For many small and medium enterprises (SMEs) in Malaysia, preparing financial statements can feel like a daunting task. Some business owners treat them as mere paperwork for tax filing or bank applications. However, under the Companies Act 2016 (“CA 2016”), maintaining accurate financial statements is a legal requirement. Understanding whether your company needs audited accounts or can rely on unaudited statements is critical, both for compliance and for the long-term health of the business.

Financial statements are formal records that show a company’s financial activities over a period, usually a year. They include the balance sheet, which details what the company owns and owes; the income statement, which shows profits or losses; and the cash flow statement, which tracks the movement of cash in and out of the business. These documents help directors, shareholders, lenders, and regulators understand the financial position of the company.

Audited vs. Unaudited Financial Statements:

Generally, financial statements are required to be audited. However, Section 266 of the CA 2016 provides an exemption for “small companies.” A private company qualifies as a small company if it satisfies at least two of the following three criteria: revenue of RM50 million or less, total assets of RM50 million or less, or no more than 100 employees.

Companies that are not qualified for the exemption, or those that choose to provide audited statements for the benefit of investors, lenders, or other stakeholders, are required to engage a licensed auditor. The auditor examines the company’s accounting records, ensures compliance with Malaysian Financial Reporting Standards (MFRS), and issues an opinion on whether the financial statements present a true and fair view of the company’s financial position. This independent verification provides confidence in the accuracy and integrity of the company’s reporting and supports informed decision-making by shareholders, creditors, and other stakeholders.

In contrast, unaudited financial statements are prepared internally by the company’s management or accountant without independent verification. Small companies that meet the exemption criteria under the said Section 267 of the CA 2016 can rely on this approach, which reduces administrative costs and simplifies compliance. Even so, accuracy remains essential, as unaudited statements still form the basis for important business decisions and statutory filings.

Regardless of whether financial statements are audited or unaudited, directors have a duty under Section 213 of the CA 2016 to act with care, skill, and diligence in the best interest of the company. Poor record-keeping or inaccurate statements can lead to disputes among shareholders, penalties from the Companies Commission of Malaysia (SSM), and, in serious cases, personal liability for directors. Maintaining accurate and transparent financial records is therefore not just a statutory obligation, but a vital safeguard for both the company and its leadership.

Exposure from Inaccurate or Fraudulent Financial Statements:

In cases around inaccurate or fraudulent financial statements, SMEs are particularly exposed to the a certain extent of risks. Inaccuracies, whether accidental or deliberate, can mask cash flow problems, hide losses, or misrepresent profits. Fraudulent reporting can include overstating revenue, understating expenses, or misclassifying transactions. Such actions can result in legal action, fines, loss of credibility with banks and investors, and, critically, personal liability for directors. Even unintentional mistakes can trigger tax audits, shareholder disputes, or regulatory investigations, which are costly and time-consuming.

Practical Tips for SMEs:

• Determine if your company qualifies as a small company under Section 267 to see if audit exemption applies.
• Keep up-to-date accounting records throughout the year; avoid leaving everything until year-end.
• Even if exempt from audit, consider an internal review by an accountant to ensure accuracy.
• Prepare financial statements in accordance with MFRS for SMEs, which simplifies reporting.
• File annual statements and returns promptly with SSM to avoid penalties.

Implement internal controls to prevent and detect errors or fraud, such as dual signatories, regular reconciliations, and segregation of duties.