A tough test for audit industry :

With audit exemption here to stay, small accounting firms must change.

NOW that the Companies Act 2016 exempts certain private companies mainly dormant and small ones from having to appoint auditors, the audit industry should rise to the challenge by finding other ways to remain relevant to the SME sector.

Thats the suggestion from the Companies Commission of Malaysia (CCM), the regulator that has the power to grant the exemptions.

The accounting firms that rely on income from statutory audits, particularly the small and medium practitioners (SMPs), should heed that advice because its unlikely that Malaysia will revert to the days of mandatory audits for all companies.

Audit must be purpose-driven and market-driven, and there must be value to what companies are paying for, says Nor Azimah Abdul Aziz, CCMs deputy CEO (regulatory and enforcement).

Audit firms and the Malaysian Institute of Accountants (MIA) have lobbied hard against audit exemption, saying the financial statements of many SMEs wont be reliable if not audited; the companies will have trouble with their tax filings and loan applications if they dont have audited accounts; and the loss of audit jobs will hurt SMPs and reduce training opportunities for accounting graduates and students.

When this column last looked at this issue (Companies Commission should explain its stand, StarBizWeek, Aug 12, 2017), I wrote that the CCM had been silent on the importance of the exemption and the reasons behind the thresholds (revenue, total assets and number of employees) for exemption.

That was incorrect. Early last month, the commission issued a press release to go with its practice directive that sets out the rules for determining which private companies arent obliged to have their financial statements audited.

The press release quotes CCM CEO Datuk Zahrah Abd Wahab Fenner as saying audit exemption is meant to help small companies reduce their compliance costs, especially when these companies are owner-managed.

As the auditor reports to the shareholders on the financial statements prepared by the directors, the value of audit is less significant where the directors and shareholders are the same people, she explains.

As such, the Parliament has exercised its wisdom when passing the law that allows audit exemption for certain categories of private companies. Therefore, the parameters of audit exemption should be where there are minimal risks of fraud coupled with appropriate safeguards for shareholders protection.

The CCM came out with another press release on Aug 18. In it, the regulator elaborates on the case for audit exemption.

Whilst the CCM understands the importance of an audit of company accounts in promoting accountability, accuracy and transparency, there is also a need to revisit the value and necessity of an audit towards balancing the needs of the company with those of its stakeholders, says the commission.

It is an undeniable fact that the majority of the smaller SMEs are owner-managed or family-run businesses, where the shareholders and directors are typically the same individuals. For these SMEs, due to the unique structure of their business models, the costs for a conventional audit mandated by law, which provides negligible value to its business, may not be a justifiable cost.

On the rationale for the exemption criteria, the CCM says the parameters (combining economic structure and economic size) were derived from the experiences of leading jurisdictions that have implemented audit exemption policies more than a decade ago.

The criteria adopted by the Registrar of Companies is also coupled with the safeguard of allowing shareholders holding not less than 5% of the total voting shares to require the company to have its accounts audited, says the CCM.

In addition, the Registrar is also given the power to direct companies to have their accounts audited.

According to the commission, SMEs in Singapore, Britain, Hong Kong, Australia, New Zealand, Canada and the United States are exempted from mandatory audit.

The SMPs may not necessarily be big losers as a result of audit exemption. For one thing, based on the current thresholds, only a small percentage of the companies in Malaysia will qualify for exemption.

And the CCM thinks the exemption is an impetus for the SMPs to reinvent themselves by developing their professional capacities and capabilities in niche areas of expertise to serve the mixed categories of SME segments.

SMPs with the ability to provide SMEs with a diverse range of business advisory services and the expansion of such services beyond the traditional mandatory audit work will be a catalyst for growth for both the SMEs and the SMPs, resulting in a crucial long-term win-win relationship, says the regulator.

Its a typical business challenge. Can a crisis be converted into an opportunity? After all, SMPs are businesses too; theyre not exempt from industrial disruptions.

Executive editor Errol Oh is amazed that a single press release is regarded as sufficient for explaining to the public a complex and major rule change.

Question :

1. Make a short report about the article above.