Audit exemption for Sdn Bhd companies: who actually qualifies

Audit exemption for private companies has existed in Malaysia since 2017, but the rules that decide who qualifies were replaced at the end of 2024. Anything written about audit exemption before then describes a framework that no longer applies to current financial periods, which is why so many directors are working from the wrong test.

The framework that applies now

Practice Directive 10/2024, issued by the Registrar on 16 December 2024 under subsection 267(2) of the Companies Act 2016, sets the current qualifying criteria. It applies to financial statements with annual periods commencing on or after 1 January 2025. Practice Directive 3/2017 was revoked, but it continues to apply to financial periods that commenced on or before 31 December 2024.

The consequence is that the correct test depends on when the financial period began, not on when you are looking at it. A company with a June year end was still on the old framework for the period ending 30 June 2025, because that period began on 1 July 2024.

The two-of-three test

Under the current directive a private company qualifies if it meets at least two of the following three criteria — not all three — in the current financial year and in the immediate past two financial years.

• Annual revenue does not exceed the threshold for the applicable phase. Revenue excludes reversals of earlier accounting entries, entries related to taxation, reversals of provisions, and gains on derecognition of property, plant, equipment and investment property.
• Total assets in the statement of financial position do not exceed the threshold for the applicable phase.
• The number of full-time employees at the end of the financial year does not exceed the limit for the applicable phase. A full-time employee is a paid worker working at least six hours a day for at least 20 days a month, or at least 120 hours a month, and excludes directors and shareholders working full time as well as unpaid or irregularly paid family and friends.

Dormant companies, and companies that cannot qualify

Companies dormant since incorporation, and companies dormant in both the current and the immediate past financial year, remain exempt on that basis. A company is dormant in a financial year if it does not carry on business and no accounting transaction occurs, disregarding transactions arising from obligations it is required by law to pay and the related costs of complying.

Several categories are outside the directive altogether:

• An exempt private company that has opted to lodge a certificate as to its status under section 260 of the Companies Act 2016 in place of financial statements.
• Public companies, including listed companies.
• A private company that is a subsidiary of a public company, or one under the joint control of a public company. An associate of a public company may still qualify if it meets the criteria.
• Foreign companies.
• A newly incorporated company that is not dormant, because it has no two preceding years of financial data.

Two further points are commonly misread. The criteria are applied to the company's own figures, not to consolidated group figures, so a holding company and its subsidiaries are each assessed individually. And where another law, regulator or guideline requires an audit, that requirement prevails over the exemption.

What you still have to do

There is no application form and nothing to apply for. Exemption is an election a qualifying company makes for itself, and the company remains free to appoint an auditor if it wants one. The company is responsible for assessing its own eligibility.

What does not go away is the accounts. An exempt company must still prepare financial statements complying with the applicable approved accounting standards, circulate them to members within the period the Act allows, and lodge the unaudited financial statements with SSM within 30 days of circulation — together with the directors' report, the statement by directors, the statutory declaration, and a certificate signed by a director confirming entitlement to the exemption and that no member has required an audit. The saving is the audit fee and the fieldwork, not the accounting work behind it.

Being eligible is not the same as being right

Eligibility is a legal question. Whether to use it is a commercial one, and the answer depends on who relies on your accounts. Audited financial statements are commonly expected by lenders reviewing facilities, by counterparties on substantial leases, by prospective investors and acquirers during due diligence, in tender prequalification, and under shareholders' agreements that require them. SSM itself notes that a number of agencies continue to require audited statements for licensing, grants and loans.

There is also a mechanism worth knowing about. Members holding at least 5% of the issued shares, or at least 5% of the members eligible to vote, or the Registrar, can require a qualifying company to audit its accounts by written notice given not later than one month before the end of the financial year.

The reasonable middle position for many small companies is to take the exemption where no external stakeholder relies on the accounts, while keeping the underlying bookkeeping to a standard that would survive an audit if one later becomes necessary.