Not many SMEs have in-house accounting professionals, so the mandatory annual audit can assist such companies,” she told SunBiz in an email interview. The compulsory annual audit, which may be exempted in the Act, will also deter fraud and protect the directors of such SMEs so that there is less risk of sanctions for failure to maintain proper accounting records. “If the annual audit is removed, ad-hoc audits may still be required for funding or financing purposes. Such ad-hoc audits may be expensive,” Hafsah added. She said doing away with annual audits for small companies would also have an impact on the submission of tax returns since the submission process requires the audited accounts. When banks extend financing or loans, the banks would also want to have a copy of the audited accounts. In addition, there will be an impact on the accounting profession, as many accountants will see a drastic reduction in their audit revenue. Audits of small companies provide a training ground for fresh accountants. About 78% of the accountants who responded to a survey stated that they do not have any strategy to cope with any possible audit exemption. On the bright side, Hafsah said audit exemption for dormant companies and small private companies will allow start-ups and SMEs to enjoy cost savings as they will no longer need to appoint auditors to audit their accounts. “Overall, the amendments of the Companies Act 2016 are positive and supportive of businesses particularly SMEs in the country. The Act will lower costs and improve ease of doing business for SMEs by introducing a single electronic template for incorporation of companies, allowing a single shareholder and director, waiver of AGM and exemption of audits for dormant and small companies.” SME Corp and the Malaysian Institute of Accountants have declined to comment further on the progress of the proposed audit exemption in the Act, as it is under the purview of the Companies Commission of Malaysia (SSM). An SSM spokesperson said it has looked at the feedback on the proposed audit exemption for SMEs. “SSM is preparing a Practice Note on the issue and will be releasing it for the public’s information,” the spokesperson told SunBiz. According to the SSM’s website, under Section 255 (3) of the Companies Act 2016, the registrar may exempt certain classes of companies from compliance with requirements on financial statements. The categories for such exemptions are yet to be released. SSM said, generally, the law requires every company to appoint an auditor for each financial year. However, under Section 267(2) of the Companies Act 2016, the registrar is empowered to exempt certain categories of private companies from having to appoint an auditor for a financial year. “However, the registrar has yet to invoke this provision and, therefore, the audit requirement is still mandatory for all companies,” SSM said in its Frequently Asked Questions section.