New “Small Company” Concept for Audit Exemption – Practical Application (Part 1)

The Companies (Amendment) Act 2014 introduced the largest number of changes to the Companies Act since its enactment in 1967, in particular the “small company” audit exemption concept. The “small company” criteria recognise a broader group of stakeholders (for example, creditors, employees, customers, etc) who may have an interest in the financial statements, other than just shareholders. Similar criteria are used for differentiated financial reporting in other countries such as the United Kingdom and Australia. While audits can be useful, they cost time and money. The new audit exemption is intended to help reduce regulatory costs for smaller companies that do not have wide market impact, and would result in a reduction in compliance costs for at least 25,000 small companies which currently do not qualify for audit exemption. Existing safeguards will however be retained, such as requiring all companies to keep proper accounting records, and empowering shareholders with at least 5% voting rights to require a company to prepare audited accounts. 

In this article, we illustrate the application of the new “small company” concept in three scenarios, assuming these companies are not part of a group of companies.