The Importance of Audit Compliance for Malaysian Companies

Many investors astutely view Malaysia as an excellent entry point into the thriving ASEAN economy. However, it is crucial not to misconstrue this “entry point mindset” as an opportunity for lenient corporate compliance. In reality, Malaysia enforces strict audit and compliance regulations like any first-world economy, meaning business owners and executives must align their governance processes to meet these rigorous demands.

This article looks at the importance of audit compliance for Malaysian companies, covering the benefits of comprehensive audits, the legal framework governing these practices, and the significant value audits bring to stakeholders. By understanding and implementing effective audit practices, businesses can enhance their credibility, mitigate risks, and achieve sustainable growth in Malaysia’s ever-growing market.

What is a Company Audit in Malaysia?

An audit is a thorough and independent examination of a company’s financial statements, intended to provide an objective assessment of their accuracy and compliance with established accounting standards. This process is crucial for verifying that the financial records present a true and fair view of the company’s financial position and performance in order to uphold the transparency of Malaysia’s investment environment.

 In Malaysia, accredited auditors play a pivotal role in this process. They are entrusted with examining financial records, evaluating internal controls, and ensuring that all financial reporting adheres to the stringent standards set forth by the Malaysian Companies Act 2016. By providing an unbiased opinion, auditors help reinforce the credibility and reliability of a company’s financial information.

Legal Requirements for Company Audits in Malaysia

Key Facts and Regulatory Bodies 

• Legislation: The Malaysian Companies Act 2016.
• Financial Year: Typically ends on December 31 but may vary at the company’s discretion.
• Regulatory Bodies: 
  • The Malaysian Institute of Accountants (MIA) oversees the accounting profession.
  • The Ministry of Finance (MoF) approves auditors.
  • The Securities Commission Malaysia (SC) oversees auditors, sets guidelines, and promotes audit quality to ensure reliable financial reporting.
• Reporting Standards: Malaysian Financial Reporting Standards (MFRS) for public companies and Malaysian Private Entities Reporting Standards (MPERS) for private companies.

Overview of the Companies Act 2016

The Companies Act 2016 requires that all companies incorporated in Malaysia (whether local or foreign owned) have their financial statements audited by an auditor approved by the MoF. This requirement ensures the accuracy and integrity of financial records, which are vital for both Malaysian compliance and business credibility in a wider international market.

Mandatory Audit Requirements for Malaysian Companies

Under the Act, companies are required to:

• Keep their accounting books up to date.
• Prepare annual financial statements in compliance with MFRS or MPERS, depending on the nature of the company.
• Submit audited financial statements annually. For private companies, the preparation of financial statements should occur within six months from the financial year-end. This must be done for public companies within 30 days of the Annual General Meeting (AGM).

Criteria for Audit Exemption

Certain small private companies may qualify for audit exemption under specific conditions, which aim to reduce the regulatory burden while maintaining transparency. The criteria include:

• Dormant Companies: No accounting transactions and halted operations during the financial year.
• Zero-Revenue Companies: No revenue in the current and previous two financial years, with total assets not exceeding RM 300,000 (approx. US$63,600).
• Threshold-Qualified Companies: Revenue not exceeding RM 100,000 (approx. US$21,200) and total assets not exceeding RM 300,000, with no more than five employees during the current and previous two financial years.

Benefits of Audit Compliance for Malaysian Companies

Audit compliance is not just a regulatory burden but offers many advantages to Malaysian companies. Here’s a concise overview of the key benefits:

• Financial Discipline and Accountability
  • Proper Account Preparation and Avoiding Penalties: Regular audits ensure accurate financial records, helping companies avoid penalties under the Malaysian Companies Act 2016.
  • Deterrent Against Fraud and Illegal Activities: Audits act as a major deterrent against fraud, providing an independent examination of financial statements to identify risks.
• Improved Decision-Making
  • Providing Accurate Information for Managerial Decisions: Audited financial statements offer a reliable foundation for strategic planning, budgeting, and performance evaluation.
  • Enhancing Credibility and Reliability: The credibility of audited financial information builds trust with investors, creditors, and stakeholders.

