Malaysia’s New Audit Exemption Framework

For years, many micro and small enterprises in Malaysia have felt the financial pinch of mandatory statutory audits. However, the landscape is shifting. With the issuance of Practice Directive 10/2024 (PD 10/2024), the Companies Commission of Malaysia (SSM) is rolling out a brand new, progressively expanding Audit Exemption Framework.

If your company's financial year commences on or after 1 January 2025, here is exactly what you need to know about the new rules.

📉 Why The Change? Quality Over Quantity

This update isn't just about saving SMEs money—it’s about preserving the integrity of Malaysia’s audit industry. A World Bank report highlighted a concerning mismatch in Malaysia: a high demand for statutory audits but a limited number of qualified auditors.

To put it in perspective, as of November 2024, there are 689,134 active companies but only 1,947 active approved auditors—a staggering ratio of 1 auditor to 354 companies. By exempting smaller, non-public interest entities, auditors can focus their resources, ultimately improving the overall quality of audits and annual reports across the country.

🪜 The 3-Phase Approach: Do You Qualify?

To qualify for the new audit exemption, an active private company must meet at least two (2) of the following three criteria. To help businesses transition smoothly, SSM is implementing these thresholds progressively over three years:

Phase 1: Financial Periods Commencing in 2025

• Annual Revenue: ≤ RM 1,000,000

• Total Assets: ≤ RM 1,000,000

• Employees: ≤ 10

Phase 2: Financial Periods Commencing in 2026

• Annual Revenue: ≤ RM 2,000,000

• Total Assets: ≤ RM 2,000,000

• Employees: ≤ 20

Phase 3: Financial Periods Commencing in 2027 onwards

• Annual Revenue: ≤ RM 3,000,000

• Total Assets: ≤ RM 3,000,000

• Employees: ≤ 30

🚨 The Golden Rule: It’s not just about the current year. To qualify in any given phase, your company must meet the thresholds for the current financial year AND the immediate past two (2) financial years. (Note: Companies that are dormant since incorporation, or dormant in the current and immediate past financial year, continue to be exempted).

🔍 Deep Dive: How to Actually Calculate Your Eligibility

When SSM says your "annual revenue" must be under RM1 million, or your "employees" under 10, how exactly are those numbers calculated?

1. Decoding "Annual Revenue" Annual revenue includes all revenue received and receivable, but you must exclude certain entries that might artificially inflate your top line. Do not include:

• Credit entries for the reversal of previous accounting entries.

• Accounting entries related to taxation.

• Reversals of provisions made earlier.

• Gains on the derecognition of property, plant, equipment, and investment property.

2. Who Counts as an "Employee"? You must look at the number of full-time employees at the end of the relevant financial year.

• The "120-Hour Rule": A full-time employee works at least 6 hours a day for 20 days a month, OR at least 120 hours a month. This includes local, foreign, contract, and probationary workers.

• Crucial Exclusions: You must exclude a Director or Shareholder who works as a full-time employee, as well as family members or friends who are unpaid or receive irregular wages.

3. Total Assets Total assets are defined by applicable approved accounting standards and include both your current and non-current assets.

📖 Case Study: Navigating the "Immediate Past Two Years" Rule

Let's look at "Company E Sdn Bhd", whose financial year ends on 31 December. They want to qualify for Phase 3 in 2027 (Limits: RM3m Revenue / RM3m Assets / 30 Employees).

Here is their financial history:

• FYE 2025 (Past Year 2): Revenue RM3.0m | Assets RM3.0m | 25 Employees

• FYE 2026 (Past Year 1): Revenue RM2.5m | Assets RM3.0m | 20 Employees

• FYE 2027 (Current Year): Revenue RM2.0m | Assets RM3.0m | 20 Employees

The Verdict: Company E does not qualify for audit exemption in 2025 or 2026 because its figures exceed the much lower Phase 1 and Phase 2 thresholds.

However, they DO qualify in 2027! Why? Because in 2027, SSM looks at the Phase 3 limits. Looking at Company E's current year (2027) and its immediate past two years (2025 and 2026), its revenue, assets, and headcount never exceeded the RM3M/30 pax maximums.

🛑 Exceptions and Compliance

Not everyone gets a pass. The exemption does not apply to public companies (and their subsidiaries), foreign companies, or exempt private companies (EPCs) that opt to lodge an EPC certificate in lieu of financial statements.

Furthermore, no audit doesn't mean no paperwork! If you elect for the exemption, you are still legally required to prepare and circulate unaudited financial statements that comply with approved accounting standards. These must be lodged with SSM within 30 days of circulation, accompanied by the directors’ report, statutory declarations, and a specific Audit Exemption Certificate signed by a director.

💡 The Bottom Line

PD 10/2024 is a welcome relief that reduces financial burdens while ensuring accountability. Take the time now to review your financial projections and past accounts—the hiring and financial decisions you make today will directly impact your eligibility for 2025, 2026, and 2027!