SSM offers leeway to select private companies for audit exemption

(Aug 18): The Companies Commission of (SSM) has given a leeway to select private companies for audit exemption, as a means to reduce the burden of such regulations on small and medium enterprises (SMEs).

“Whilst SSM 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 in a statement today.

It noted that the Companies Act 2016 enforced in this year required all companies to prepare and audit their financial statements before submission to SSM.

“However, under section 267(2) of the Companies Act 2016, the Registrar of Companies (RoC) can exempt selected categories of private companies from having to appoint an auditor and to impose the criteria and conditions accordingly,” SSM said.

“To this end, on 4 August 2017, SSM issued the Practice Directive No. 3/2017, highlighting that dormant, zero-revenue and threshold-qualified private companies are eligible to elect for audit exemption,” it added.

Countries that have exempted SMEs from mandatory audit include , Hong Kong, Australia, US and UK, with Australia having introduced it from as early as 1971.

It also highlighted that the cost to conduct mandatory audit for some SMEs is not justified when shareholders and directors are the same individuals, making the audit report — meant for transparency between a company and its shareholders — insignificant.

Additionally, it said auditors from small and medium practice firms (SMPs) are increasingly acting as “expert advisors” for businesses — especially SMEs — which may jeopardise their independent stance when performing an audit.

“In hindsight, the potential advantages of audit exemption would include allowing SMPs to focus their resources in developing their professional capacities and capabilities in niche areas of expertise rather than performing statutory auditing to serve the mixed categories of SME segments,” said SSM.

SSM said companies applying for exemption are required to lodge a full set of unaudited financial statements, accompanied with a statement that the company is qualified for audit exemption, and that the company receives no request from its shareholders that audit must be conducted for a particular year.

Of the types of companies that can apply for exemption, SSM said a company is considered ‘dormant’ if it is inactive in the current and in the immediate preceding , it said.

A company falls under the ‘zero-revenue’ category if it does not generate revenue in its current and immediate past two financial years, with total asset under RM300,000 in the past two financial years.

A company is ‘threshold-qualified’ if it has less than five employees with revenue under RM100,000 each year in its current and two past financial years, and total asset under RM300,000 in the two past financial years.

Meanwhile, SSM gave the assurance that the policy comes with safeguards to allow shareholders holding not less than 5% of the total voting shares to require the company to have its accounts audited.

“On top of that, the RoC is also given the power to direct companies to have their accounts audited,” it said.

“With regards to lodging financial statements which are fraudulent, section 593 of the Companies Act 2016 makes it an offence and prosecution action will be taken against errant companies and directors for lodging false and misleading statements to the registrar,” said Datuk Zahrah Abd Wahab Fenner, chief executive officer of SSM.

“To this end, SSM has been vigilant and conducted continuous enforcement as reflected in the number of cases with respect to fraudulent information lodged with the Registrar,” she added.

In the first half of 2017, 189 investigation papers have been opened, 32 cases concluded while four cases have been prosecuted for furnishing false information to the registrar.

Source: The Edge Markets

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