• Better Tax Compliance
  • Ensuring Proper Tax Filing: Audited financial statements ensure accurate tax returns, compliant with Inland Revenue Board (IRB) requirements, helping avoid penalties.
  • Identifying Compliance Weaknesses: Auditors can identify weaknesses in tax compliance processes and recommend improvements.
• Enhanced Corporate Governance
  • Promoting Ethical Business Practices: Regular audits promote transparency and accountability in financial reporting.
  • Strengthening Internal Controls: Audits provide an opportunity to evaluate and improve internal control systems, essential for risk management and operational efficiency.

In essence, by adhering to rigorous audit compliance, Malaysian companies not only meet legal requirements but also build a strong foundation for sustainable growth and enhanced credibility, which drives long-term business success.

Benefits of Audit Compliance for Malaysian Stakeholders 

Audit compliance does not just benefit the companies themselves. There is reciprocal value for stakeholders of all types, including investors, customers, suppliers, and creditors. Here’s a concise overview of the key benefits for Malaysian stakeholders:

• Confidence for Investors and Customers
  • Enhancing Credibility and Financial Stability: Audited financial statements provide assurance that the company’s financial information is accurate and reliable. This builds investor confidence and attracts potential customers who value transparency and financial stability.
  • Improved Investment Decisions: Investors rely on audited statements to make informed decisions about their investments, ensuring they have a clear understanding of the company’s financial health.
• Assurance for Suppliers and Creditors
  • Demonstrating Creditworthiness and Reliability: Audits demonstrate that a company is well-managed and financially stable, which can help in securing better credit terms and trust from suppliers.
• Enhanced Corporate Governance
  • Ensuring Accountability: Audits hold management accountable for their financial decisions and operations, reinforcing good governance practices that inform investor decisions.

By adhering to rigorous audit practices, companies not only comply with regulatory requirements but also manage to enhance their reputation and relationships with key stakeholders. This, in turn, supports sustainable growth and long-term success compared to less transparent competitors. 

Selecting the Right Auditor

Choosing the right auditor is crucial for ensuring effective audit compliance and gaining the maximum benefits from the audit process. Here are key criteria to consider when selecting an auditor, along with important questions to ask prospective auditors.

Criteria for Choosing an Auditor:

• Professional Qualifications: In Malaysia, a company auditor must be approved by the MoF. To become approved, they must be members of the MIA and hold a practicing certificate and have passed an audit interview conducted by the Accountant General’s Office. All InCorp auditors are qualified in this regard.
• Relevant Experience: Look for auditors with experience in your specific industry. Industry-specific knowledge can provide valuable insights and ensure that the auditor understands the unique challenges and requirements of your business sector. InCorp’s auditors possess extensive on-the-ground experience in Malaysia across various industries, offering tailored audit services.
• Reputation and Track Record: Check the auditor’s reputation and track record. Seek references and reviews from other clients to assess their reliability and quality of service. InCorp’s strong reputation for serving over 750 corporate clients in the wider Southeast Asian business community reflects its commitment to ongoing excellence.
• Additional Services: Consider auditors who offer additional services such as tax advisory, risk management, and financial consulting. These services can add value and support broader business objectives. InCorp provides comprehensive audit and assurance services, including tax advisory and risk management.

Questions to Ask Potential Auditors

• What are your qualifications, and what licenses do you possess?
• What experience do you have in our industry?
• Can you provide references from other clients in similar sectors?
• What is the basis on which fees are charged?
• What additional services do you offer that could benefit our company?

Why Choose InCorp for Your Auditing Needs

Choosing the right auditor involves thorough evaluation and due diligence. While all auditors must be accredited according to Malaysian law, excellence goes beyond basic accreditation. 

InCorp’s auditors are accredited by the MIA and approved by the MoF, but they also bring extensive, proven on-the-ground experience in the Malaysian corporate landscape, and a comprehensive range of services, including tax advisory and risk management. This makes InCorp an excellent choice for ensuring robust governance and tailored compliance solutions.

Where to Next with InCorp

Audit compliance is the foundation of effective corporate governance and sustainable business growth in Malaysia. By adhering to these rigorous but transparent audit standards, companies meet legal requirements, enhance their credibility, mitigate risks, and build strong relationships with stakeholders. 

The selection of a qualified auditor, such as those provided by InCorp, ensures that businesses receive insightful and comprehensive audit services tailored to their specific needs. For further insights on strengthening your audit compliance and leveraging these practices for long-term success, contact InCorp today