M.Krishnamoorthy
A media coach, adjunct professor and author
The audit exemption threshold for annual turnover/income from RM 100,000 to RM 3 million for SMEs may not benefit entrepreneurs in the long run.
A group of auditors say the exemption for SMEs with total assets from RM 300,000 to RM 3 million may be beneficial for SMEs to save annual audit fees in the short term.
"I don't think expanding the audit exemption is good for businesses, and Malaysia should not mimic the practices of advanced countries because the situations are not the same. Our country is still a developing nation, and we should compare ourselves with Vietnam and Thailand, which have not implemented audit exemptions," said Datin Yap Shin Siang, CEO of YYC Group.
YYC is one of Malaysia's top 10 accounting, tax, and business consulting companies. Last week, in a press conference, Yap and several other auditors told the Companies Commission of Malaysia’s (SSM) proposed audit exemptions may not benefit the SMEs in the long run.
Datin Yap emphasised that Singapore has sufficient infrastructure and the capability to attract large financial institutions to develop the country. In contrast, Malaysia, with weaker fundraising capabilities, needs the support of small and medium enterprises to help drive the country's economic development.
She believes that the SSM's proposed new audit exemption standards significantly relax the audit exemption thresholds.
“The proposed audit exemption will result in small enterprises remaining small while large enterprises will continue to grow. SMEs often struggle to afford financial managers or skilled administrators. Accountants or auditors not only play the role of accounting or auditing professionals but also serve as financial advisors. The exemption of audits may deprive them of the role of being financial advisors accompanying SMEs in their growth.
“Many SME owners may lack a good understanding of their financial statements. Without the assistance and advice of auditors, this could slow down decision-making and hinder the growth of SMEs, ultimately impacting the country's overall economic development.
“The Malaysian Statistics Department’s data showed that SMEs currently make up 97% of Malaysia's total number of enterprises and contribute 38.2% to the Gross Domestic Product (GDP). They are considered the lifeblood of the national economy. If the growth of SMEs slows down, it will undoubtedly have a ripple effect on the overall economy,” Yap added.
She explained that when undergoing audits, there is a true and fair view opinion, impacting shareholder relationships and growth opportunities.
When exempted from audits, SMEs lack true and fair opinions on financial statements. She added that this could impact shareholder relationships and subsequently diminish development opportunities.
“Entrepreneurs may save on audit costs by establishing sole proprietorships or partnerships. Establishing a private limited company (Sdn Bhd) often aims to attract more shareholders for business expansion.
“Having more shareholders in a company makes transparent and genuinely fair-view financial statements crucial. Financial statements that have not undergone audits may raise suspicions among shareholders.
“More importantly, as investors seek investment opportunities, having audited financial statements becomes essential. Suppose potential investors are interested in doing business with a company but cannot access audited financial statements, and even company information is unavailable in databases like CTOS. In that case, it may result in missed collaboration opportunities.”
Yap added that the exemption may result in a shortage of accounting talent and affect national development. “When nearly 70% of companies are exempt from audits, the perception may arise among the public that the country does not need as many accounting professionals. This could potentially lead to fewer students enrolling in accounting programs and significantly reduce opportunities for accountants to start their businesses, exacerbating the talent shortage issue in the field.
“Singapore experienced a significant decrease in accounting talent after implementing audit exemptions. The country had to attract talent from Malaysia to fill the gap continuously. The Singaporean government established a special task force to ensure an adequate supply of accounting professionals domestically. This example serves as a cautionary tale for us.
“Data indicates that over the past six years, the number of members in the Malaysian Institute of Accountants has grown at a rate of 2.5% annually. Currently, there are over 38,500 registered accountants in the country. However, this falls far short of the government's target of 60,000 accountants nationwide, highlighting a considerable gap.”
The presumed saved audit costs could incur higher charges. “While entrepreneurs may save on audit fees in the short term, they still need to submit unaudited financial reports. In the long run, this might result in higher fees. Exempting audits could lead to the closure of many small audit firms, exacerbating the imbalance in market supply and demand and potentially driving up audit fees. When entrepreneurs face tax audit issues, they may have to pay higher fees to larger audit firms.”
Datin Shin believes that through the new audit exemption standards, it will, while narrowing the gap with developed markets such as Singapore, the United Kingdom, Hong Kong, and Australia, thereby enhancing Malaysia's competitiveness.
Another leading auditor Dato Lock Peng Kuan managing partner of Baker Tilly Malaysia said that although the proposal to increase the exemption threshold may have minimal impact on large accounting firms like ours, some may even arguably think that these firms could benefit from expected market consolidation, both in terms of workload and talent acquisition.
“However, the public needs to recognise the broad segmentation of the accounting industry and its long-term contributions to businesses in general. In short, there remains a strong need for smaller practitioners to ensure the trustworthiness of financial reporting, especially for many smaller SMEs lacking qualified accountants within their reporting systems.
“Requiring companies to undergo audits serves a purpose beyond assuring stakeholders. Viewed holistically, audits instil discipline among entrepreneurs early in their growth journey. For instance, exercises like audit stock-taking and debtor confirmation offer entrepreneurs comfort regarding stock aging or obsolescence and debt collectability and highlight the importance of financial system comprehension, crucial for future growth.
“The value of audits for SMEs goes beyond mere compliance. Audits delve into crucial reviews like the company's going concern assessment, alerting owners to red flags such as negative operating cash flows and changes in market conditions that may jeopardise business continuity. Auditing standards mandate the communication of such findings to those charged with governance, fostering checks and prompting business owners to strategise cash flow management early on,” Lock added.
Freelance Writer M. Krishnamoorthy (www.imkrishna.net) is a media coach, adjunct professor and undercover journalist. He has freelanced with Bernama, NST, The Star, and Malaysiakini. He also freelances as a fixer/coordinator for CNN, BBC, German and Australian Television networks and the New York Times. As an undercover journalist, he has highlighted society's concerns.
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