ACCA appreciates the opportunity to offer feedback on the proposed new audit exemption criteria for private firms in Malaysia, as outlined in the consultative document published by the Companies Commission of Malaysia (SSM) on 7 February 2024.
We note that this is the second time the SSM has sought feedback on its review of the extant audit exemption criteria introduced on 4 August 2017 via Practice Directive No.3/2017. The SSM has revised its proposed new criteria following responses from the February 2023 exercise, leading to the current consultation.
The latest changes are significant, and we believe that the new audit exemption criteria will likely have a broad and significant impact if implemented.It is therefore in the interest of SSM to mobilise all stakeholders affected by the changes and encourage as many responses as possible to facilitate a robust understanding and review of the implications, including any unintended consequences, from the proposed changes.
It is in that spirit that many within our community have expressed concerns over the constricted time frame for the consultation. The consultation document was released only three days before the start of the Lunar New Year celebrations. Given that many people were on holiday for an extended period as part of the celebrations, the ability of many to carefully consider the proposal is curtailed. For ACCA, the window to engage with our members and stakeholders was significantly reduced, and we had limited time to work on our response.
We hope the SSM will extend the consultation period and engage with everyone who is affected by the proposed changes so that they have the chance to share their views.
While the short timeline for consultation has impeded our ability to perform more extensive outreach and formulate a fully considered position, we have sought to take into account the interests and perspectives of a broad range of stakeholders in arriving at our comments.
In the absence of consultation questions posed by the SSM that we could directly address, we have based our comments on key matters raised during our engagement with members and other stakeholders.
We are in full alignment and support of SSM’s view that it is “crucial to strike a balance between providing cost relief to smaller businesses and ensuring adequate oversight on financial reporting”. The expected surge in SMEs not subject to independent audits may have profound and enduring implications for the trustworthiness and integrity of the corporate sector, including supply chains, and the resilience of the broader economy.
We strongly recommend that should the proposed changes be proceeded with, specifically the threshold increases, they should be implemented gradually over a longer period. Through our outreach, stakeholders are proposing a phased approach, starting with thresholds of RM500,000and increasing to RM3 million over a period of five years. This will allow stakeholders more time and space to adjust and respond to shifting market forces.
We are concerned that the conduct of independent audits is conflated with administrative burdens. The rationale articulated in the consultative document for increasing audit exemption thresholds inadvertently implies that financial statement audits and the services of audit and accounting practitioners are of little or no value to SMEs. We therefore urge SSM, working with fellow regulators and other industry partners, to invest in educating stakeholders on the importance and benefits of audits. This helps to mitigate any incorrect perception about the value of audit and will either prompt SMEs to consider having an audit done voluntarily, or prompt stakeholders of SMEs, for example their bankers or major customers, to demand for an audit to be performed.
A potential unintended and severe consequence of an abrupt and significant increase in audit exemption thresholds is that it may diminish attractiveness of the accountancy profession. There is a real risk that employment opportunities will be significantly reduced. Coupled with a perceived change in the value of an audit, as mentioned above, young talents may be deterred from pursuing opportunities in the accountancy profession. It is therefore critical that the scale and timeline of the new exemption criteria are carefully calibrated to allow SMPs to pivot and adapt to the expected drop in SME audits.
We firmly support SSM’s intent to strengthen the enforcement regime to deter misconduct and maintain accountability. SSM should ensure that it retains, and indeed, enhances regulatory power over those charged with governance and be unequivocal about its ability and intention to impose severe penalties for wilful misreporting of financial information.
We would like to also underscore the importance of monitoring the impact of the exemption on an ongoing basis. This is essential to ensure that the criteria and associated policy decisions remain relevant in the prevailing business and economic conditions. Periodic reviews and a transparent feedback mechanism allow for adjustments to be made in response to any fundamental change in market dynamics, risks that may emerge, and any unintended consequences.
To read the detailed response, please download the consultation response document on this page.